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Autumn Statement: How long can we keep skating on thin bond market ice?

5 December 2012

In today’s Autumn Statement there was some great news on jobs and fuel duty, but it’s surrounded by a surreal atmosphere. We must still beware the bond market.

Employment is at a high with 1.2 million private sector jobs created since early 2010. Youth unemployment is falling – we’re doing much better than our neighbours. Government is living beyond its means to the tune of £108 billion, down from £159 billion in 2009-10. Fuel duty has been frozen at merely eye-watering levels: those of us who campaigned for it will now have to defend the consequences. Billions will have to be found from somewhere else.

We’re told the Government still has an even chance of balancing the books within five years but it will take an extra year before the debt is falling.  ITV’s polling tells us only 6 per cent of the public realise the national debt is going up. Almost half the public think the debt is already coming down and that’s no basis for meaningful democratic debate: we’re still addicted to cheap debt.

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Government action means Britain is a comparatively safe haven in a risky world for bond investors. The Chancellor knows higher rates would be a disaster for the public finances and for indebted businesses and individuals but ‘monetary activism’ has been used to deliver low rates. The Treasury has collected the interest payments on the bonds bought by the Bank of England so we see today more clearly the depths to which Labour delivered us.

Worse still, if the Bank loses control of inflation, bursting the bond market bubble, the game will be up. The Treasury and Bank of England would face appalling choices:  either interest rate rises and a brutal correction or more money creation in a self-defeating attempt to keep rates low.

There was some good news today but the real question is this: can the Government keep skating on thin bond market ice until the good times come again?

Steve Baker is the Conservative MP for Wycombe and Chair of the All-Party Parliamentary Group on Economics, Money and Banking.

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  • DZ

    I see: the Chancellor says he will increase tax on fuel. Then he doesn’t. And that is supposed to be a political and economic masterstroke? Actually, he is making fools of us, whilst avoiding a focus on real waste.

  • pigou_a

    Seriously you are the the chair for the all party parlimentary group on economics money and banking? This has to be a joke.

    Have you even read any economics at all? You know, just basic economics, maybe a bit of Friedman, Mishkin, Blanchard or Mankiw? Loony liquidationist Austrian economics doesn’t count. We tried that in the 20s, and it doesn’t work.

    I guess you haven’t. That does go some way to explain why the economic decisions of the coalition have been so monumentally inept.

    Look, it’s clear you and the rest of our esteemed parliamentarians are utterly clueless on economics. So rather than continuing to screw over our economy, could you just call an election so we can vote in some competent representatives?

    • jazz6o6

      “………….. So rather than continuing to screw over our economy, could you just call an election so we can vote in some competent representatives……”

      Nice idea. Any thoughts about where we can find these folk and how to persuade the dumb electorate to vote for them ?

      • mykraal

        Certainly not from within the current political parties. Osborne has inherited a mess and is probably no worse than anyone else. Every system fails and perhaps we are heading for failure. I hope not because it will be be worse than now.

  • pigou_a

    This is a joke right? Do you really not understand basic macro economics, public finance or history?

    Are you completely unaware of what has happened in Japan for the last 20 years?

    Over the last four years the economy has performed worse than during the Second World War. I wonder if that is because our MPs (yes I read Gummer’s identical drivel in FT yesterday), are staggingly ill informed.

    At least Gummer will get booted out in 2015. Sadly despite your laughable lack of understanding of basic macroeconomics, you will probably keep your seat whatever happens.

    It’s very simple, if you tighten fiscal policy when interest rates are zero it is very difficult for the MPC to offset the effects on GDP, ergo economic growth is worse than during the Great Depression. Cutting public spending (and ranting about the debt) when interest rates are zero is likely to increase the debt to GDP ratio.

    Larry Summers explained all this very clearly 18 months ago, so you can’t say you weren’t warned:

    • TomTom

      Yet the Adjustment has fallen doubly on the household sector through destruction of Savings meaning Capital is used instead of Interest; Usurious rates of Interest Payable to Banks; Scarcity of Credit; and Tax Increases to keep the Government Machine funded. It is a real case of Government Crowding out the Household Sector and Private Consumption

  • TomTom

    The Bond Market has nowhere to go but BUST. Gold is rigged and the Central Banks have rigged every Market. There is nowhere to go but endgame. That is the destruction of the financial system or its capture by The State

    • the viceroy’s gin

      Yes, unfortunately, after the next crash the Supreme Soviet will be taking over the banking and financial systems everywhere.

      You will drive Latas and like it, plebs.

      • TomTom

        Ladas which were really Fiat 124s made in Togliattigrad

  • Mike Barnes

    “We must still beware the bond market.”


    How many times are you going to try and scare us with talk of the BOND MARKET VIGILANTES!!! You’ve been at it for 2 years.

    They haven’t been around for 4 years since the crisis began, they are not coming to get us.

    If it’s your governments ‘good work’ that is keeping borrowing costs low then can you please explain how the USA and France lost their AAA ratings and still saw their borrowing costs actually FALLING!

    Japan has been a disaster for 20+ years, and still their borrowing costs are lower than ours.

    Honestly do the very serious people like your good self ever get tired of being wrong? We must beware of inflation! We must beware of bond market vigilantes!

    You’re completely wrong and we’re never going to get anywhere while people like you are in power.

    The number 1 biggest problem right now is a complete lack of demand in our economy. And sucking more and more money out of the people at the bottom is making things worse.

    • HooksLaw

      If there is no demand in the economy how come Starbucks are making so much money they need to hide their profits in Lichtenstein?
      No demand – but loads of money around for people to buy pointless cups of coffee.

    • Cowboydroid

      There is no such thing as a successful fiat currency. They all inevitably fail, and fail relatively quickly. To understand why monetary intervention never works, one needs to understand why governments intervene in the first place. Government uses currency inflation to forcefully acquire any resource at any time at no cost. Debt allows a government to defer the pain of forceful resource acquisition from one generation to the next. Monetary intervention is merely a more advanced form of power grab. We don’t have Lords using Knights to intimidate the Serfs anymore, but we do have politicians using monetary policy to grab the wealth of its citizens.

  • Jim

    I did used to think that the bond bubble would pop, but maybe that is fighting the last war. As the BoE is buying most of the new debt, we are effectively heading towards a closed socialist system. So, much like the Eastern Block, we will find that foreigners will start rejecting pounds.

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