This bit in Tim Duy’s post on Europe’s self-immolating fiscal policy caught my eye:
One would normally anticipate that as growth decelerated, bond yields would fall in expectation of monetary easing. Not so in Europe, as slower growth fosters fear of sovereign default as deficits widen. As is well known at this juncture, the response of policymakers will be to enact deeper austerity measures, which will in turn slow growth further. Not what one would call a path to a good equilibrium.
In other words, bond markets are responding rationally to the increased risk imposed by austerity measures by demanding higher yields in compensation, a pattern that will be ignored by policy makers convinced they must appease the bond market that exists only in their heads.
This is the fun-house mirror image of fiscal policy here in the US, where fear of invisible bond vigilantes was cited as a reason not to enact further stimulus, never mind the fact that yields were (and remain) at rock-bottom levels that indicate anything but investor unease with US borrowing.
Apparently the information content of bond prices can only ever lead to one conclusion – austerity.