Markets have a mind of their own

 

At the beginning of May the UK government could borrow for 10 years at just over 1.6% per annum. Yesterday that rate rose to just over 2.6%, a full 1% or 100 basis points increase. This has happened despite Mr Carney’s very clear indications that he intends to keep short term interest rates low for the forseeable future, short of a major upset on inflation.

So why have the markets responded like that to his Forward Guidance? After all that was designed to keep interest rates and interest rate expectations low.  There are two main reasons. The first is the strong impact US rates have on us. US rates have risen even further than in the UK in recent weeks. Secondly, the UK economic figures have come out much better than  expected, bringing forward investors’  ideas of when rates might or should rise, despite the Guidance on official short rates.

US rates have risen on expectations that the Fed will soon end its large Quantitative Easing programme. They have risen despite various attempts to reassure people that the stimulus will not be withdrawn prematurely, to damage recovery. When the UK withdrew or temporarily suspended its QE programme there was no such impact.

Central bankers have to try to guide market expectations in the way they wish, to keep enough confidence in an economy without letting inflation race away. So far in his short time as Governor Mr Carney has been lucky, that he arrived just as the UK economy was showing good signs of revival. He was less lucky with the background for launching forward guidance. The US pushing rates up has had more impact on the UK bond markets than the Bank’s statements. It has produced the irony that the Governor’s policy was designed to keep rates down, yet the markets have pushed borrowing rates up rapidly for the government.

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55 Comments

  1. Leslie Singleton
    Posted August 15, 2013 at 6:08 am | Permalink

    I was once taught that Government (and Central Bankers) have no control over interest rates except possibly in the very short term. Especially given the length of time that rates have been artificially held down already, what chance that now that the B of E has well and truly over-egged the pudding on short rates, long rates will necessarily rise in compensation? Only a thought.

    • Gary
      Posted August 15, 2013 at 10:19 am | Permalink

      The central banks now set out to control the entire yield curve. That was what Operation Twist was about. Using QE money to buy securitiesat all durations and buying short dated bonds and swapping them for long dated.

      The markets do have a mind of their own and that is why it is foolish for a govt to second guess the market.

    • Disaffected
      Posted August 15, 2013 at 11:34 am | Permalink

      Osborne claimed the economy should be based on sound money not funny money. So what has he to say for himself that he followed Labour’s lead? Why has he not made spending cuts as promised? Why so many tax rises? Why will he not achieve his target of balancing the structural deficit? Cross your fingers and hope strategy is not a sound way to run the UK economy nor is it a part-time job. Based on performance he failed in political strategy and the economy. Markets are sensible not to listen to Osborne or what he might tell others.

  2. margaret brandreth-j
    Posted August 15, 2013 at 6:38 am | Permalink

    The selling of produce and the markets always have a mind of their own. Whilst economists and governments were talking about globalisation many years ago, it was already happening , they were providing a commentary , not predicting.
    We certainly need our bond markets to be healthy . We didn’t see any of the new money ,but if it has kept us in a healthier position, then there are unseen long term benefits despite UK withdrawal of QE in the short term passing uneventfully.

  3. Mike Stallard
    Posted August 15, 2013 at 6:42 am | Permalink

    The old – and big question:

    Is the USA finished? Heavily in debt, 20th century industries now gone to China, one vast rust belt in the East and Hispanic in the west.
    We are just one of the US satellites.

    Meanwhile Islam, China, India, Africa and South America are coming to the boil.

    Things really do not look good at the end of our civilized little world order do they.

    Reply The US is far from finished – huge oil and gas resources, great technology, many of the world’s leading brands and multinational companies etc

    • lifelogig
      Posted August 15, 2013 at 8:56 am | Permalink

      i rather like the USA at the moment especially the larger world companies. They have cheap energy, do not have so much idiotic lefty BBC think and are hugely powerful in military terms, stable and with good resources and a business like people who know what works. On the other hand why would anyone lend to the UK at those low rates with Cameron soon miliband and the inflation outlook as it is….. not me anyway.

      • Iain Gill
        Posted August 15, 2013 at 4:45 pm | Permalink

        Yes and house prices are sensible in the USA too, they were allowed to correct properly.

    • A different Simon
      Posted August 15, 2013 at 9:01 am | Permalink

      Mike Stallard ,

      The US are the Worlds only military super power .

      It’s also a great place to do business .

      This is not because the social safety net has large holes in it or because access to healthcare is much more dependent on the ability to pay or any of the bad things that some think we need to emulate .

      It’s because of the good things :-
      – entrepreneurial middle class
      – a much more grown up attitude towards risk
      – no stigma attached to bankruptcy ; at least you tried
      – a less institutionalised population
      – a less fractured more cohesive society
      – less nimbyism
      – things happen much more quickly

      The UK middle class is anti-entrepreneurial . People admire others with a “good job” with a big company more than they admire someone with the gumption to take a risk and go out on their own .

      The US offers the stability that Europe and the UK don’t in areas like regulation , Govt policy , legislation , taxation , political stability . The UK and Europe are a shambles in these areas .

      The US doesn’t commit economic suicide by unilaterally opting for expensive energy .

      About 6 months ago I was trying to persuade an associate of the benefits of trying to service an emerging new industry in Europe and the UK .

      He told me that he wasn’t interested in Europe and the UK and would continue to do business with America .

      6 months later he has been proved right .

      You can’t make money in Europe and that is nothing to do with anything which is easy to change like levels of taxation but the general inertia which extends timescales into plate-techtonic timescales which are much longer than SME’s can hold their breath .

      Because it is so hard for a legitimate business to make money in Europe and the UK , nobody wants to invest here . America is a safer bet with better returns .

      • A different Simon
        Posted August 15, 2013 at 9:25 am | Permalink

        Profit has become a dirty word in the UK and Europe .

        This is in no small part due to the Govt failing to hold the irresponsible banks and price gouging energy retailers to account .

        The public opinion backlash should have targeted politicians and those banks which were guilty of excesses , market rigging and irresponsible lending .

        Instead it has fallen on any business which declares a profit .

        You might think the possibilities for companies which want to transfer the US shale technology to Europe and the UK are good but other than Breitling Oil and Gas and a couple of others but the serious money doesn’t want to come here .

        They can make more profit on a resource a twentieth of the size in the US because it is so hard to do business here .

        Ethical and responsible businesses have ended up carrying the can of public opinion for the banks .

        This has made profit a dirty word in the UK and Europe and deterred investment .

        • uanime5
          Posted August 16, 2013 at 3:51 pm | Permalink

          Profit is a dirty word because companies keep increasing their profits by paying their employees less or in some cases nothing (mandatory work activity) and reducing employee rights using zero hours contracts. Perhaps if companied made profits in an ethical manner people wouldn’t be so hostile to these profits.

      • uanime5
        Posted August 16, 2013 at 3:49 pm | Permalink

        Given that half the UK’s exports go the the EU, while most of the EU countries makes money by trading with other countries in the EU it seems that you can make money in Europe.

    • oldtimer
      Posted August 15, 2013 at 9:04 am | Permalink

      …plus, in addition to JR`s points, the USA still has a strong entrepreneurial culture and its demographics are in its favour – unlike China facing the implications of its one child policy. Europe, and especially the EZ, is entirely another matter with its unresolved issue of the huge financial imbalances between Germany and the other members. I think the jury is out on the UK`s ability to pull itself out of its current debt predicament.

    • lifelogic
      Posted August 15, 2013 at 10:30 am | Permalink

      No the USA is in far better shape than the UK with Cameron and Miliband shorty – cheap energy, less BBC fake green lefty think, stong defence, economies of scale – too many lawyers and guns seem to be the main negatives and the debt levels. I an quite happy with holding some large US world companies equities at the moment.

    • uanime5
      Posted August 15, 2013 at 1:02 pm | Permalink

      Other than South Africa and maybe Egypt I wouldn’t say Africa is likely to be any threat. Much of the middle east is also unlikely to be able to compete with the USA any time soon.

      Though South America is developing well.

    • lifelogic
      Posted August 15, 2013 at 3:45 pm | Permalink

      CERTAINLY NOT FINISHED cheap energy, less bbc think, strong defence, world class companies just too many guns and lawyers and too much government and gov debt.

      • Bazman
        Posted August 16, 2013 at 6:49 pm | Permalink

        What about idiotic right wing think like yours? Seems to be plenty of that in the good ol’ US of A.

  4. Mike Wilson
    Posted August 15, 2013 at 6:55 am | Permalink

    Lot of use of the word ‘lucky’ in that article. One might like to think there ought to be a bit more involved in these decisions than ‘luck’.

    It is clear that, one day, the markets will demand much higher interest rates to lend to us. (It amazes me that we have got away with it for so long.) Instead of taking a sensible view like ‘this can’t last forever, we have to encourage consumers to reduce borrowing and reduce government borrowing too’ – the government is encouraging a new consumer borrowing splurge – to buy already seriously over-valued houses.

    On every level this is wrong. It is stupid, immoral and reckless.

    Why are we governed by such people. Oh yes, 10.8 million of you voted Tory and 6.8 million voted Liberal.

  5. alan jutson
    Posted August 15, 2013 at 7:07 am | Permalink

    Rates will have to rise eventually, it is just a question of when.

    I hope all of those people who are now rushing to purchase property have done their homework on the historic level of mortgage interest rates.

    I seem to remember that the historical average mortgage rate level is close to 8% over the last 60 years.
    Yes we had 15% at one time which was way above the norm, but we have also had the recent ultra low rates which are way below the norm.

    I wonder where that will leave the government (taxpayer) in underwriting some new high loan to value morgages.

    Remember higher inflation usually comes with higher interest rates, if that is the case then those recently retired will find they have been well and truely screwed with low annuity rates, which are fixed for life.

    Reply Around the time of Labour’s visit to the IMF for bail out for the UK they had to offer 15.5% for the state to borrow money compared to today’s 3%+. No-one thinks we are going back to those levels, but imagine the public spending implications at much higher rates of interest.

    • alan jutson
      Posted August 15, 2013 at 8:18 am | Permalink

      Reply – reply

      “imagine the public spending implications at much higher rates of interest”

      Exactly, that is why so many of us have been saying the government has to cut and control its spending and waste urgently, because the debt will automatically rise as interest rates rise.

      To simply rely upon so called future growth, and higher rates of tax to pay for it all, was always a nonesense.
      Thus we have had 3 years of tinkering around the edges, and lost the opportunity to really get a grip on things whilst interest rates were low.

      People and governments simply have to learn to live within their means, printing money just papers over the cracks and delays the inevitable, when then even more drastic action will be needed.

      • Disaffected
        Posted August 15, 2013 at 11:45 am | Permalink

        Well said Alan. However, not so much people, the GOVERNMENT has to cut spending and act as an example to influence culture in this country. To create an environment where personal debt is the norm is wrong ie Student loans and cheap mortgages as you describe. Borrow and waste or borrow and give away are not good examples of a prudent government.

        Other examples of wasteful incompetence: energy policy, quangos, large government. With the recent appalling nominations to the Lords the UK is reported to have the second largest political system in the world, second to China. Remember the early legislation promise to address the sleaze of politicians? Now it is being advanced in parliament to bring back expenses without receipts despite the government failing to exercise true leadership to eliminate corruption and raise standards in contrast to that it expects of its citizens.

        Reply All MP expenses need receipts now, as most did before.

    • Mike Wilson
      Posted August 15, 2013 at 11:13 am | Permalink

      I find your reply astonishing … ‘imagine the public spending implications at much higher rates of interest’ … quite mind boggling in fact.

      Does your government imagine those public spending implications? You are borrowing massive amounts of money at low interest rates. How long are the bonds you are selling? 10 years? More?

      How long will it take to repay the debt? Estimates vary (we need estimates!) but some say the total debt now is about a trillion pounds. So, a 1 with 12 noughts.

      If we ever move into surplus, how much will we repay each year? How about a massive 10,000 million?

      Which, if my arithmetic is correct, means it would take 100 years to pay back the debt. How many times, during that 100 years, will the debt be rolled over? What interest rates will be demanded in 20, 30, or 40 years’ time?

      You have no idea and nor do I. Which is why it is utterly irresponsible to borrow such huge sums of money. It ought to be illegal. It is high time government borrowing was limited by law – and not with moveable goal posts.

      Reply I personally am not borrowing, and have urged the government on many occasions to spend and borrow less. Governments traditionally have a stock of borrowing which they never repay but roll over. The issue before us is how high should this stock go and when can we start reducing it? Fortunately for the Uk, unlike some countries which are closer to serious borrowing problems than the UK, the country has its own currency, the ability to create money when justified, an average debt of long maturity delaying the repayment/rollover time, and now a substantial proportion of its debt in its own hands.

      • Brian Tomkinson
        Posted August 15, 2013 at 5:08 pm | Permalink

        reply to reply,
        JR: “Fortunately for the Uk ……now a substantial proportion of its debt in its own hands.”
        I presume you mean money created out of thin air by the BoE? If it’s such a good idea why don’t they go the whole hog and print another £1 trillion? When is someone going to tell us the truth, that politicians and bankers are robbing the prudent to protect borrowers (particularly the government) even the reckless and profligate. Of course the government is the most profligate whether it be Labour or this Conservative-led coalition.

      • Mike Wilson
        Posted August 15, 2013 at 5:40 pm | Permalink

        Reply to reply: Wow, that’s a bit of a cop out … ‘I personally am not borrowing …’

        But you are a member of the government. Are you shouting from the rooftops about the constant increase in debt?

        Who cares about other countries? I don’t. I care about THIS country, MY children and the next generation generally. We have ‘the ability to create money when justified’ … are we in a lunatic asylum? Just print money whenever we feel like it!

        What is the average length of our debt? How many times will it need to be rolled over before you think it will all be paid back? (Assuming we ever stop borrowing more EVERY day.)

        Reply I am not a member of the government. I am a Conservative MP, who has regularly made proposals to reduce state spending and borrowing

    • lifelogic
      Posted August 15, 2013 at 11:16 am | Permalink

      I see the rates in Switzerland are far lower, still Cameron says we do not want to copy them, though he clearly has no sensible reasons or he might have mentioned them.

      • Leslie Singleton
        Posted August 18, 2013 at 2:36 pm | Permalink

        lifelogic–And remember it was not Switzerland that our daft PM chose to disparage so gratuitously–it was a Greater Switzerland no less. Who could ask more than that, meaning ditto Switzerland but bigger? I can think of nothing of any kind that I would wish to criticize let alone be rude about.

  6. Brian Tomkinson
    Posted August 15, 2013 at 8:24 am | Permalink

    According to today’s Telegraph: “Top economists said the Monetary Policy Committee (MPC) could relaunch quantitative easing (QE) within months if markets did not move into line with the “forward guidance” unveiled by Governor Mark Carney last week.”
    What do you think about that? Osborne said when in opposition that QE was “the last resort of desperate governments”, and that “in the end printing money risks losing control of inflation and all the economic problems that high inflation bring”. I presume he discarded those views when he took office? He hopes to inflate away the debt which he is planning to double from whhat it was when he became chancellor. Why does no politician talk about the debt and deficit anymore? Lest you forget, the debt is now £1,207 billion and, of course, still rising inexorably.

    • Mike Wilson
      Posted August 15, 2013 at 11:15 am | Permalink

      Brian, where do you get that 1,207 billion number from?

      What does it include? PFI liabilities? Future public sector pension liabilities? Or is it just literally the total amount the government has borrowed by selling bonds?

      • Brian Tomkinson
        Posted August 15, 2013 at 4:36 pm | Permalink

        Mike,
        I refer to the following site from the Tax Payers’ Alliance: http://www.taxpayersalliance.com/debtclock/
        It is the current amount of money the government owes and does not include future liabilities. Frightening isn’t it?

      • Mark
        Posted August 15, 2013 at 10:56 pm | Permalink

        The current total for gilts in issue (including inflation uplift on index linked gilts) is £1,330.95bn, plus about £65bn in Treasury Bills according to the DMO.

        Reply £375 bn of these are owned by the state

        • Mark
          Posted August 16, 2013 at 10:55 am | Permalink

          The DMO report government holdings of £199,978m at end July, excluding holdings by Local Authorities, public corporations and the Bank of England (but including the DMO itself). The Bank of course holds some index linked gilts for its pension fund. These holdings are mainly on behalf of National Insurance Fund, National Saving and Investments (i.e. assets against customer deposits), the Courts, and National Lottery funds, via the Commissioners for the Reduction of the National Debt. Such holdings can properly be offset against the gross gilts in issue, because they are in fact funded by payments from outside government.

          http://www.dmo.gov.uk/rpt_parameters.aspx?rptCode=D4L&page=Gilts/Government_holdings

          The QE gilts are held by the BEAPFF on the basis of a loan rather than ownership via purchase with funds raised by taxation. That loan is a low start payday loan until genuine third party lenders can be found. Since the loan is from one arm of government to another it does not cancel the debt: that would require formal monetisation and cancellation of the loan to BEAPFF.

          Once the idea that government simply prints money to meet its obligations takes hold there is no incentive for anyone to pay taxes, and monetary and economic collapse is likely to follow soon after. Indeed, there are real limits to the credibility of increasing levels of QE funding for similar reasons. Hence why Carney has sought to introduce “jaw jaw” guidance as a monetary policy instrument. He knows he can’t risk testing the limits of QE credibility.

        • Mark
          Posted August 16, 2013 at 11:04 pm | Permalink

          The BEAPFF portfolio of QE gilts has a mark-to-market value of £368bn, below the £375bn acquisition cost, on the back of rising yields. The £8bn shortfall will reduce the ability to draw down accumulated coupon income to help fund the deficit.

    • zorro
      Posted August 15, 2013 at 12:54 pm | Permalink

      As I mentioned on a previous blog, QE is the only option they are politically prepared to deploy in this situation, and is really inevitable following their ‘forward guidance’ and the market reaction to it. If they don’t agree, then we will print, perhaps a little Canutesque…… But look at Japan, really high levels of debt and they intend to massively increase the monetary base…..but still low LTIR. In all honesty, this will not end well without some huge debt write off internationally or mega refinancing/restructuring…..but then again, who knows?……That might be the aim. Who would have imagined the hubris? Hello, we are the government, massively in debt and deficit ridden, no real growth strategy, but we are just telling you we are keeping ZIRP for three more years……Admittedly, there was the caveat (of sorts) about inflation, but they seem to think that they can contain it…..Nothing like confidence in your own ability eh?

      zorro

    • Denis Cooper
      Posted August 15, 2013 at 2:38 pm | Permalink

      I think that if gilt yields continue to rise then probably at some point Carney will write an open letter to Osborne proposing that the Bank should create more new money and use it to rig the gilts market and get yields back down.

      And I think that Osborne will reply with an open letter giving Carney the necessary authorisation to do that, but those who are angry about it will direct most of their ire against Carney rather than Osborne.

      And I also think that MPs will only be informed about Osborne’s decision after he has made it and sent the letter of authorisation to Carney, and that even though it had seemed likely for some time that Carney would propose more money printing MPs would still not have got round to insisting that no such letter should ever be sent by Osborne without their prior approval through a formal vote.

  7. Max Dunbar
    Posted August 15, 2013 at 8:30 am | Permalink

    I wonder who wears the trousers in the Carney household? And I wonder where the ‘women on the Monetary Policy Committee’ statements are really coming from.

    • Leslie Singleton
      Posted August 15, 2013 at 10:24 am | Permalink

      Max–Perhaps not wearing the trousers, more likely he is just trying to keep her happy (etc ed). Anything for a quiet life. And did you read the thoroughly sexist article on “Men in their Sheds”? How dare it not be headed “Persons in their Sheds”? For those who missed it, the thrust was that Men should club together in joint Sheds to work on projects at the bottom of their gardens. Promoters of this idea should beware or they’ll be hounded for daring to run a Male only Club. Luckily there are many women who do not think like this but not enough unfortunately.

      • alan jutson
        Posted August 15, 2013 at 4:43 pm | Permalink

        Leslie

        Are you sure it should not “families in their sheds” if the recent thermal imaging survey completed by Slough Council is to be believed.

        It has been estimated that many thousands of people are now living illegally in sheds at the bottom of peoples gardens, and paying rent to do so.

        Have to say that this has been going on for years, but it appears that the problem is now so huge in some area’s, nothing is likely to be done because there is nowhere else for these people to go, so Councils up until now have turned a blind eye to the problem.

        The result perhaps of an increasing population which outstrips house building by a large margin.

        Shanty towns next if we are not careful.

        • Leslie Singleton
          Posted August 16, 2013 at 10:01 am | Permalink

          Alan–The need for accommodation at this sort of level is self-evident and my answer, as I have said before, is bring back prefabs. Everybody can’t live in an “Executive” home–not that modern-built homes are anything to shout about.

    • lifelogic
      Posted August 15, 2013 at 3:42 pm | Permalink

      Order are probably from Cameron’s mumsnet wing rather than Carney’s wife perhaps. Good to see Stuart Wheeler talking sense re gender differences on the world at one today. Cameron even seems to think barmy gender equal insurance is a good plan. One assumes he thinks he is God now and can override billions of years of evolutionary variances by EU law.

      If you legislate for gender equality then by definition you discriminate by law against woman or men and get worse candidates.

      • Bazman
        Posted August 16, 2013 at 6:59 pm | Permalink

        Woman are discriminated by lots of things as they are. Is that not discrimination? Being put back for promotion as they have had some time off because of a child is not as you say ‘Gods law’. You think Stuart wheeler speaks sense on this is telling of your own right wing stupidity that when questioned is seen wanting a great deal. Take a look at your own previous posts and lack or replies to valid comments for proof added to the fact that you continually make the same ludicrous comments and assertions. Is that because you are a white middle aged man and you cannot help it? You of course want no special treatment and in fact do not get any for this burden do you? Use your brain for once.

        • lifelogic
          Posted August 17, 2013 at 8:54 pm | Permalink

          Both woman and men make choices, based on their abilities, aspirations, resources and talents – such is life. The fact that they do not have 50/50 representation all the time is inevitable and any attempt to “correct” this is clearly moronic and discriminatory.

          Most sensible women understand this very well indeed alas not the BBC.

          • Bazman
            Posted August 18, 2013 at 9:33 am | Permalink

            The problem being that if you are a woman you need more ability, aspiration, resources and talent to make these choices due to moronic and discriminatory.attitudes from people such as yourself who Pigeonhole them in what they can and can’t do and see any methods to correct this discriminatory. Having 99% of men in one occupation is discriminatory by one form or another and mindless rants about political correctness and the BBC does not change this. Sensible woman being ones that agree with you as anyone who does not is not ‘sensible’ even if they are right. More mindless white middle aged man nonsense who probably believes this minority group are themselves victims of discrimination.

  8. behindthefrogs
    Posted August 15, 2013 at 10:18 am | Permalink

    Meanwhile the government has closed my NS&I savings account which was a source of cheap borrowing for it. Why instead doesn’t it promote more heavily these sources of savings?

    Reply QE is cheaper

    • alan jutson
      Posted August 15, 2013 at 4:45 pm | Permalink

      Reply to reply

      I like your sense of humour John, shame that it is true in the short term.

      Just shows what the Government think of the savers though, treat them with contempt !.

    • zorro
      Posted August 15, 2013 at 6:07 pm | Permalink

      Effectively, the government is saying to savers we don’t need you, we can print our own money.

      zorro

  9. David Hope
    Posted August 15, 2013 at 10:28 am | Permalink

    As I said before, this Forward Guidance is purely a marketing thing to say “look we are doing something”. Not a lot has changed.

    Like your colleagues Steve Baker and Douglas Carswell I really wish we would stop the central planning of money. Central banking is never truly (or typically remotely independent) being forever torn between boosting GDP figures, house prices, buying government debt, and from time to time keeping inflation down. Now employment has been added to the mix! But an economy and a market is a huge mix of participants all with different motivations and all central banking does is redirect capital – in recent times to consumption and homes.

    Clearly Carney is not independent and has been brought in by Osborne with a remit to boost growth figures (even if that growth is yet more debt based) for the next election.

    I don’t want to be too pessimistic but I can’t see how this will allow a long term rebalancing of the economy. Sound money and less interference can go a long way…. but of course to happen politically we need a government that is not in heavy debt

  10. Acorn
    Posted August 15, 2013 at 11:37 am | Permalink

    “US rates have risen on expectations that the Fed will soon end its large Quantitative Easing programme. [ … ] When the UK withdrew or temporarily suspended its QE programme there was no such impact.” [BoE Balance sheet has been flat since April = Acorn]

    At the beginning of May the UK government could borrow for 10 years at just over 1.6% per Annum. Yesterday that rate rose to just over 2.6% … ; Spot the connection???

    Anyway, I am now convinced that the Conservatives are going to win the next election. In fact, I may have a small wager on it. Why, because the voters are even more economically illiterate than the politicians; and, as Jerry said yesterday,you can fool all the people all the time, or at least the 99% that don’t matter to the metro elite. There is no time left to educate the voters before the next election; so, from now on concentrate on setting up family finances for a full on, five year, crony capitalist parliament.

    JR is implying above that our economy will be decimated by “The Bond Market Vigilantes” pushing up interest rates; don’t worry. The UK, like the US issues its own currency that is allowed to float against other sovereign currencies. The central bank decides what the short term interest rate will be, not the markets. The market tells the central bank what it thinks short term interest rates will be in ten years time, with the rate it will trade the 10 year Bond at today. Yes, there are people who will hold those Bonds to the redemption date.

    Have a read of http://neweconomicperspectives.org/2012/12/functional-finance-and-the-debt-ratio-part-ii.html . Then have a little smile every time you hear or see talking heads going on about crippling deficits and debt and austerity; knowing that you know that the 99% won’t ever know, that the pain they are suffering, is the result of an erroneous political ideology.

    Repkly You read things into my post that are not there. I was not complaining about bond markets nor forecasting doom from higher rates. I just think we should understand that Mr Carney may want to keep rates low, but the markets have their own ideas about the longer dated borrowing costs.

    • zorro
      Posted August 15, 2013 at 6:12 pm | Permalink

      Reply to reply – John, the thing is that Cameron has said on several occasions in the media that we have low interest rates thanks to his successful economic stewardship which is, of course, nonsense……We have ZIRP and QE because if we didn’t, we would be up a certain creek without a paddle! We are in the midst of a prolonged experiment potentially approaching a large cliff….

      zorro

  11. A different Simon
    Posted August 15, 2013 at 12:10 pm | Permalink

    I’m not in favour of reckless spending , trashing currencies , lack of discipline or printing to infinity but why does the Govt co-opt the taxpayer into paying interest on the money it uses ?

    Why does it not just print it interest free ?

    • Mark
      Posted August 16, 2013 at 11:12 am | Permalink

      In a few words: because people prefer to spend money today rather than save it for later, and because life is uncertain.

      A forensic analysis of the issue is in this paper by Prof Martin Shubik:

      http://cowles.econ.yale.edu/P/cd/d03a/d0338.pdf

  12. forthurst
    Posted August 15, 2013 at 1:00 pm | Permalink

    “Markets have a mind of their own”

    Perhaps markets have more than one mind: the mind of the purchaser of medium dated gilts who finds the outlook for inflation being tied to a statistic over which the government has deliberately renounced all possible control, namely that of the unemployment rate, by making no attempt to regulate an unquantifiable influx of people from either the EU or further afield; the mind of the bankster who likes low borrowing rates in order to maximise his profits in the carry trade where commodities and stocks offer opportunites for market rigging and manipulation; the mind of the business man who cannot borrow money from his bank, either at a competitive rate or at all, to invest in order to hire those people which the government claims to wish to see removed from the unemployment register; the mind of the rentier wishing to buy more property irrespective of cost in order to pass on those costs to those who will pay anything for a roof over their heads; the mind of the saver who at some point will feel driven to invest their capital in anything but a deposit account.

  13. ferdinand
    Posted August 15, 2013 at 3:05 pm | Permalink

    The market will always – always – beat the Governor and the MPC.

    • zorro
      Posted August 15, 2013 at 6:15 pm | Permalink

      That is the judgement of history….. I am just amazed at their arrogance at thinking that they can control events in the mid term.

      zorro

  14. Atlas
    Posted August 15, 2013 at 5:49 pm | Permalink

    It is an interesting question to ask how long a Government can keep on debasing the currency before events engulf it. Germany in the 1920s may be one exemplar. The later Western Roman Empire is an other. Neither ended up happily. I find all this talk of QE just another fools paradise solution to the intrinsic problem of a post-industrial economy.

  15. theyenguy
    Posted August 18, 2013 at 2:28 pm | Permalink

    Finally, yes indeed markets do have a mind of their own, well perhaps better said, on May 24, 2013, Jesus Christ, operating at the helm of the economy of God, Ephesians 1:10, enabled the bond vigilantes to call the interest rate on the US Government Note, ^TNX, higher to 2.01%, making for an extinction event that terminated Emerging Market Investment, EEM, and Utility Stock Investment, XLU. The rise of the interest rate on August 13 2013, to 2.71%, constituted an “apocalyptic event” that has terminated fiat money.

    With the failure of credit on August 13, 2013, both the sovereignty of democratic nation states, (this being seen in World Treasury Bonds, BWX, collapsing in value), and the seigniorage of the world central banks, has failed. Jesus Christ, has pivoted the world’s economic and political paradigm from Liberalism to Authoritarianism.

    From August 13, 2013, forward, regional nannycrats will set the rules for the formation of the new money, that being diktat money, which will determine everything else.

    Diktat money is defined as the compliance required, as well as the trust that is engendered, the debt servitude that is enforced, and the austerity schemes that are experienced, such as heavy losses on large bank deposits via bailins, levying additional taxes, privatizations, sale of a country’s central bank’s gold reserves, fiscal councils, such as those reported on by the IMF, Case studies of fiscal councils and The functions and impact of fiscal councils, and statist public private partnerships, which oversee regional economic commerce, trade, and the factors of production, when sovereign regional leaders such as Jeroen Dijsselbloem, President of the Eurogroup, and Michel Barnier, EU Commissioner responsible for internal market and services, as well as sovereign regional sovereign bodies, such as the ECB, invoke mandates for regional security, stability, and sustainability.

    Diktat and physical possession of gold bullion will be the only trusted forms of wealth under Authoritarianism.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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