Today's spending review announcements in the UK will reinforce the reputation of Chancellor Osborne as the 'Lord of Austerity'. A reputation he doesn't deserve, as the cuts to date in the UK have, for all the hype, been pretty modest.

Spending over this Parliament will have only been reduced by around 2%, a much lower figure than has been achieved in previous cost reduction programmes. The deficit (annual funding gap) got up towards £160bn and is still around £120bn today. Ring fencing Health, Education and Overseas Aid have guaranteed a painfully slow reduction in borrowing requirements, and the National Debt has continued to rocket.

So far this has been just enough to keep the bond markets quiet, given that an arm of government has been printing money and buying in bonds, which has supported demand. 

Add to this the requirement by banks to hold increasing levels of government paper and you have a false market underpinned by government action which has kept interest rates low and government borrowing costs down. 

How has the Chancellor been able to do this and at the same time preserve his reputation as a prudent fiscal manager?

The answer is the bond markets, thus far, have been very kind to him, principally because there have been fewer and fewer available sources of sovereign bonds with a low default risk with the Eurozone currently a 'no go' area for all but the brave.

Moves in the US to wean the economy off QE life support may well upset this situation and Bernanke's signal and the market reaction to it may well be a portent of what is to come.

When the banks have recapitalized and built their liquidity buffers there will come a time when they will not want to take yet more low coupon government paper in the face of potentially rising global interest rates, creating significant capital losses on existing bond portfolios. 

The implication for Jersey is simply that we are tied in to the Sterling area, and if instability returns there will be less wealth creating activity as investors hunker down to weather the storms. 

This time may be a way off yet, and may not manifest before the election, but the day of reckoning will come, and it won't be pretty.