Why should pensioners and people dependent on social security pay the price when bond investors demand higher returns?

That is the question raised by the latest turmoil in government bond markets.

The Financial Times argues that governments should heed the warning from bond investors, avoid interfering with market prices and confront rising pension and social-security costs instead, making the most vulnerable pay for a crisis not of their making.

I think precisely the opposite response is required.

Government exists to protect people, particularly when they are vulnerable. Its purpose is not to guarantee wealthy asset owners whatever return financial markets happen to demand.

And governments have far more power over bond markets than conventional economic commentary usually admits.

In this video, I explain how the UK could end quantitative tightening, reduce interest rates, stop unnecessary bond issuance, abandon the full-funding rule, reform interest payments to commercial banks, discourage financial speculation through taxation and increase taxes on those benefiting from higher interest rates.

These are political choices.

The deeper question is, therefore, not whether the bond markets have spoken.

It is whether democratic governments are prepared to say no to their demands. That's because if every economic crisis ends with wealth being protected while ordinary people pay the price, something has gone profoundly wrong with the relationship between markets and democracy.

This is the audio version:

There is no Debate Ammunition for this video is. I just did not have time to prepare it.

This is the transcript:

The Financial Times published an editorial on 2 September, and that's what I want to talk about. I don't usually talk about Financial Times editorials, so there's a good reason why I make an exception in this case, and that is because the editorial in question was so utterly repugnant.

The editorial was about the increase in interest rates payable on government bonds around the world, but especially in the UK. And the question arose because on 1 September bond yields rose around the world, and in the UK they went to around 5.25 per cent. That is a record since 2008, and the FT's message to the government was:

“Back off. Let the markets do what they want. Leave the central banks to raise interest rates if that's what they wish to do to control a threat from inflation, even though nothing they can do by raising interest rates will have any impact upon inflation at all, and don't interfere; accept the increased cost, pay up and do protect savers.”

And if somebody has to pay the price, they were absolutely explicit where that cost should fall. They said that those in receipt of social security and those in receipt of state pensions should suffer as a consequence of the extra interest that was going to be payable to keep savers happy.

Now, let's be clear, the FT also made it obvious that they believe that central banks must be left alone by the government. They believe that central bankers' jobs must be made easy. They believe that they should be allowed to raise interest rates. And that is what precipitated this crisis.

Because Donald Trump is lobbing missiles at Iran again, everyone thinks that the economic recession, which we all know is coming our way, is going to get worse and be closer, and they therefore thought that central banks are going to raise interest rates. So, around the world, investors dumped government bonds, which is what they do when they want to increase the yield on them, and that is what they had to do to match their expectation of the interest rate that central banks are going to raise the base rate to.

Now, that's all a little technical, but the point I want to make is that this is about three things.

The first is about a battle between central bankers and the bond markets and the government, and the central bankers and the bond markets are on one side, and the government is on the other. Let me be clear. That's the case.

The second is a conflict between the central bank and government about interest rates, with the government wanting interest rates to be low and central banks wanting them to be high, with all the consequent effects including increased unemployment and higher risk of recession.

And thirdly, this is about who should pay the price for neoliberal failure?

The argument that the FT puts forward is that this should be borne by those who have the least capacity to bear it and those who have done nothing to create it.

They say that the central bankers who have created part of this crisis should be allowed to carry on as normal.

They say that savers, those with wealth who have benefited enormously from neoliberal policy, should be allowed to continue to enjoy the gains that are coming their way through no effort on their part.

And at the same time, they're saying that the most vulnerable must bear the price and governments should do nothing about it.

In other words, what the FT is saying is that the wealthy should win. The bond markets should win. Democracy should lose. Ordinary people should suffer, and as a result, the government should back off. As ever, the neoliberal view is that government has no right to intervene.

And unsurprisingly, I don't agree with any of this. I do not believe that the government should listen to bond markets. I do not think it should put the interests of markets ahead of democratic choice. And I do not think that governments must accept market discipline. The demand that the wealthy must be protected while others are expected to bear the cost is something that I think the government should ignore.

The government should not be rewarding savers when they have done nothing to secure a benefit at this moment. It should be ensuring that the vulnerable are protected. That is the most basic task of government. When ministers say the primary duty of the government is to protect the country, this is how I interpret it.

And I believe governments are not powerless in the face of bond markets. There are actions they can take, none of which are mentioned by the Financial Times because, of course, they do not wish to acknowledge that they exist.

The choice is whether the government serves democracy, and the people it is meant to represent, or financial markets. So, what can they do to fight back against the financial markets, which the Financial Times is, unsurprisingly, supporting because that is where its interest lies?

There is quite a lot. In fact, I have laid out at least seven steps that the government can take, and all of these are viable, and I offer them in no particular order because they could all be chosen. That is my point.

First of all, the government could tell the Bank of England to stop its quantitative tightening programme. QT, as it is called, is a programme where the Bank of England sells off the government bonds that were bought after 2008, and in 2020 as a result of COVID, and it does so to deliberately force down the price of bonds in the market by oversupplying the market with bonds. And that is done to force up the interest rate.

This is why the UK is already suffering an interest rate above that of any other country. We are the only country in the world where QT is in operation. We are already paying an excess price for this. This is an austerity programme being run by the Bank of England, wholly unnecessarily, and the Bank of England could be told to stop fuelling the crisis that we are in by ending its QT programme right now by denying to the market bonds that the market does not want.

Secondly, the Bank of England could declare there to be an economic crisis. There is an economic crisis in the UK right now. It is called a cost-of-living crisis. And in the event of a crisis, the Bank of England can be told by the government that it cannot exercise control over the interest rate, and the government can. This is provided for in the Bank of England Act 1998, and the government should at this moment require the Bank of England to cut rates because that is what the economy needs.

We are heading for a recession. We are heading for a period of intense vulnerability. We need to support business. We need to support jobs. We need to support those people who the government should exist to serve. And that means we should cut interest rates rather than raise them. If that puts us out of step with the rest of the world, well, that means the rest of the world will have to follow behind us, as I think they would.

The point is, somebody has to take the first move, and it should be us. We should be saying it is our job to protect our economy, not to crush our economy, which is what the Financial Times and the Bank of England want to do. So the Bank of England should be told to cut interest rates.

At the same time, the government should stop bond issuance. Now, every day, almost without exception, the government issues new bonds. It issues bonds to replace those already in issue that have come to the end of their life, and new ones to match the government deficit, which is running at over £100 billion a year.

But it could at any moment end the bond auctions, which it is undertaking. It could fund itself through the Bank of England. It could stop its full funding rule that says it must sell bonds to balance its overdraft with the Bank of England. And it could instead run up that Bank of England overdraft, which is what it did before 2006, and which is what the Bank of England said it could do again in 2020 when the COVID crisis appeared.

By restricting the supply of bonds in this way, which the market does not want, it would support their price, and it would force those upwards, and so interest rates downwards. This is what any business would do. If it was oversupplying the market and the price of its product was falling as a consequence, it would simply stop the level of production that it was undertaking to let the price rise again. This is what the government should do.

It does not have to accept whatever price the market is offering for government bonds when it is oversupplying the market, both for reasons of supposedly balancing its books, and of course because of what the Bank of England is doing with its QT programme. In either case, stopping bond issuance would force rates back up again and would give the sort of shock that would end this crisis in the bond markets.

And at the same time, as I've already mentioned, the government could end that full funding rule which says it must balance its books day in, day out by the issue of Treasury bills and new bonds. It could simply say, “Game over, we don't need to do that anymore. There is no requirement to do this under the Maastricht Treaty anymore because we are not in the EU. So it's time for this nonsense to end. We will simply fund ourselves from the Bank of England if that's what we choose to do.”

At the same time, it could tell the Bank of England to stop paying interest on the central bank reserve accounts, which are held with the Bank of England by our commercial banks, but which were created by the government when it bought the bonds that were the subject of the quantitative easing programme in 2008 and onwards, and 2020 and onwards.

These funds were created for the banks in question. They did not deposit them. But we pay interest on them. The interest in question is currently running at around £20 billion a year. If we tiered the level of interest payable, so only the first part of any deposit had the full rate and the rest had a much lower rate, we could save over £10 billion a year. And if the government insists it has to balance its books, that provides it with a pool of money which it can use to continue to support pensions and social security. And that lets it tell the FT and bond markets to get lost: it is not going to abandon people to support savers.

And there is more that the government could do as well. In particular, it could announce the introduction, or at least a plan to introduce, a form of financial transaction tax called a Spahn tax. Now, Spahn taxation applies to trades in things like government bonds, but the rate of tax goes up considerably when there is financial distress. Because in a period of financial distress, and we are having one at the moment, that is what is forcing up interest rates, the level of trading in markets goes up, and so does the rate of tax on financial services dealing as a consequence.

So, if the normal rate of tax is very small, 0.01%, much less than a percentage point on the value of the trades that take place, if you want to slow the whole process of dealing down so that people take time to consider what they're doing and to stop the speculation that is inherent in the process of this dealing, you would impose this extra tax, suppose, say, a rate of tax of half a per cent on deals, and most of the profit margin in all of that dealing would disappear instantly, and that would stop the speculative trades which are currently being used to attack the government.

Put in place the mechanism, in other words, that will stop these attacks from taking place, and that is what a Spahn form of financial transaction tax would do. The government could use this to regulate markets. The best outcome would be that the Spahn tax would never be charged because the speculation did not take place. That would be a success in this case, but it is by putting controls of this sort in place that we can stop this form of stupidity from taking place inside the City of London, and elsewhere around the world. And that would mean we could have stable markets run by stable government for the benefit of the country as a whole.

And finally, the government could do the obvious thing at this moment, which is to increase the tax rates on those who are gaining from this increase in interest rates. It could increase the tax rates on unearned income from interest, but also from dividends and other sources as well. This would not only be fair in terms of rebalancing the tax rates within the economy, it would also reduce the level of gain being earned at this moment without justification.

At the same time, it could increase the rate of tax on banks, and it should, because monopoly profits are being earned. They're exploiting a situation for their own advantage. And in that case, these increased profits must be taxed. That is essential. We want to use the levers available to government to end the abuse that is going on, and we could.

If these actions were taken, we could support pensions, we could support social security, we could support those who are going to be made unemployed by the crisis that is coming our way, we could support the vulnerable. We would make those who are enjoying the benefits of higher interest rates bear more of the cost. That is what the government should do.

The government has the power to stand up to bankers. It has the power to stand up to the wealthy. It has the power to control the Bank of England. It should do all of those things. You can sense that I'm angry that it isn't, and I am angry that it isn't. And why is that? That's because I believe its primary duty is to protect vulnerable people, and the wealthy are not vulnerable.

And so the FT is saying, “We stand up for the wealthy, and the poor must pay.” And I'm going to proudly say I will stand up for those who are vulnerable, those who are poor, those who are at risk, and the rest can deal with themselves, and the FT can frankly go and get on with whatever it wants to do, but its opinion is utterly repugnant, and I reject every component of what it had to say.

That's what I think. What do you think? There is, of course, a poll down below. Let us have your opinions. Please do like and share this video. Please do subscribe to our channel. Please hit that bell button because that means you'll be told when we create a new video. And if you'd like to buy Tom or me a coffee - a nice red mug this morning - that would be great. There's a link to do that just down below.

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