Bond Outlook
| There are so many negative factors facing the world economy that we find the relaxed tone of financial markets a cause of wonder. We recognise, of course, the desirability of “accentuating the positive and eliminating the negative”, advice which most politicians have been practising even before the Johnny Mercer 1945 song hit. There are a few Cassandra’s, often so extreme that they are not taken seriously, yet overall the scenario is neither so disastrous as such commentators claim, nor as optimistic as the establishment would have us all believe. Let us review the current threats. |
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| First is the gradual breakdown of the implicit bargain linked to the USD as the leading reserve currency. The USA, consumer of last resort, undertakes to buy much more of the world’s output than it sells and, to cover the gap, will always provide enough dollars, which the foreign creditors keep or recycle. The problem is that the gap is now so wide and growing so fast that the American printing presses are working overtime. (That is only an image – much of the “printing” is done by bank transfer.) |