The consequence of government debt reduction strategies: Toby Nangle column

The likely methods that G-7 governments will employ to tackle their public deficits and introduce debt sustainability may end up diminishing their influence on the world economy.

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