One of the main issues for fixed income investors concerns the way in which G-7 governments can step up to the challenge of debt sustainability. Governments effectively have four options: high real trend growth, fiscal austerity, default and inflation (or a combination of the four). Discounting the first as something that is always desirable, irrespective of the level of debt, let’s concentrate on the remaining options.
Reducing debt through a fiscal squeeze is disinflationary. However, the prosp
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