Bond Outlook by bridport & cie, March 9 2011

“White man speak with forked tongue”. How many of us remember that phrase from old Westerns when the Indian Chief lost confidence in the promises made by the new masters of the country?

Central banks are supposed to implement policies which keeps inflation at or below 2%, and are further supposed to anticipate future inflation if, for example, wage or raw material costs increase. In contrast, governments, with huge debts around their necks, have every interest in inflation running at two or three times the central bank’s targets (even if they themselves have set the targets !), as there is no more convenient way to reduce the relative size of their debt.