Q: What investment could you have made on 15th November 2008 that would have returned you 12% in just over six months?

A: Buy the plucky pound, sell the dollar.  Here is the graph:

Unfortunately, that is the day that George Osborne chose to warn the world of a potential sterling crisis.   But to be fair to him, the pound did fall against the Euro, quite alarmingly, until it emerged that the Europeans were even deeper in the mire than we were.  On that one we are back roughly where we started. 

The point is that the dollar has fallen, quite fast, since the darkest days of March saw the world expecting a  nasty deflationary depression.  As hope has returned, so has money fled the low-yielding dollar and headed back towards the riskier other currencies.  As this has happened, yields on longer-term Treasury debt have increased: if Uncle Sam wants to borrow, now he has to compete against an increasing range of private counterparties.   So the dollar's fall and the rise in longer-term yields is benign, hopes the Fed. 

We had better hope so.  The UK is in a broadly similar position to the US.  (In some ways, it is better: our parliament is generally more biddable than the US Congress, so unpleasant tax-rises and spending cuts can happen when the bond market really threatens.  Compare and contrast with California).  A rise in yields means that the next £700bn of borrowing takes place at a much more expensive rate.  In some circumstances - and with debt at 80pc of GDP - that spells curtains - default, disgrace, devaluation.   Reyjkavik on the Thames. 

But it is much less of a problem if the real economy at the same time is improving. Then, the government reaps the rewards through higher tax revenues and the debt is much easier to repay.  So there are 'good' ways for bond yields to rise, and bad ways. 

The good version: rising yields mean rising optimism, a healing economy. But in a long post, Tim Duy discusses alternative reasons for rising yields.  The basic one is: capital markets don't trust the US not to inflate, and force the central banks of the world to step in and accumulate US dollar reserves to prevent a dollar collapse.  The mechanics are complex, but he sees a real possibility of a return to the dynamic of 2007-8, where the result is a boom in commodity prices.  As we have argued in our G20 piece, without fundamental rebalancing of consumer demand from the US to China, instability will remain. 

Krishna Gua in today's FT also zeroes in on the same fundamental question: what does the Fed do to support the economy and the government's massive borrowing without bringing out the spectre of long-term inflation and scaring away the very investors they most need.  In many ways, this is a bilateral issue: the G2. But we all suffer the consequences. All government financial policy is now global.

So the big issue I refer to in the title is whether the US and other central banks can skilfully manage the transition from deflation-fighting debt-issuing/buying policies to the fiscal consolidation/quantitative tightening that will follow, without killing the next recovery.   These articles, that mix market analysis with policy questions, are not easy - they zig-zag around like the markets they follow. But they reflect to a fair degree the complex analysis going on in ministries and central banks right now, and for the foreseeable future.