James Carville, adviser to Bill Clinton, once said that if there were reincarnation, he would like to come back as the bond market, because then he could “intimidate everybody”.
The Financial Times has repeated that line in an editorial, claiming that bond investors continue to exercise power over governments and that unless “government spending is brought under control”, financial markets will impose their will.
It will not surprise readers of this blog to know that I think this view is nonsense. It may suit bond dealers, bankers and financial journalists to repeat it, but it is built on a false premise about how governments work.
First, governments do not borrow in the way households or companies do. A household has to earn money before it can spend. A company has to make profits, or raise capital or debt, before it can invest. Governments with their own central banks do not face these constraints. When a government spends, it creates money. That is a simple fact of modern monetary systems. The Bank of England, the Federal Reserve, the Bank of Japan and most other central banks all issue the currency in which their government's debts are denominated. They have acknowledged that fact. QE proved it. The FT and commentators deny that reality.
That fact is that reality shows that so-called “borrowing” is not a necessity. It is a policy choice. Governments issue bonds because they wish to offer safe assets to the financial system and because they want a mechanism for influencing and managing interest rates. But they never need to issue bonds to fund spending. That spending always happens first because only the state can create the money, which the private sector then, later, uses to buy government bonds.
Second, the FT's narrative flips reality upside down. The article suggests that bond markets set the rules and that governments must cut spending or raise taxes to please them. In truth, bond markets only function because governments guarantee their existence. Without the state's promise to stand behind its own currency, there would be no “safe asset” for investors to buy. Nor would there be the structures in which bond markets can operate. Bond dealers are not doing governments a favour. It is governments that create the conditions in which bond dealers profit. To suggest otherwise is to grant the City of London and Wall Street a veto over democracy.
Third, deficits are not a sign of weakness. In fact, they are the foundation of private wealth. The FT's editorial bemoans rising government debt-to-GDP ratios since 2007. But what it ignores is the fact that these rising rates are a measure of the growing accumulated savings of the private sector, held safely in the form of government bonds. When governments run deficits, they are allowing households, businesses and pension funds to hold wealth in the safest form available. To call this a problem is to misunderstand the whole architecture of modern finance. It is also to ignore the real issue of growing inequality.
Cutting deficits, as the FT urges, would mean cutting private wealth. That would, unless properly planned, undermine, not stabilise, economies. It would appear that they have no comprehension of this issue, which I will be addressing in my series on quantum economics very soon.
Fourth, the idea of “bond vigilantes” is a myth. The FT might as well be reporting that the City's high priests are demanding the sacrifice of virgins, so inaccurate is their portrayal of reality when they suggest that such fictional entities control what government might do.
That said, of course, bond prices go up and down, and yields fluctuate. But the idea that markets will “impose discipline” on governments is hollow. At any time, the Bank of England could step in to set yields where it wants them to be. It did precisely that during the 2010s, and again during the Liz Truss crisis in 2022, when pension funds faced meltdown. In a matter of days, the Bank bought gilts and restored calm.
That episode showed something vital: the bond market only exists at the grace of the central bank. Far from intimidating governments, bond traders live under their protection.
Fifth, the FT's so-called “solutions” are dangerous nonsense. The article suggests governments must cut benefits, suppress public services, and avoid taxing wealth to appease markets. This is the politics of cruelty dressed up as financial wisdom. It amounts to saying democracy should be subservient to investors' fears. In fact, the real task is the opposite:
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We need governments to guarantee public investment in housing, healthcare, education and the green transition.
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We need progressive tax systems not because they “fund” spending, but because they shape a fair society and tackle inflationary pressures when they arise.
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We need central banks to recognise their role as backstops to government policy, not as supposedly “independent” agents serving the City.
In summary, the FT's editorial line gives the impression that elected governments are mere playthings of the bond market. That is not true. Governments make our money. They spend first. They guarantee the conditions within which bonds are traded. The danger is not that markets will impose their will. The danger is that politicians believe this myth and impose needless austerity on their own people to keep traders happy.
That is not an economic necessity. It is political cowardice. And it is time we called it out.
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Question Please?
Am I to understand that the BoE has to redeem these bonds at the original agreed rate of return they were issued or at the rate that is being driven higher by the second hand (private) bond market whose ‘internal’ rate of return is higher?
You see, I thought bonds were different to shares because the redemption value was locked in at issue, they were more long term. For me, if they are redeemed with the BoE at the originally issued return, then indeed the Financial Times is doing nothing but stirring up trouble.
The redemption price is locked in at issue. So too is the interest rate. What happens in between is that those who like to arbitrage the markets will try to make considerable profit by exploiting between particular bonds to make a profit, often over fractions of a second, at cost to others, of course. They call this added value behaviour. I call it parasitical. I think we can safely assume that the FT is in the first camp.
Having spent a career trading government bonds (mainly French and German) I am not going to claim to be unbiased. However, investors who buy 30 year gilts might change their mind at some point and want to sell. Providing a “secondary market” is an important function and matching buyers and sellers does require speculation and arbitrage in order to offer fair prices.
The problem comes when the tail wags the dog.
If anything then its the ‘Bond Market Vigilantes’ who need to be reigned in by the ‘Purchasers’ who need them to meet their liabilities
Timely piece, when Starmer has just been repeating his supposed commitment to growth yet his Chancellor refuses to enable growth by investing.
Starmer may not understand because he doesn’t have a background in finance, but how can the FT get it so wrong?
Their readers want them to do so?
“the FT’s editorial line gives the impression that”… the FT knows which side its bread is buttered and thus plays along with the idea that “elected governments are mere playthings of the bond market.”
There sorted. Don’t buy the FT any more, it prints nonesense, & I can see that watching old Jasper Carrott (& at least he was funny).
Bet you a pound to a penny I never get a reply.
Thank you and well said, Richard.
One hopes bond dealer Clive Parry chimes in.
A bit of a character is our James Carville. I’m a Mauritian Creole and have Louisiana Creole connections. Carville exaggerates his Cajun, not the same as Creole, origins.
My family’s Louisiana connections are Democrats and related to a former governor. They say Carville acted as a spy in the Kerry 2004 camp for his wife, Bush advisor Mary Matalin, and in the hope that a Bush victory would pave the way for Hilary Clinton in 2008.
The financial markets can however affect the economy through two factors. The first is the reliance of the British economy on the international finance sector and the City (on which we grossly over rely, and which all Governments have exhausted all their resources, and your wellbeing, solely to protect); thus we now have 20% of our national debt in foreign hands, and Japan (which has 2.5 times our debt, in comparative terms) has almost no foreign owned debt. This is not an accident. It is, rather proof there is not only one way to do this. But neoliberals do not want you to hear that.
The second factor is a function of the fact that we measure everything against the budget deficit. That is the wrong measure for a supposedly trading nation. The obsession with the budget deficit, given the structural hopelessness of the British economy, and the total catastrophe that is Brexit (the taboo that forbids all politicians to speak its name), leads inevitably to austerity, tax rises and spending cuts. It is a vicious spiral, from which there is no escape. Keynes worked that bit out almost a century ago. Add to that the £100Bn trade income we have lost through Brexit; and in any foreseeable, plausible economic future, there is no way back.
The deficit we should be worried about, is the trade deficit. The UK trade deficit was £32Bn in 2024 (£226Bn in goods – the offset comes from the City, because the whole UK economy and budget sacrifices itself solely for the good of the City, but it is nevertheless insufficient to produce an overall trade surplus). The EU had a €146Bn trade surplus in 2024 (virtually the only deficit in the EU since the financial crash era was 2022, because of the Ukraine war). Japan, historically has run trade surpluses, but recently it has fluctuated between surplus and deficit. The problem for the UK in these comparisons, is that while 45% of Japan’s GDP is in foreign trade, and 22% of the EU’s GDP is in non-EU foreign trade; in the UK foreign trade accounts for 64% of UK GDP; apparently the highest in the G20. And yet we spend all our effort on a budget deficit problem we can’t fix, and is exacerbated by a trade deficit we should be concentrating on fixing, but don’t, and has been made near impossible by Brexit.
Noted, Jon. Much of this will be covered in a video that I have been working on this morning. But, I stress, working on means that I have been drafting it, and it is not filmed as yet.
Just teasing this out a little,look at the City and its supposed benefits. If we look at trade with the EU, total UK trade year to March, 2025 was £361Bn. The £100Bn Brexit trade loss (4% GDP can be found in various established sources), implies that we would be around £460Bn if we were still in the EU.
Turning to the City, first a measure of significance. UK Total Services exports worldwide, to June, 2025, £528BN. Other Business services: £192b; Financial services: £107.0 billion; Travel services: £69.3 billion; Telecoms, computer and information services: £46.7 billion; Transport services: £33.8 billion. Total of largest 4: £406Bn. The rest, £126BN (the link to that detail is in ods.format, which I cannot open): Source, gov.uk, Department for Business & Trade, Official Statistics UK trade in numbers (web version); Updated 21 August 2025; https://www.gov.uk/government/statistics/uk-trade-in-numbers/uk-trade-in-numbers-webversion#:~:text=Table_title:%203.4%20Top%205%20UK%20services%20exports,services%20%7C%20Value%20(£%20billion):%2033.8%20%7C.
Financial sector, £107Bn. The City does not dominate the services exports sector. The disparity between the total commitment of government backing, to the hilt for a TBTF City sector, still with inflated international pretensions does not quite look as impressive when we compare with everything else (from goods to non-financial services), not least the loss of total £100Bn trade with the EU; suggests to me that we need to scrutinise not the City & financial sector’s very selective accounting profits it yields, but the Government support costs and the total economy costs of the City to Britain, for what it actually delivers. Perhaps if we were less focused on the finance sector as the be-all-and-end-all, and the City’s international pretensions, the BoE would not have had to throw ££30Bn+ down the drain to protect the pension industry from disaster in the LDI crisis (effectively an international financial crisis); to say nothing of the waste the City delivered to the economy in the 2007/8 Crash, from which we have NEVER recovered. We are so obsessed with connecting everything up, we have lost the art of protective separation. A local wind blows in Wall Street, and the door of the BoE in Threadneedle Street is immediately blown off its hinges.
That was merely a rough stab at some non-quantum outline hypothesising. But I am metaphorically, trying to probe a festering wound in the UK body economic, and the inadequacy of totally misdirected Government economic policy.
Thanks
Well Mr Warren, I for one am grateful that you have!
The selling of Britain so cheaply by those who are supposed to be looking after it is shocking, really.
I entirely agree – it’s political cowardice that this argument is not challenged by those who were democratically elected, and are therefore the legitimate governors of the UK. But the flip side is that it’s also political convenience.
As with the nonsense of the household analogy, it’s another device by which politicians can escape responsibility for taking tough decisions about who gets what, when, how and why. In other words, the real work of politics, to which they all voluntarily subscribed, but to which, once in power, they want to avoid at all costs. In short, two lovely little fallacies that make absolute sense to the man and women in the street as taken together they capture the real life experience of most people.
As I said in a previous comment on a similar subject, this myth making started in the 1970s, and became accepted as fact after constant repetition by both Thatcher and Reagan and their proxies. And it is now so entrenched that even people who know better are loath to challenge the myth. Meanwhile, all those the myth benefits (the rich, big business, finance, etc), their proxies – and, obviously, last but not least, politicians – have absolutely no reason to debunk it.
And anyone who doubt this, or my timeline, watch (or read) any speech (in the Commons or elsewhere), by almost any opposition shadow minister, or government minister, on almost any policy issue from the 1940’s, 1950’s, 1960’s, or, indeed, the early to mid 1970s (e.g. Bevan’s speeches on the need for a national health service; Benn on industrial strategy; Crosland on comprehensive schools and modernising British Rail; or, on the US side anything that relates to Roosevelt or Johnson). What you’ll see is politicians who knew what politics was and what it required. Who argued for certain policies: who they were for, when they should be enacted, how they plan to deliver them (including how they be paid for), and why they’re needed. They are not what we get now, from the likes of Streeting and all others: ‘Well, of course we’d like to do this/that, but obviously we can’t as there’s very little money and so many other priorities.’
So, codswallop, cowardice and convenience. The curse and death of contemporary politics.
Thanks.
Regarding your reference to James Carville, he’s also responsible for the, ‘It’s the economy, stupid’, line attributed to Bill Clinton. After Clinton he went on to advise various politicians in various countries (some not so nice), including here. He often appears on various MSNBC evening shows (especially with Ari Melber), and he’s as sharp today as he always has been (also a man after your own heart in the wardrobe department :-). When he made that comment about the bond markets he would have done so knowing full well that they are bloodsuckers and exploiters.
Noted….
Could you argue that what you say is technically correct, but practically not quite so simple?
Japan-style yield-curve management carries risks (inflation, imported inflation/currency depreciation). Not that risks mean nothing should be done, but they are there.
I think you’ve got to couple a program of yield management / deficit funding (which we should do) with a careful long-term well communicated investment plan. The world (internal and external) needs to believe it will lead to self re-enforcing growth with limited or no inflation (especially currently).
I think few here will necessarily follow your logic.
Might you exoploian it again?
Was it aimed at John Warren?
I just meant that what you say is technically correct (bond markets don’t rule) but asserting central bank primacy by having it manage to a target yield (like Japan does) has some risks too.
“The fact is that reality shows that so-called “borrowing” is not a necessity.”
A question.
The French PM this evening lost a confidence vote and his job because, as I understand uit, he says France cannot continue to increase its debt burden.
Why is he so concerned?
Because he does not understand.
May I ask if the same is the case for France which is part of the Euro zone?
I know Greece got hammered by bond markets and the EU for their deficits will France as their ex primeminister warned today be the same?
Maybe.
Because it is believed that will work.
Collapsing bond markets, in themselves, are not the problem. As Richard observes, Central Banks can intervene and dictate pricing.
What a collapsing bond market might be signalling may be more interesting…. but let’s be clear, recent behavior is not a collapse despite what certain sections of the press might claim. As I observed a couple of days ago my old bond trading friends are buying not selling.
It’s a combination of weak bonds and currency that signals trouble and the pound is fine, for now. (Unlike the Truss sell-off when the pound tanked as well.)
If Starmer articulated a vision of investment in health, housing, transport and education plus tax reform the bond markets might like what they heard.
Besides explaining market moves is tricky the sell-off could just as likely be attributed to the rise of Farage as a fear of Reeves.
Thanks
[…] By Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and a director of the Corporate Accountability Network. Originally published at Funding the Future […]
Labour will deliver an austerity budget announcement now in November because that is what restoring public finances means. Bond market activities have helped secure this outcome.
The financial markets, orthodox social and economic think tanks, the mainstream media have won the battle to ensure Labour does their bidding.
Labour does not have the intellectual capabilities or the desire to do otherwise.
HMT/OBR/BoE were already on their side of the media and financial markets.
It would take exceptional politicians to take such a formidable group on. Labour’s leadership are not interested I suspect in doing much that doesn’t command widespread support from donors etc.
As you have rightly pointed out Richard the real losers are the people.
I think its time to issue an alternative budget which would address the problem of the trade deficit, fiscal deficit , the value of the pound , the need for investment to kick start the economy and the need to correct the misaccounting going on in government accounting.
It makes no sense to address any of these issues in isolation. They are all interconnected.
For example if cash spent on services yielding a long term benefit were recategorized as capital this would reduce the fiscal deficit and move the issue to raising cash for investment
Rather than cash for services.
Devaluing the pound should be considered to boost exports and home production and deter imports.
This would help to detract from reducing interest rates and the direct marketing of investment bonds at attractive rates.
The City wouldnt like it but so what.
That way we could all talk about the story rather than disputes about specific issues which are imponderable until put together in a package.
Its quite a task but the broad principles are already widely supported.