Is it yet relevant that the US ought to slow?

Government stimulus measures are having ever less of an effect on GDP and the “serious person” (h/t Paul Krugman) point of view is now that deficits need to be cut. For example, the new homebuyer tax credit has come to an end and I haven’t heard any suggestion that it will be reintroduced… and MBA mortgage applications are down 35% in four weeks. There is talk of the Fed raising rates at some point — Bernanke has said they will probably have to start hiking while unemployment remains elevated — to deal with inflation.

I think the last point is likely to be nonsense. Inflation is not the threat at present. But a slowdown in the US is a real concern. In addition to the arguments above, the savings rate has dropped again, which means consumption expenditure seemingly only has one way to move as household balance sheets are slowly, eventually, repaired.

But that isn’t what the market is focusing on at the moment. Economic releases in the US and Asia/EM are still positive (the worst the bears have come up with recently is that PMI’s show a slowing rate of expansion). The present decline is due to a withdrawal of liquidity by the banking system and fears of sovereign default in the Eurozone, and the rising probability of a Euro breakup (which the market always believed was impossible).

So… what? So this isn’t the beginning of a market decline caused by a double-dip recession. I just wonder whether there is room for the markets to rally again before that scenario starts to play out.