Bond Outlook July 30th

“..bringing our (the USA’s) wants and needs into realignment after two decades of narcissistic debt accumulation to finance an unprecedented spending spree on consumer durables (we would add “and housing” – bridport) is going to involve years of savings and frugality”. Thus, Merrill Lynch, elegantly re-expressing the views we have been developing and expressing in our Weekly over the last few years. The key message is that the present economic problems are not just a short-term cyclical setback, they are long term and can only be overcome by the USA adapting its consumption to its production at government, national and household level (we deliberately leave corporations out of this list)

May we allow ourselves to remind readers of what we have been saying in support of this pessimistic outlook:

• The underlying problems of the USA reflect the historical Greenscam policy of throwing cheap money into circulation to solve threats to growth, thereby countering all economic forces that sought to balance earnings, spending and saving.
• The economic force which first refused to give way to the cheap money policy (which ironically was caused by cheap money) was the bursting of the housing bubble, which both set off the related problems and also prevents their correction until housing turns round
• The credit crisis results from the housing crisis, amplified by the separation of risk from reward (the CDO and off-balance sheet phenomena)
• Tax rebates can delay consumer belt tightening, but cannot stop the inevitable
• Lower spending and higher savings are desirable as a route to sustainable economic growth but are very painful on the way (lower consumer spending means a falling GDP)

Pimco introduce another consideration, viz.