Thus, even if you did not believe in deflation, it was entirely rational to buy bonds on the basis that you thought the Fed did – or, more importantly, that it would act to prevent it. So the mere mention of the word deflation produced a drop in 10-year bond yields from 4 to 3.2 per cent in little over a month. It has taken a similar time to reverse, not because the threat of deflation has changed but because the perception of policy has.In the meantime, household and corporate America took advantage of a very attractive window of opportunity to re-finance their balance sheets at bargain levels. This ability, in effect, of US households to refinance their mortgages at a new 10 or 15-year rate ,with little or no penalty, should not be underestimated as a driver of US growth. But crucially it is at the long end of the bond market that this takes place, a fact that will not have escaped the Fed’s notice.By contrast, UK households are hugely exposed to short-term rates through our crazy mortgage system.

Fine when rates are falling, but in the next phase this represents a serious constraint on the economy. Higher short rates will immediately “tax” the UK consumer, but leave the US consumer unaffected. No wonder Gordon Brown is keen to move the UK to some form of fixed-rate system.So with the momentum that drove bonds up now pushing them down, what of equities? We believe they entered a new, cyclical bull phase in the second quarter of this year The setback in bond markets will focus investors on the broadly positive economic conditions that have been ignored as bonds buckled. But talk of a lack of a boom is disingenuous; to deny a bust is not to forecast a boom. Indeed, should we see anything like the conditions required by the “double dippers” to finally acknowledge growth is taking place, we would probably be at the end of a cyclical recovery in profits/rally in equities rather than at the start of it.Mark Tinker is a partner at the stockbroker Execution. The borrowers are back. On Friday we learnt that during the first three months of this financial year, our Government borrowed £13.8bn – roughly half the forecast deficit for the entire year to next April

The borrowers are back.

For 2003/4 the deficit could rise to 4.6 per cent of GDP.In Europe, both Germany and France are running deficits above the 3 per cent ceiling of the EU’s stability and growth pact, with Italy nudging up against it. And in Japan, well, the combination of its, so far, ineffective pump-priming and falling nominal GDP has pushed the deficit up to an estimated 7.7 per cent of GDP this financial year. (See first graph.)Does this matter? In a general sense no, for in a period of slack growth it is natural for governments to run deficits. The US deficit is proportionately smaller than it was under President Reagan, when it reached 6 per cent of GDP. Further, current low interest rates mean the cost to taxpayers of these debt burdens is easily manageable.

But there are two serious concerns that will, I suggest, worry taxpayers and governments alike in the future.The first is the way governments have been almost universally over-optimistic about their funding needs. When the US proposed its budget in February, the forecast deficit was $300bn – so it has risen by 50 per cent in less than six months.Here, a similarly rose-tinted view is evident. The Treasury’s forecasts show the deficit remaining comfortably below the 3 per cent EU ceiling, but many market forecasters doubt this. The contrast between the Treasury outlook and one from the economics team at HSBC is set out in the second graph.The second concern is that government borrowing represents a transfer of wealth from future taxpayers to present ones. With a growing economy and, equally important, a growing population, some net borrowing seems quite acceptable. But with the prospect of slower growth and a stable or falling population, the burden becomes huge.A typical maturity for government borrowing is 20 years and some debt issues will not be repaid for 30 years. It is reasonable to make a distinction between current and investment spending, for money invested should bring some future flow of income to pay back the debt.