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Bond Outlook by bridport & cie, January 26 2011

Note well what King of the BoE is spelling it out, echoed by Trichet: an income squeeze in the West is unavoidable. No such recognition by Bernanke in the USA.

Perhaps it takes a central banker, unencumbered by changes of government, to spell out what politicians on both sides of the Atlantic seem so wary of articulating, viz. that the crisis was brought about by overspending and can only be solved by lowering the standard of living in the countries concerned. Mervyn King of the BoE assumed the task this week in a major televised speech. He used the expression “income squeeze”, defined as wages and salaries rising more slowly than inflation, as one of the steps to the UK regaining its international competitiveness, with unavoidable cuts in public spending and a lower Pound also helping to rebalance the UK economy.


He expressed sympathy for countries in a similar position to the UK, but without the option of a weaker currency (for them only greater cuts in salaries can work), and also for savers and people living off the return on their savings. Clearly a return to normal levels of interest rates is desirable for the Monetary Policy Committee. Yet King also justified keeping rates low, even at the cost of exceeding the 2% target inflation rate, by spelling out that the BoE’s remit included letting inflation exceed the target in exceptional circumstances.

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