Thursday, February 25, 2010

The Global Monetary Analyst Default or Inflate or… [morgan stanley]

The Global Monetary Analyst
Default or Inflate or…
How will governments and central banks respond to the sovereign debt crisis that we believe is in the making in the advanced economies? In previous issues of The Global Monetary Analyst, we have argued that governments may be tempted to inflate away some of the debt, and that sovereign risk therefore spells inflation risk. The markets disagree with this notion – inflation expectations are low – as do some of our colleagues! In today’s lead piece, Gerard Minack, like Dick Berner in a recent note (see We Can’t Inflate Our Way Out, February 19, or the short version on page 7), argues that bond yields and thus borrowing costs will rise in response to higher inflation and significant parts of government spending are indexed to inflation, so inflation won’t do the trick. Rather than pushing inflation higher, Gerard thinks governments may try to push or keep bond yields below nominal GDP growth. One way to do this would be through regulation requiring financial institutions to hold large amounts of government bonds as a prudential measure. The debate will continue on these pages – stay tuned.                HERE
The Global Monetary Analyst- [morgan stanley]

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