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Bond Outlook July 12th

While Stephen Roach of MSI criticises Bernanke over “flip-flopping”, we find him quite consistent in quietly squeezing US borrowing till the housing bubble ends and credit expansion slows.

Bond Outlook [by bridport & cie, July 12th 2006]

It is not often that a Central Banker is victim of a personal and public lashing such as that given to Bernanke by Roach of MSI this week. For once we find ourselves in less than full agreement with Roach and his accusations of "flip-flopping" by Bernanke in his public statements. Poor Bernanke can scarcely spell out in gory detail what world economic rebalancing means for the USA. If he did, he would lose his job immediately; increasing savings, balanced internal budgets, lower consumption of the world's output via a weaker dollar, and an end to mortgage equity withdrawal - these are simply not acceptable objectives politically. So Bernanke has to be understood in terms of what a responsible guardian of the currency has to do faced with the situation he has inherited, or, expressed more poetically, the poisoned chalice he has been handed. At the risk of hubris, we believe we have understood him, in that he has agreed with other Central Bankers on a joint effort to reduce liquidity. His particular measure of when "enough is enough" is the end of the US housing bubble and of the credit growth it has induced.

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