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Bond Outlook by bridport & cie, March 9 2011

Every central bank has tightened or expects to, except the Fed. Inflation lets debt decline. Is someone whispering as much in Bernanke’s ear? Does that mean a QE3 come June?

Bond Outlook

“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. For political reasons, governments can never go public on this subject, but we have to wonder how many quiet discussions take place between central bankers and representatives of Treasuries / Ministries of Finance.


Such discussions have greater legitimacy in the USA, where the remit of the Fed allows for encouraging employment. That is one reason why we suspect that quantitative easing will be prolonged in June, despite hints to the contrary.

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