Bond market vigilantes

Government bond holders were the playground bullies of the 80s and 90s. They would threaten governments and central banks with bond sales to get what they wanted – usually fiscal discipline and lower inflation. Bond vigilantes – a self-appointed nickname – was presumably a way to sound more like Batman and less like thugs. Like everyone who picks their own nickname, they had high opinions of themselves:

“Bond Investors Are The Economy’s Bond Vigilantes.” I concluded: “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.”

The guy who coined the name in 1983

These threats worked because selling government bonds causes their price to fall, and the yield – the interest rate – to rise. A government bond is just an IOU from the state, so higher interest rates make it more expensive for governments to borrow. Higher interest rates in government bond markets also usually increase interest rates elsewhere in the economy, slowing down growth. Governments, especially smaller, fiscally precarious ones, had reason to be afraid.

Their reputation was cemented when Bill Clinton’s campaign strategist James Carville said: “I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.”

Quantitative easing mostly killed off the bond vigilantes. Central banks have bought trillions in government bonds since the GFC, making the threat of a bond vigilante sell-off mute. Sell all you want, the central bank will hoover it up.

Or did it? The deluge of fiscal and monetary stimulus, vaccines, and the beginnings of a recovery have some worried about inflation – a concern I’ve discussed previously. Bond holders hate inflation because it erodes the value of their (usually) fixed coupon payment. Because they hate inflation, bond holders tend to be wary of government spending. A world where governments are planning trillions of new spending has the vigilantes reaching their capes and masks. The FT reports:

It’s probably premature. Bond yields have slumped again after reaching record highs last week. The Reserve Bank of Australia brought forward bond purchases in response to yields rising. It’s hard to fight a central bank.

Bond vigilantes bring together history, macroeconomics, markets, and superheroes in a neat bundle. I recommend further reading:


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On finding science in the most unusual places

There was an Anti-Vax march in Sydney over the weekend. A family friend on Facebook spoke at the rally and shared the video in a post:

Notice what he emphasizes: experimental vaccines, a rushed regulatory process.

Then, from a recording of his speech:

“I challenge Prime Minister Scott Morrison to prove to the world that I am – being over 70 – vulnerable. I’m not vulnerable! I look after myself!”

“Many of the people I talk to tell me I don’t believe in science. That is rubbish. I am an absolute stalwart for science. I love science. I just don’t love scientists. I trust science, I trust it, I just don’t trust many scientists.”

He never explains how he can trust science, but not those who produce it, nor where he finds all the science he allegedly loves. Someone in the crowd clarified matters by yelling “fuck science.”

It is easy to feel demoralized listening to him. Thousands of people in one of the wealthiest, most educated countries on earth came to hear him speak. To overturn two hundred years of medical research, he came armed with sayings from Mark Twain and Thomas Jefferson – presumably not realizing Jefferson was an untrustworthy scientist.

Yet, this man, a man with no interest in any science which contradicts him, still finds it necessary to speak the language of scientists; he might profane the vocabulary, but he uses it nonetheless. We are spared references to god, scriptural revelation, or prophecy, and get instead proof, process, and rushed experiments – regardless of how disingenuously they are meant. The Scientific Revolution has come so far that even its opponents are forced to use its vocabulary, and accept its process, even if only in lip service. Our species’ long battle against the forces of ignorance and darkness is far from over, but at least we have them playing by our rules.

Still, there is a legacy he shares with his pre-scientific forefathers: the absence of doubt. Where the greatest minds of the human race are unsure, this man is convicted. Convicted with the kind of arrogance only faith can provide.


A similar point I made several months ago.

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No end in sight for the debate over inflation

The debate over the Biden’s administrations proposed stimulus I discussed a few weeks ago is still going. If you wanted to keep up to date, here are some useful links:

The debate still hinges around three technical questions:

  • How large is the output gap? This is the gap between what an economy can theoretically produce, and what it is producing today. Think of the gap as representing idle factories or unemployed workers. The larger the gap, the more stimulus can be applied before you hit ‘supply limits,’ and cause inflation.
  • How effective will the stimulus be? Stimulus does not automatically create the demand which fills the output gap. Instead of buying a new TV, people might save the money they receive, or use it to pay down debts. Those who are concerned expect most of the stimulus to be spent, those who are more sanguine, the opposite.
  • How will inflation behave if it arrives? Both camps agree there is likely to be some inflation, but they disagree over how it will evolve. Those in favour of the stimulus as it stands expect inflation to steadily increase, perhaps even to 2% or 3%. They see this as a good thing, given inflation has been below target for almost a decade. There is little risk of it getting out of control because the Fed can always raise rates in the last instance.

    Pessimists are concerned that if inflation starts growing, it could quickly get out of control. Instead of growing to 2% or 3% and stabilising, expectations might change, causing inflation to continue higher. If the Fed has to react by rapidly raising rates, it could have negative consequences for the financial sector and the wider economy.

This says nothing about the politics around the stimulus. Biden does not want to run the risk of delivering an underpowered stimulus as Obama did after the GFC.


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The media standoff in Australia

Image result for facebook logo

Facebook shut off news access for Australian users on Wednesday. It’s part of an ongoing brawl over proposed legislation that would create a statutory code for bargaining between news organisations and large technology platforms like Facebook or Google. You can read more about it here or here.

Some initial thoughts:

  • This seems like an misstep for Facebook, especially since Google signed an 11th-hour deal with major news publishers to avoid anything so drastic. It is taking a combative stance against a national government, in an environment where there is already concern about Facebook’s influence. “Large corporation threatening nation-state” is a bad look.

    Who has more to lose? For the Australian government, backing down means giving in to a foreign company – not even a foreign power. For Facebook, acquiescing sets a precedent that regulators in other countries could emulate. I suspect Facebook will try and cut a deal here they can use in other regions.
  • The lady doth protest too much, methinks. As much as Facebook repeats that it is just a mere platform, we now have an incontrovertible demonstration of its power; it put up barriers to news for millions of people with the click of a button.

    The words that come to mind when I think about Facebook are no longer “innovative,” “social network,” “founder-in-t-shirt,” “cringy posts,” or “newsfeed,” instead they’re “fake,” “malign,” “opaque,’ “behemoth.”
  • In the short-term, it might have the consequence of hurting smaller publishers who rely on Facebook to reach audiences. Larger news organisations can still expect traffic through their website.

Trump is performing better than the headlines suggest

Trump has now been acquitted in his second impeachment trial, notching up yet another “first.” Had you scanned the headlines of the New York Times or the Financial Times, you could be forgiven for feeling a modicum of satisfaction amidst the disappointment; Trump got off, but the Republican Party is breaking with him; Trump got off, but his name has been tarnished for good; Trump got off, but is fading into irrelevance in (the surely very tacky) Mar-a-Lago.

The story is a little different if you scroll down.

74% of Republican voters want to see him continue in politics. Only 54% of Americans want him out of politics. I stress only because Trump is, on paper, specifically the paper the NYT is printed on, the most disreputable and tarnished President in recent history.

What about the political establishment, his fellow-travelers? Only seven out of the fifty Senate Republicans voted with Democrats against Trump. Of those seven, three do not have to stand for election for five years, two are retiring, and two – Mitt Romney and Lisa Murkowski – have long built names as the (only) Republican Senators who dare to criticize Trump. Bill Cassidy from Louisiana, one of the seven, has already been censured by Louisiana’s Republican Party.

Much has been made of Mitch McConnell’s statement: “There is no question that president Trump is practically and morally responsible for provoking the events of that day.” A statement he made after having voted to acquit Trump.

All this despite having been banned from Twitter for weeks.

Has Trump’s brand been damaged? Among Democrats and Moderates, yes. Among his base, which encompasses a majority of the Republican Party, probably not.

Are Republicans divided over his future influence? Perhaps in private. For now though, most establishment Republicans have been remarkably reticent to criticize the Teflon Don.

Trump will be the defining question for right-wing politics in the US until at least the mid-terms in 2022. There are a spectrum of possibilities from party moderates neutralising his influence, to Trump retaining control, including a messy collapse into years of internecine war. I suspect Trump will hold the reigns in the short-term. The winner-takes-all electoral system incentivizes party unity, and makes the threat of Trump running as a third-party candidate existential. This will make the mid-term elections in 2022 a litmus test for each faction. I suspect moderates will look for mistakes and failures in the 2022 mid-terms as evidence to try and neutralise him prior to 2024.

Would that we did not have to care about the parochial divisions of an outlandish political party in the United States. Yet, this group has the power to stymie everything from action on climate change, to relief for one of the world’s worst humanitarian disasters.

China’s growing cultural muscle

I tend to discuss China’s growing assertiveness with reference its economy or foreign policy. It’s a pity, because China’s increasingly muscular cultural scene is illuminating. If you want to understand the trajectory of China over the next few decades, it’s vital to observe the stories China tells about itself.

Check out this trailer for the new film ‘The Eight Hundred.’ It is a dramatization of the Battle of Shanghai, a particularly bloody siege in the Second Sino-Japanese war – part of what we would call the Pacific Theatre of World War 2.

A few points to reflect on:

  • The Second World War may be the most dramatized war in modern cinematic history. Were these films your primary source about the war, you would presume its centre of gravity lay somewhere between Omaha Beach and a blitzed out London. The Eastern front, and to an even greater extent, the Chinese theater, are rarely mentioned; I suspect there are more blockbuster films about the American civil war than both combined. One benefit of a thriving film industry in China is that new historical stories will be told.
  • These stories will increasingly be filtered through a nationalistic lens. The FT reports that China’s media regulator required changes to the film, because the troops that fought in the battle were from the Nationalist Kuomintang army. The Nationalists would later fight (and lose) a civil war against the Communists, before retreating to Taiwan.

    Nationalistic depictions of war are not unheard of in Hollywood today (American Sniper was a particularly egregious example), but more often than not, contemporary war films emphasise moral ambiguity, despair, and the senselessness of violence. Based on the trailer, ‘The Eight Hundred’ is more Horace than Owen with regard to: dulce et deocrum est pro patria mori. The trailer ends with the following line:

    “To my dear wife YuZhi, when our kids grow up, they shall join the army to avenge their father. To devote themselves to their country. So that our descendants won’t suffer anymore humiliation.