Bond Outlook July 28 2010

The FT debate about austerity versus deficit spending continues and is again a useful starting point for our Weekly. Skidelsky and Kennedy argue powerfully in favour of the Keynesian position that government spending is the route out of recession. They emphasise a nuance in that such spending must be directed towards infrastructure renewal and expansion.

Last week we wrote of the significance of confidence in encouraging expansion. The euro crisis has acted as a siren call, as arguments about what Keynes would advise become irrelevant if confidence is absent, and especially if its absence is due precisely to government deficits.