Alas poor, impotent vigilantes.
You may have noticed a line in Obama’s job speech last night about how the Chamber of Commerce and the labor organizations want an infrastructure bill. What wasn’t mentioned is that many bond vigilantes are also calling for major infrastructure spending and additional fiscal stimulus in this country.
They are doing this through the market system, as borrowing costs are at the lowest rate they’ve been in recorded history, with negative real yields going out more than half a decade. And they are also doing this in the media. The bond vigilantes, who are supposed to come crashing down on us as if we were the next Greece, are calling for investments and stimulus.
From Bloomberg Television the other day, pre-speech, here’s Bill Gross of Pimco:
On his policy recommendations for the U.S. economy:
“…The export-import thing in terms of what we have done for many years in terms of aircraft. And Boeing was a specific example. Why can’t we apply that concept to smaller businesses in terms of providing financing? The infrastructure bank that might be proposed by President Obama tonight begins to do that, but I suggest we go beyond that and provide a bank for small and medium-sized as well as large U.S. corporations.”
On what he’d like to hear from President Obama in tonight’s address:
“I need to see some gusto. I don’t think $300 billion really does it. When you break the program down about half of it is simply to continue existing programs. So we have less than 1% thrust in terms of new GDP types of programs, much of which is in 2012 and 2013 with the infrastructure bank. I would like to see something bold. I don’t think we are going to see it, and I think the markets will be disappointed eventually and probably disappointed tomorrow morning if we see something at $300 billion or less.”
When the bond vigilantes are making noise about hyperinflation or deficits spiraling out of control they get a huge amount of coverage, but when they are calling for a more aggressive fiscal stimulus and a larger infrastructure bank they get none. Heck, even when they are screaming for more stimulus through market and media mechanisms the current NEC director goes on TV explaining how we need to do the opposite of what bond vigilantes want in the name of appeasing the bond vigilantes.
Part of that has to due with the noise machine, but part of it comes from a real asymmetry in the political economy of the bond vigilantes’ power. From this great Peter Frase post:
But today, the bond market vigilantes are not much in evidence. Or rather, they are in evidence, but they suddenly seem unable to have much of an impact on U.S. fiscal policy. Bill Gross, of the ludicrously enormous bond fund PIMCO, is running around screaming about the need for more borrowing and more stimulus. But he has no effect, because it turns out that while bond investors have powerful ways of constraining U.S. government borrowing, they have only indirect and weak means of expanding it…
If bond investors start demanding higher interest rates on government debts, this immediately raises the cost of borrowing for the U.S. government. This, in turn, has knock-on effects throughout the economy, as interest rates rise for everyone and economic activity is thereby constrained. For these reasons, the U.S. government has powerful incentives to avoid doing things that cause the interest rate on treasuries to rise.
Today, however, we find ourselves in the opposite situation: what the bond market seems to want most of all is for the U.S. to borrow more money and stimulate the economy. That’s the best explanation for the incredibly low yield on Treasury bonds, which is negative in real terms over some time periods. And yet the U.S. is not borrowing more; instead both parties are demanding insane policies that will cause a second recession, ostensibly based on fallacious notions about the magical effects of budget cutting and a nonsensical conception of the relationship between government and household finances.
The problem here is that the power of the bond market is asymmetrical. When the interest rate on Treasuries go up, this immediately makes all of the government’s activities more expensive, and hence forces changes in fiscal planning. But when the interest rate falls to near zero, this only presents an opportunity for expanded borrowing, an opportunity that can easily be thrown away if the political system is too insane and dysfunctional to take advantage of it.
Hence the bond vigilantes sit on the sidelines, impotent and hopeless. Just like the rest of us.
And like this guy: