If the slow-motion meltdown of the Euro has taught us anything in the last few months, it’s that the idea of the bond market is the most powerful force in international political economy at the moment. The idea of the bond market has so obsessed European leaders even to the point where they seem willing to throw their economy (and possibly the world’s) back into a recession for the sake of interest rates and Greek bondholders. Americans can hardly gloat; the idea of the bond market has pervaded calls for austerity in the U.S for the past three years, despite the fact that a first-ever downgrading of U.S Treasuries lead to lower, not higher interest rates on government debt.
So, how do we break our political system of the fear of the bond market bogeyman?
The Bond Market On the Couch:
The first thing we need to establish is that this current wave of magical austerity thinking isn’t purely the fault of bond traders or ratings agencies or financial journalists. It’s true that bond traders have lead speculative attacks on European government debt in the cynical hope of getting bailed out by the ECB or the Germans or the IMF. It’s also true that ratings agencies which either naively or corruptly rubber-stamped worthless financial instruments only to overreact when it came to the debt of immortal institutions which have the power to tax and print money. It’s certainly true that financial journalists and the media in general have hyped a government debt crisis without informing people about the causes or scale of the problem, while selling a false narrative about “bloated” welfare states and “overly-rigid” job protections.
However, it’s also the case that there are plenty of neoliberal politicians who have been perfectly happy to not just follow along with the bond market’s narrative, but to amplify and twist the same message to give themselves cover for making unpopular decisions they already wanted to make before the crisis, while ignoring any nuance or ambivalence on the part of the bond market.
That being said, it’s absolutely true that the bond market is a bad actor in the world economy – and not for the first time. As Karl Polayni wrote in the Great Transformation, in classical liberal political economy, the bond market (abetted by the gold standard that allowed for the easy exchange of one currency for another, and the lack of any capital controls) was supposed to act as the enforcer of capital over again any government that tried to use fiscal or monetary power to stimulate the economy in a recession, or to expand state provision of goods and services, or to use inflation to ease the burden of public and private debt. A government that violated the status quo would face a capital flight, attack on its currency, and a massive budget deficit all at the same time.
The problem with this regime was that it amplified the effects of recessions – panics could spread freely across borders, runs on banks, stock markets, and public treasuries couldn’t be halted, and there was no entity capable of pushing back against the current of fear. As Polayni recorded, the result was the Long Depression of 1873-1896, followed by the economic malaise of the 1920s, followed by the Great Depression. Overall, the hey-day of economic liberalism (roughly the period between 1854-1945) saw 32 contractions, with an average length of 20 months, as opposed to 63% fewer recessions and 55% shorter recessions since 1945.
This current wave of bond market hysteria, which looks much like our pre-1945 crashes, points to a fundamental irrationality of this supposedly hyper-rational market enforcer.
On the one hand, the market markets which ate themselves sick with CDOs and credit default swamps, are lunging for American public debt and calling for more bank bailouts and further stimulus to create the growth that they know is necessarily to produce the growth necessary for them to see any recovery of the economy, which is absolutely required for future profits.
At the same time, they want the state to devote all of its resources to repaying bondholders at 100 cents on the euro and to impose crushing austerity (as opposed to raising taxes, let alone taxes on the financial sector’s wealth) to do it – despite the fact that this austerity makes things worse for them by sapping consumer demand, increasing the difficulty of states servicing their debts, and raising the likelihood of default. They also want as close to deflation as they can get and for consumers to pay back their mortgages and credit card debts, while ignoring the fact that inflation is necessary if consumers are to increase spending and pay down their debts.
Even as bond traders argue that “politicians on the right and on the left fell short of the job by not taking measures to reduce spending,” the ratings agencies equivocate that “we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.” Essentially, the bond markets want a free lunch – they want a stimulus that someone else pays for, increased spending without higher taxes or borrowing, and austerity so that they can be repaid first without pain to the economy.
Likewise, there is a similar irrationality in the attitudes of the bond market to sovereign debt. Ratings agencies have sounded ever-more strident alarms about public sector debt, repeatedly downgrading American, state government, and European debts. And yet, unlike the financial corporations whose products and stock were rubber-stamped AAA, states are functionally immortal, given their power to tax and issue money. (ftnote 1) Hence the reason why the bond markets have gobbled up American debt despite the downgrade.
If the bond market is not all knowing, if it can’t actually prevent itself let alone governments from creating recurring economic crises, we have to stop treating it as a deus ex machina to be propitiated.
The (Neoliberal) State:
Just as there is a curious equivocation on the part of the bond market, there is an odd selective deafness on the part of politicians. They hear only those parts of the reports that call for austerity, not those calling for stimulus and growth.
Likewise, there is an irrational disconnect between the problems facing elected officials – slow growth and high unemployment, leading to reduced tax revenue and increased drain on social insurance and social welfare programs – and the solutions they propose. In the U.K, the Tory government has proposed increasing the age limit on retirement (which will actually increase costs by increasing the rate of disabilities as elderly workers push their bodies beyond what they can bear) and accelerating NHS privatization (despite the fact that the NHS is the cheapest system in the world). On the continent, the troika (the EU, IMF, and European Central Bank) are calling for Greece to reduce its public sector workforce by 150,000 people, cut supplemental pensions by 35%, and cut the minimum wage by 20% – all actions that will decimate consumer demand and growth in an economy with 19% unemployment.
It’s hard to tell how much of this is due to ideological commitment to neoliberalism, how much due to national or partisan or personal self-interest, and how much of this is due to incompetence or ignorance. In the end, it doesn’t really matter. The combination illuminates something that Richard Murphy calls the “cowardly state,” but which more accurately can be described in the style of David Harvey as a neoliberal state, a state that is weak only when it comes to restraining capital, but as we have seen since the beginning of the financial crisis, incredibly strong when it comes to rescuing and maintaining the interests of capital.
What this means is that the state itself is a battlefield in the fight for recovery and reform, and one that will have to be taken before anything else can be done.
In the end, the best weapon we have against the rule of the bond market is truth and ridicule; there is nothing more subtly powerful than myth, and nothing less influential than a naked emperor. And hopefully it will also pull away the curtain on neoliberal politicians supposedly helpless before the might of the bond markets.
However, one of the major weaknesses of the progressive movement has been to think that truth is sufficient, that proving the other side wrong will do the trick. Ultimately, what we need to do is intellectual politics – replacing the conventional wisdom and the purveyors of conventional wisdom in our think tanks, in our party officers and elected officials, and in our government.
Ftnote 1 – As Krugman, Dean Baker, Brad DeLong and others have noted, the case of Greece (which largely is due to the lack of a functional taxation system and control over its monetary policy) and Ireland (where the state guaranteed bank debt at 100 cents on the euro) are being used to cover over the fact that Spain, France, and Italy were basically fine before the crisis and would be easily able to deal with their debt if the bond markets weren’t yanking interest rates into the stratosphere (or if the European Central Bank would actually start acting like a central bank).