Sir,
John Plender is correct that the 1970s showed how costly high inflation is ("The Trump bear market for bonds is fast approaching," Insight, December 6). As investors lost faith in monetary and fiscal authorities to control inflation, they required returns to hold long-term bonds that German chancellor Helmut Schmidt called the highest since the time of Christ.
The danger to the bond market now, however, is not from inflation. President Donald Trump has increased prospective budget deficits, and these will raise the US trade deficit. Foreigners financing US deficits could resist holding ever-increasing shares of their wealth in US bonds and demand higher interest rates. The recessionary impulse would be immune to expansionary monetary and fiscal policy and would raise unemployment. To prevent this, the US should pursue fiscal discipline and a fairly valued dollar now.
December 10, 2017 Financial Times
