Depression fears stalk the world

12th August 2011

Jeremy Warner, the assistant editor of The Telegraph believes that gilt yields at record lows point to a depression.

And it is not the first by a journalist. This follows a warning last week by the Daily Mail's Alex Brummer, who also sees alarming echoes of the Great Depression.

Among other things, Warner admits that he, along with famous bond investors like Pimco's Bill Gross, got it wrong when he was bearish about government bonds. However, good news for gilts investors, isn't good news when it comes to other assets.

He writes: "That is bad news for corporate bonds and equities. When governments attempt to reduce their demand for debt, as is beginning to happen at the moment with fiscal austerity programmes, you get a self feeding pressure of excess demand on limited supply, and yields fall even further. What these yields are pointing to then, is a depression. In such an environment, corporate profits will suffer and insolvencies will rise. Equity markets suffer accordingly."

His views have fired up the comment boards to offer solutions.

escapedroger says: "The answer is to liberalise people's incomes, set a high 0% income tax threshold and have a simple capital/corporation flat rate. Then get rid of VAT ( the intrusive Euro state nonsense) and have a consumer purchase tax regime with all essentials untaxed and then a normal band and a very high luxury band. We need the country to get back to work, grow things and make things. With all the money the government wasted on propping up financial speculators they could have given families a credit to relieve debts, then house prices could have been crashed and real growth could restart."

Meanwhile Patrick Hadley thinks Warner is mincing his words.

"Jeremy Warner is of course correct when he implies that inflation is the only possible way out of the current mess. Of course he cannot be explicit about that in these pages but in desperate times you need a desperate remedy and realise that any harm caused by inflation will be far less than that caused by any alternative policy," he writes.

It is also gloomy on the other side of the Atlantic.

Here the Federal Reserve Bank of Philadelphia surveys its 37 financial panellists who see low growth stateside for a long time to come.

In a note, it says: "The forecasters see real GDP growing 1.7 percent in 2011, down from their prediction of 2.7 percent in the last survey. The forecasters predict real GDP will grow 2.6 percent in 2012, 2.9 percent in 2013, and 3.1 percent in 2014."

And yet this all doesn't mean quantitative easing mark three or not quite yet, at least until the Fed sees what happens in the next few months according to the Wall Street Journal.

It reports: "Fed officials would need to see evidence of continued weakening in economic growth in coming months before launching a third round of government-bond purchases. An even more crucial gauge is inflation. The central bank is unlikely to take such a big step, which would probably renew worries about rising commodity prices, without clear signs that inflation is easing."

The Atlantic has a bleak assessment.  

"What's more depressing:

a) That GDP grew 0.4% in the first quarter of 2011

b) That GDP grew 0.8 percent in the first half of 2011

c) That the debt ceiling deal will likely make things worse

d) All of the above

We select (d). The U.S. could very well be on the brink of its second recession in three years."

Finally here is the Economist looking at Europe – its grim conclusion –

"Falling output will reduce the effectiveness of fiscal consolidation, both by negatively impacting revenues and by cutting the denominator in the debt-to-GDP calculation. Disappointing fiscal progress may lead to more market trouble, raising sovereign borrowing costs. Or it might lead governments to push for more aggressive austerity still. Or both. One thing is for sure: a return to euro-zone recession would set the stage for a prolonged crisis environment, through which the survival of the currency area will constantly be in question."

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