Policymakers’ new enthusiasm for cutting budget deficits will slow growth across the advanced industrial economies, cutting the outlook for commodity consumption and prices over the next 2-3 years.
For the past year, investors and commentators have been trying to guess how quickly extraordinary stimulus provided during the 2008-2009 crisis would be withdrawn.
Most attention focused on the timing of interest rate increases and measures to mop up excess liquidity provided by central banks. Instead tightening is set to commence from the fiscal side.
Until recently, most commentators saw government spending as part of the solution, and worried about withdrawing fiscal stimulus too quickly, risking a double dip recession. Now deficit spending is seen as the problem, risking a financing crisis. Keynes is once again unfashionable and the bond market vigilantes are in the ascendant.
AUSTERITY IS FASHIONABLE
Governments in Germany, Portugal, Spain, Italy, Greece and Ireland have already outlined austerity measures, while the United Kingdom and France have also promised unspecified efforts to cut deficits and restore public finances.