Isn’t it wonderful how government can make things better by decree? By edict! By passing a law! Spend too much money? Running a little short? Don’t worry about it; we’ll print up some more. Who says government can’t be a positive force?

If this week’s non-manufacturing sector data signals that the services sector may be faltering, fixed income, forex, and equity markets may continue to price in a reduction in interest rates on December 11.

A second devastating wave of writedowns from major banks has rocked confidence. To add to the gloom there are mounting fears that the problems could engulf other types of American debt – credit cards, car finance and unsecured loans.

On Tuesday, the Bank of Canada will announce whether they find it necessary to cut interest rates by 25bp to 4.25 percent, as downside risks to growth continue to mount and credit markets remain tight.

Professional system trader Art Collins shares his daily biases in the index, bonds and currency futures markets for December 3.

This week John Mauldin takes a look at problems at the edge of the economy which threaten to derail not only the recent robust growth (at least in the statistics) but also the markets.

Banks typically borrow short and lend long. But when short rates are so high, how can they make any money lending for long-term mortgages? They can’t. So they stop lending. And without ready mortgage credit, buyers stop buying houses. And when buyers stop buying houses, house prices fall.

It appears that evidence is pointing in favor of a reduction in the federal funds rate, and the FX, bond, and equity markets will likely continue to reflect that if ISM manufacturing is released in line with or worse than expectations.

Lawrence G. McMillan reviews the options market in his weekly column for November 30.

The 10-year note already yields less than 4%. Bonds have been falling since June. They are just another of the many signs of deflation – of a draining away of credit, cash, liquidity – from the markets. Now the Fed is no longer driving inflation; it is trailing along behind deflation, trying to keep up with it.