Bond Outlook September 12th

The knock-on effect on the real economy is becoming apparent (employment losses), so that even Henry Paulson – he who a month ago assured us that the problems would be restricted to the housing market – has understood that this is no short-term crisis, but will require well into 2008 for its solution. Bernanke in the meantime appears deliberately to be playing it cool by giving a speech about trade deficits, Asian savings gluts, US savings shortages and inflation pressures, but with nary a mention of the liquidity crisis.

Already the direct impact of the bursting of the housing bubble (end of remortgaging and using house equity as a source of cash to spend over and above earnings, plus unemployment in housing-related industries) is enough to slow down and possibly stop US GDP growth.