The newest anomaly in financial markets tops all others arising in recent months. Inflation fears are now reflected in expectations that US monetary policy will and should become more restrictive before the year is out. The European Central Bank is about to go down this route and the Bank of England may also want to do so.

This new twist in the monetary policy tale has some of the hallmarks of the Bank of Japan’s monetary tightening in 1990 to fight inflation, just as the credit crunch was starting to bite. To understand the current economic downturn and the growing risk of policy error, we have to acknowledge the influence of de-leveraging.