The FT has an article this morning with the headlines:
How central banks beat back the ‘bond vigilantes'
Unlimited bond buying has made it near impossible for investors to punish overspending
The article includes some of the usual nonsense that bond dealers are apt to offer journalists, including the claim that ‘one day all this spending will have to be paid for'. But, in essence the article now recognises a truth which is worth reiterating.
That truth is that after a decade of QE, and now with the onset of direct monetary financing of government spending by central banks (whatever past sentiment and regulation suggests legal, desirable or otherwise), bond markets now have very little remaining influence over governments.
The great threats that were always made in the past to governments that wanted to increase their spending were threefold.
First, it was said that bond markets would refuse to fund the spending, so it could not happen.
Second, it was alternatively suggested that bond markets would push up interest rates and so punish the government for its actions and the electorate for being mad enough to put them in office.
Third, it was claimed money would leave the country, and the exchange rate would be threatened as a result.
These arguments no longer stack up, at all. If bond markets don't want to fund a deficit now a government in many countries can simply turn its back on the market and fund itself. It's not governments that are being shunned now: it's the bond markets that are. The situation has completely reversed.
The same is true on interest rates. QE has proved that these are now almost entirely under government control. Threats to rates from the bond market no longer really exist in any meaningful sense.
So will money flee? It can still. It's true that money is moving towards the dollar, for example. But the reasons have nothing to do with deficits. They have instead to do with economic fundamentals. Exchange risk has not gone away. Governments who, for example, wish to put themselves outside world trading blocs when the full extent of our interdependency is becoming ever more apparent, do see moves against their currency. But that's not because of the scale of spending; that's because of relative trading weaknesses in the real economy.
So, the bond markets are now neutered.
The age old threat to government's spending, always wheeled out by the supposedly great who were rarely up to much good, has been laid to rest. Thank goodness.
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Again, another good point but I would not rule out the markets finding another way to make themselves artificially indispensable. The question is, what will the little buggers do next?
Answer – regulate, regulate and regulate their market distorting practices.
And as long as there are people like Torsten Bell(end), the IFS and far too many stupid, ignorant middle class Guardian columnists bleating about paying it all back, you still have the risk of consent for such a stupid policy being manufactured for equally stupid politicians to put into practice. I fear that the decision to ‘pay it all back’ will be political – not practical.
And boy – do I want to be wrong.
I want you to be wrong too
The pint’s on me if you are
I’ll come to you to buy it when I can, as well
Thanks.
Make mine a pint of Theakston’s Old Peculier or Adnams Broadside please. Or Timothy Taylor’s Landlord.
Mind you, I’d still rather not on the basis we seem to have agreed!
Adnams bitter will do for me…..
PSR,
The fact that a Conservative govt. is doing the stimulus and bailouts (not just in the UK but most parts of the English-speaking world) makes the substance of your fears less likely.
If we compare this with the blame game and nonsense that followed the GFC we will also see that the shoe is now on the other foot politically (think it through). What’s more the public’s patience with the austerity rationale has already worn far too thin for another round in quick succession.
If anything the bond market’s few remaining targets (vulnerable targets) are probably all in the Eurozone (no monetary sovereignty) and if they test those countries out there may be some serious social unrest.
Post-Brexit, the EU will not want to see that happen. A 2nd round of sovereign debt crises would be too much co-incidence. It will also have people realising that the victims may not be to blame after all and that there is something seriously wrong with the EZ model.
Anyhow..
As a Government Bond Trader for 35 years I offer some thoughts.
First, markets don’t have a view, they are merely a place where buyers and sellers meet. People have views and, as people, so do Government Bond Traders but I have never in all my time seen a trader take a view based on their political views… it would be too expensive. In that sense, bond markets are apolitical.
Second, the early 1980s when the phrase “bond vigilantes” was coined was another time. Inflation was still the big fear and investors reacted vigorously to anything that threatened to raise it. Inflation acts asymmetrically on Bond investors – once a burst of inflation has eroded the value of your money it never comes back. As it turned out, their fears were misguided because we have had secular disinflation for 35 years but their fears that excessive government stimulus would be inflationary were real.
Third, if the 1980s bond market told us what people were thinking then, 2020 bond markets tell us about today. 30 year rates in the US are 1.3%, UK are 0.75%, Japan are 0.40% and Germany are zero. These rates are sending out a message very clearly.
In conclusion, policy makers should look at the information that markets contain…. and if they do then all the policies you prescribe follow as “obvious”. Of course, those that oppose your ideas will grasp at anything to justify their view…. but despite what they say the UK 50 year gilt trades at 0.55%…… and that is a fact.
Finally, I think you might be surprised by how many bond traders agree with your views….. I might have been a trader for 35 years but I have been a socialist for 45 years…… and I am not alone in the Government Bond market.
Thanks Clive
But I have to disagree on one thing: those who bond traders work for do very definitely have political views and are not afraid to share them
Indeed, owners of investment banks certainly don’t share your views (or mine)….. but my point is that there never was a small group of elite bankers making the market trade where it did. Markets then reflected views of a broad group. For sure, bond investors tend to be old, wealthy and conservative so it was not surprising that they took fright at the first whiff of inflation…. but there was no “vigilante” group.
Equally, today, they are still old, wealthy and conservative but rates at 0.55% on 50 year gilts are not just a result of QE….. it is telling us that a broad group of investors and borrowers believe that something is profoundly wrong with our economic model and that we need to change course. We should listen to markets but not be slaves to them
What there was and still is (and always will be?) is a group of self interested, powerful/wealthy people that will harness any arguments (false or otherwise) they can to further their agenda.
The challenge is to rebut the arguments they make and explain to ordinary folk that the world does not have to be the way our masters tell us it “must be”.
In that regard, I applaud your work… it is profoundly important.
Thanks
The demographics of Japan are far different than that of other countries and their deflationary period started as Japan was one big bubble again compared to the rest of the world..that applied to all asset prices. To assume a flat and incredibly low yield curve can remain in place for pretty much everywhere (except the emerging economies where real positive IR still exist) is a massive gamble. After all would you hold a 30yr gilt /treasury at todays levels where in real terms you are guaranteed to lose money unless you are regulated to do so? Some might but the majority won’t. The Gilt market has acted as a constraint on Government and Central Bank actions in the past. In the future there is no need for it to be as Central Banks can control pricing. The vigilante going forward will be the FX markets. Not necessarily through speculation but a simple a reluctance to own a currency whose purchasing power is being eroded with inflation. Anybody expecting to take receipt of £ in a business capacity would simply sell it forward. So we arrive back at the inflation bogeyman. This used too kill bond markets and it will do the same to FX..will it return on the scale we saw in the 70s?.. That is an altogether different discussion…using Japan as an example of what might happen going forward is naive to say the least. To say inflation will never return is just foolish.
You have noticed rates all over the world, have you?
And the historic trend to zero?
I think you are missing the point and are daydreaming instead
I will state it again it is FX that is the vigilante on government t and central bank actions over the long term. It will respond to inflation and inflationary expectations. Are you saying we will never see meaningful inflation?
Sovereign Bond markets and sovereign interest rates can be controlled by inflation. Much less so in the corporate and personal finance world. Again they will be massively influenced by inflation.
Just so there is no misunderstanding Inflation and FX are the constraint on Government .
Explain to me where inflation is coming from….
Details please…
In the context of the failure to create any of significance for a decade
Then explain why FX is vulnerable – except to political failure like Brexit
Not generalities please – actual answers using evidence – because right now there isn’t any and the markets are pricing zero inflation for time to come
What do you know that they and I don’t?
“the markets are pricing zero inflation for time to come”
Are they? Which ones you referring to? The sovereign bond market? Its rigged by Central Banks for goodness sake! Those left in are there by regulation. I think inflation is a real risk looking beyond the coronavirus crisis. I think joining money printing and populist policies will look great for a while but printing will be a drug “they cant say no to”. It’s all opinion who knows who will be right as it ultimately all rests on the prudence or otherwise of Government. But you pointing to the gilt market as “proof” is laughable.
It’s nit rigged!
There is no market without central banks and Treasuries
Your claim is the laughable one…..
Please don’t waste my reader’s time
“It’s nit rigged!..There is no market without central banks and Treasuries”
You have said it, “there is no market without Central Banks”.Central banks are by a country mile the largest player in the markets and they do so to control long term interest rates. Sovereign debt is completely rigged by central banks, it is madness to think the price of gilts and treasuries are set by institutional and retail investors.
But they do arbitrage them
Please don’t treat us as stupid
So you accept the Gilt/ Treasury market is rigged.,
Then I hear this classic “But they do arbitrage them“..Who arbitrage them? What strategies exactly?
I’m all ears
If you don’t understand that you don’t know anything about the markets
It’s nice to have some faith in humanity restored I must say. Thank you Mr Parry.
Bond traders don’t need to be overtly political to be party to groupthink.
I will confine my comments to Europe/Euro Zone. There is a great deal of discussion on funding the Green New Deal and bonds. Euractiv had a quite good article on the subject:
https://www.euractiv.com/section/energy-environment/linksdossier/explainer-how-the-ecb-can-print-green-money/
I commented underneath. It would seem that econometric purity (it’s a religion you know) still rules – ok! in the ECB/Bundesbank axis & they think that because of this they HAVE to buy bonds on the market (just listen to Isabel Schnabel ). So from a Euro-zone point of view markets are still very much “in play” – as some kind of fig leaf.
On a related note, various of my EU contacts are in discussions on funding (projects and sectors) with amongst others the EIB and other EU institutions – without any clear views on funding emerging (EIB will get more money – but it will still be a dribble compared to what is needed).
However, there remains a poor understanding of funding & the “role” of markets. I can understand how pension funds & banks need to hold gov bonds (or AAA-rated bonds) in their portfolios as a means of adjusting the risk profile. But: what is needed at least in Europe for the energy transition is a colossal amount of funding & I’d suggest this is much much greater than the “run-of-the-mill issue bonds to fund gov spending” activity which is/has been the bond markets bread&butter raison d’etre to date. From one perspective, bond markets provide a means (to a greater or lesser extent) for govs to fund current spending. But the requirement is a massive capital spend that will dwarf current spending. Why use the bond markets for this?
Of course I could be on the wrong tack here – but it strikes me that although EU institutions seem to be converging on the amount that needs to be spent on the energy transition (& the time frame) – they utterly fail to understand that existing systems, such as bonds markets, are unnecessary. Using an everyday example: using bonds markets to fund a monster capital spend is equivalent to: going to the supermarket & stocking up on bottled water despite the fact that what comes out of the tap is 1/100th of the price and is equally drinkable.
Agreed
Hence the need for direct monetary funding (DMF) of government spending by central banks
I don’t have a strong view about the difference between CBs buying bonds or CBs lending directly to Governments. Since CBs are ‘owned’ by the Government the interest paid is irrelevant.
Sure, there are frictional costs of going via the open market but they are tiny (I must declare an interest – I trade them for a living).
However, two reasons for Governments to issue more bonds; first, the market is gagging for more supply…. and they should be given it; second, if some people are violently opposed to DMF but will accept QE then why bother having the fight?
The key is to realise that we need massive spending/investment and that we CAN do it. (Or YES, there IS a magic money tree!)
Cliave
I have long argued that the market is gagging for supply
And I am happy for them to have it – so long as they realise that they’re being given the favour and nor the other way round
But I suspect that we agree on that
Richard
Can I make a passing comment on Mike’s observation, ‘it’s a religion, you know.’
For about ten years, I have, for one Saturday morning a month, sat with a group of colleagues in a forum . It was originally to explore the links between psychotherapy and spirituality. (Religion, I would contend, is often not the same as spirituality ).
In therapy, we promote an investigation into why we think as we do and recognise there is a large emotional component. We are products, to a large extent, of our conditioning and ‘tribe’. So wee look at why we think as we do and not just the beliefs.
I have been reading this blog for over ten years and have learnt a lot but I am not as well informed as the other two disciplines.
My comment is that I have found some commonality between religion and the schools of economics and , indeed, psychotherapy. All have axioms which remain unchallenged and are often fiercely defended as though they were intrinsic to one’s being and have an objective reality.
The way ahead is be able to reflect on one’s own processes and be able to assess evidence objectively. This does involve putting the ego on side to an extent.
I welcome the clarity and thoughtfulness of this blog and many of the comments. Yet reason alone is often not enough to get people to change their thinking.
Thomas Kuhn wrote the Structure of Scientific Revolutions over 50 years ago. One point he made was that paradigms usually change when the ‘old guard’ retire or die.
Eric Berne, who invented Transactional Analysis, a way of looking at human interactions and the ‘scripts’ that people adopt to govern their behaviour, said there were usually three reasons to change. One, bored, two, able to see a viable alternative to the present patterns , and three, in a crisis.
We are now in a crisis and as the Chinese define it, it is a danger and an opportunity.
People on this blog can see a way. There is an opportunity. I hope the country, the world takes it.
If we need some p[eople to retire then, I’m all for it
There will be enough deaths – but I do not wish that on anyone
This is all very interesting and I think I’m not alone in thinking the time is very much ripe for some of these ideas to be tested in the real world.
As this article says various constraints can be thrown off in this new world, but especially because of this the temptations for govts will be enormous and so governance frameworks will be key.
I’m sure you’ve/others have done loads of thinking on governance frameworks. Could you or other commenters point to a good introductory source on this area? Many thanks…
I’ll ask some colleagues…I’ve not taught it at an introductory level
I wish I could be as sanguine as you. I agree that the hedgies and disaster capitalists in the bond market have been neutered for now. Part of me would love to see a handful of them being sufficiently greedy and stupid to have a go and be blown out of the water. It would generate a massive increase in public confidence in effective fiscal and monetary governance in the public interest – which is badly needed. But I doubt these hedgies and disaster capitalists are that stupid.
But the forces of darkness and resistance (FODAR) remain formidable. They are already gearing up to ensure a return to BAU once this crisis subsides. The pressure will build on central banks to unwind their current unassailable commitment to act as the lender of last resort to governments. This must be resisted at all costs.
However, there is a pressing requirement to develop and establish an alternative mechanism to ensure economic stabilisation. The fundamental tenet of the failed dogma of this mis-named neo-liberalism was that government was the only sector that had to be small, adaptive to the behaviour of other sectors and forcefully prevented from generating imbalances that affected other sectors. All other sectors — financial entities, non-financial entities and households — should have the freedom to behave as they wish without any effective constraint on the destabilising imbalances they generate or their rent-capturing antics. And households, because they ultimately fund all economic activities other than exports and because governments had been largely neutered, bore the brunt of the imbalances generated by the financial and non-financial sectors and of their rent-capturing antics.
Post-Covid 19, economic policy has to be restructured to focus on increasing productivity and prosperity while ensuring economic stabilisation across all sectors of the economy — and clamping down on destabilising imbalances and sustained rent capture irrespective of the sector in which they arise.
In response to your first paragraph….. They have tried many times in Japan. Every new generation of hedgies tries to short JGBs – all have come to grief. The same is probably going on in Europe now…. and yes, they are that stupid (or some of them are).
But it is not the markets that are the FODAR – 50 year gilts at 0.55% tell you the markets are gagging for more supply, and deficit spending on Green and other initiatives. The FODAR are the wealthy/powerful who want to stay that way. (They may be market traders/investors…. but that is not the same thing). BUT they are losing the argument…. THAT is what markets are telling us.
You’ve got me with FODAR
@Clive Parry,
Many thanks for your comment. It is cheering and encouraging to encounter a person with your experience expressing the views you hold.
And I very much agree that it is not the markets who are the Forces of Darkness and Resistance (FODAR). Markets are simply mutually and collectively agreed arrangements for trading. I cringe every time progressives and those on the left personalise markets, treat them as an anathema and advocate statism. JK Galbraith captured it perfectly: “Instead of the owners of capital or their attendants in control, we have the admirably impersonal role of market forces. It would be hard to think of a change in terminology more in the interest of those to whom money accords power. [Capitalists] have now a functional anonymity.”
However, my focus is more on preventing the FODAR engineering a return to the status quo ante and on developing and establishing an approach to economic stabilisation that bears down on all sectors of the economy – and not just on the government sector. Once this crisis subsides – which it will, the economic and political landscape will have been transformed utterly. We need to prepare for that now as we struggle to cope with the current crisis.
Research colleagues of mine have done on professional networks would challenge all these claims: the existence of personality in markets is well established and tends to be isomorphic i.e. it reinforces particular homogeneous opinions and discards heterodox alternatives. The consistency of market moves strongly reinforces this idea.
I agree that the vampire squids, the hedgies and the disaster capitalists can move markets in ways they want, but that’s the abuse, distortion and subversion of market mechanisms – and the creation of markets in financial instruments they can abuse, abuse distort and subvert.
But that’s not my primary concern. That’s in my final para. You’ve started this necessary work with your ten principles of taxation. We need a lot, lot more of this.
I am pleased to note some others have now noticed these…
FODAR, so good!! (Sorry).
You can’t beat a good acronym. That’s one more to add to the list. Thanx!
My favourites are SNAFU and FUBAR, courtesy of the U.S Marines I believe.
So, if government funding direct from the BoE becomes the norm, is it the end of the government bond market? Or does the debt also perform a stabilising/”certainty” function within markets, in a volatile world?
Will pension funds plead that it continues? (I wonder how many Daily Mail readers understand that their pensions are part funded by the government issuing debt, whilst moaning about the level of that debt?)
With returns on bonds so low, has this tanked pension portfolios? Are people not going to get the retirement payouts that they thought they might? If so, has this been a long term trend (Or at least since 2008) as interest rates have been so historically low.
Isn’t the underlying weakness affecting it all the fact that GDP has been so poor for at least since 2008?
Growth (here I go again!!!) is the foundation of the whole “structure”. Poor growth and the whole structure starts to wobble.
If we are heading for a zero growth, sustainable economy, government bonds cease to function anyway.
The bond market will remain – but by government choice
I explained why here https://www.taxresearch.org.uk/Blog/2018/11/09/why-governments-need-to-issue-bonds-despite-modern-monetary-theory/