Markets. Why they are important.

[Alouiseg]

I've posted this elsewhere on a different thread but it's cropping up all over the place.

In all capitalist and free market democracies the government is kept in check by the bond market. When society requires new hospitals, schools, roads or an increase in its social welfare payments then the bond market decides whether and by how much they have to available to spend.

When you vote Labour because they will provide greater amounts in your benefits each month, or promise pay hikes for your school teachers and nurses or even fix the potholes in the roads they raise the money borrowing from the bond market, which is comprised of worldwide and domestic investors, banks, hedge funds, speculators and traders. If this collective group, known as the bond market decide that the government is spending beyond its means, or continually making poor decisions then it insists on receiving a larger return on its investment to compensate for the increased risk of default.

In the case of Greece, who were charged 15% interest on their Drachma borrowings to then be allowed to borrow at the German rate of 4% when they adopted the Euro, they did not re finance their debt and borrow to invest wisely they started a spending binge to such an extent that the country is now unable to borrow enough money to meet its due obligations without the joint aid of a $960'000'000'000 bailout from the USA, UK (yes its costing us £15'000'000'000) and Europe.

The UK, under "New" Labour have borrowed more than Greece. It is only the fact that we are not in the Euro and still control our own currency and interest rates and its is still likely that the fiscally prudent Conservatives will gain power that the yield charged to our government borrowings has remained fairly low albeit has risen significantly since the hung parliament.

If Labour retain power then it is extremely likely that the bond market vigilantes will punish this by demanding a much higher yield on our enormous New Labour borrowings. We currently pay in excess of £60'000'000'000 in interest alone which would triple if we were on a par with Greece. Sterling, which already fell 1.50 points against the dollar and 0.90 points against the Euro merely because Gordon Brown resigned making it more likely that Clegg could deal with Labour, would collapse in an inflation fueling rout. Imagine if Labour retained power... £1 to $1 and £1 to E0.50 ? Inflation inflation inflation.

Well that's not very democratic is it?

I don't think the markets should dictate the results of a general election. This is an historic moment in British politics where we may finally look at are old antiquated voting system. Our current system is neither democratic nor fair.

The markets will just have to get on with it and remember that without the bank bailout they would be in serious trouble.

The governments need the financial sector but the financial sector needs the government too.

If 'the markets' prove that Capitalism is incompatible with Democracy I think we need to have a long hard humane think about that rather than bow to the pressure of what is basically a giant global casino.

Thanks Alouiseg.

For anyone interested in where the bond money comes from -Here is a quote from Newsnight's Paul Mason.

" countries borrow by issuing bonds. Like an IOU but it pays interest. Who buys them first is not the same as who then holds onto them - because they can be bought and sold. But in general they are both bought and traded by pension funds. Why? Because the interest, though normally low, is a) guaranteed and b) in the same currency as the people who are receiving the pensions. Also some investors like bonds - aka "fixed income" - because they form a bedrock for an investment strategy"

So the bond money appears to (mainly) come from our pension funds.Paul Mason Blog

I also think we need to feel very very concerned if the apparently mighty markets are as ridiculously fragile and fickle as they are made out to be in the right wing press.

There seems to be confusion by some Mnetters about Markets and Banks.

They are NOT one and the same thing.

The Markets were not bailed out by the Govt. Some Banks were!

Thank you Alouiseg. Please can we put a sticky on this post so no one need ever be confused again.

Oh for goodness sake don't patronise people of course we know what markets and banks are.

We also know that had the banks failed we would have had a massive market crash and a hugely damaging global loss of confidence in the UK financial sector.

The banks were bailed out (in part) in order to avoid this and thank god they were

Actually Beachcomber, you might know what markets and banks are, but plenty of people don't. I have seen plenty of threads on various forums where people talk about how the markets shouldn't dictate the outcome of the election and how frustrating it is that we've bailed them out and now they want to tell us what should happen in an election. There clearly is some confusion.

Also PMSL at the need for a MN sticky to patronise people about what a bank is what a market is and the fact that the bank bailout was to bailout the, er, banks.

beachcomber I'm currently on another thread having the discussion!

Beachcomber,

On another thread someone has said (today):

"As to the markets, they were quite happy to be saved by the public purse when things went awry (because of irresponsible behaviour by the banks) so should now hold their weesht (as my Granny used to say)."

Whilst you may be PYSL, a lot of people are confused and I don't see that there's anything wrong with explaining things.

Yes that person was MmeLindt who knows perfectly well what she was talking about - she knows quite a lot about proportional representation and all sorts of other things too. A very knowledgeable poster indeed.

Another thread had posters saying 'fuck the markets'.

Wilful ignorance from a forum that is supposed be cleverer than the average!

'Yada Yada Yada' was one reaction.

No one is patronising, just answering a question in the appropriate place.

I don't think many people on MN are confused at all - I think they just realise that the bank bailout was about a whole lot more than making sure there was cash in high street cash machines.

I don't think people who associate the bank bailout with stabilising the markets are the least bit confused and it is cringeworthily patronising to assume they are.

I found your explanation helpful Alouiseg, and my DH is a markets professional! His rants explanations on this subject always involve so much jargon that it gets confusing.

Yada yada yada/ fuck the markets comments are probably because ordinary people are sick of being held to ransom by big business and the slavish thrall of money of some people.

Fine, you are entitled to take an aggressive stance if you want Beachcomber, but I think people on here at the moment are very quick to accuse others of being patronising.

I am not questionning whether MmeLindt is knowledgeable or not. I actually haven't read all her threads so wouldn't know. If there was some hidden sub text to what she said that I didn't pick up on, I apologise. However, as a 'fresh' reader, she comes across confused and that was just an example.

I think I'll leave this point now but Alouiseq , I found what you said interesting and helpful, and I have involvement with the City too (not personally, indirectly through some parts of my job in another area).

There isn't an awful lot they can do about it Beachcomber short of moving to a Communist State.

Thanks Lymond It took aaaaaages to write it and i nearly gave up several times.

I think it is bad form to quote a poster from another thread and use them as an example someone who is confused about something so basic. (especially when the post itself suggests otherwise).

If you think the bank bailout had nothing to do with shoring up the markets I would be interested to hear why because I've never seen that argument made before.

Alouiseg there are lots of things that can be done about it - regulation being the main one.

Thank you Alouise

Well, I'm reasonably intelligent, and I know nothing of 'markets', it's all gobbledigook to me. Personally, I'd rather someone take the time to explain something to me at the risk of being patronising, than someone assume that we all know what people are talking about. 'of course we know what markets and banks are' - that's dismissive and a bit patronising itself!

ALouisreg do you really think the only choices we have are communism or unregulated financial markets? There is rather a lot of middle ground between the two and it is silly to suggest otherwise.

Honestly!

Aloiseq - I think your post is timley and important because I think many people have no idea just how powerless the Govt wil be in teh face of the global bond marketi we get this wrong. Look at what is happening to Greece.

Just posted on another thread about the Gilt (UK debt) market. It has risen steadily all morning since the Gilt auction went well.

The Gilt market is the market that determines the interest rate the UK pays on its debts. At the moment the price of Gilts is around the price they were just before GB spoke. Therefore the market seems to have regained confidence that a Lib-Con alliance/coalition will happen.

Well I'm glad you didn't Alouiseg (give up writing it).

Beachcomber, just because you knew all that already, doesn't mean that all of us did! I knew various bits of it, but had never seen a succinct, straightforward explanation before.