In February 1990, when Jimmy Carter was US president, the financial world was shaken to its very foundations. The cause? The failure of the Democrats and Republicans to sort out the economic problems of their nation.
Ring any bells?
Once again, the two parties are at loggerheads; this time over how to avert plunging over the the “fiscal cliff” on 1 January. The politicians have just 2 months to sort it out.
And if they don’t? Well, maybe… just maybe… we’ll see a repeat of what happened in February 1980.
So what did happen in 1980? The implosion of the bond market bubble, followed by the complete collapse of the US Treasury bond market. The trigger: investor concerns about out-of-control inflation.
But hang on. We don’t have an inflation problem, do we? At least not yet.
Yes, that’s correct. And ever since the 2008 banking crisis, analystshave been arguing about whether we are or are not experiencing a bond bubble.
Indeed, some argue that deflation is the greater danger. If they’re right, then bond prices will keep on going up and bond yields will keep on going down. Heaven help us all if that happens. Japan has been dipping in and out of the deflation trap for more than 20 years, with no convincing sign of escape.
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