Bond Outlook [by bridport & cie, July 2nd 2008]
| The word of the week is “deleveraging”. Banks must reduce lending, pay off as much debt as they can and expand their equity base. That has been obvious for many months; what is new is that the time that will be required to return to healthy balance sheets is now recognised as a matter of years (two or three), not months. Deleveraging also applies to households, forced with much reluctance in the USA (UK and elsewhere), to restructure their debts. They cannot borrow so easily because of the credit squeeze and have already backed off buying new cars (and, incidentally, over-priced coffee!). Yet the US consumer is very slow to adjust. A chart produced by UBS shows how, when house price inflation minus 10-year yields turns negative, the savings rate of consumers always turns positive. The first has happened, the second must now follow! |
| Thus there is an understandable reluctance by US politicians to accept that the shift in world economic power, now so firmly underway, means that belt-tightening is inevitable, and, if not undertaken, will be forced upon the USA by the financial markets. |