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.

I'm not trying to suggest that many people know much about how financial markets work or what the day to day banking processes are - of course most people don't.

That doesn't mean that we are not able to grasp the difference between say the FTSE and The Royal Bank of Scotland.

I'm not going to get into a fight about this. I don't see that it is any different to linking (only pasted cos I'm useless at getting a link to go to the right bit of a thread). I don't think that the 'thread suggests otherwise', although I acknowledged that you referred to other threads by the same poster that you said showed that. I also said it was just an example.

All I was trying to say was the very reasonable point that, although there are lots of knowledgeable people on here, others are confused (just like real life really. Who knew?) and it's perfectly civil to try and explain.

And on that note I shall drop off, since this is clearly going nowhere.

Good post. I think people forget that we have to borrow all this money and that the interest we pay on it is influenced by what happens politically.

And that the more interest we pay the less we have to spend on schools and hospitals.

That's a simple fact.

"the market" makes it sound as though they are some entity that is not entirely controlled by man i.e. you can't buck the market. Whereas it is in fact "worldwide and domestic investors, banks, hedge funds, speculators and traders". None of these have any obligations to speculate on the basis of making a bigger profit for themselves and/or intsitutions, they don't have to put profit before the stability of nations, they choose to.

Watching Sky the talks between Lib-Con are back on. I am feeling confdent it will happen.

Cable and Ftse creeping back up too

I haven't seen anyone argue that markets aren't important. I've seen (and expressed myself) frustration at the fact that the markets, or rather those who make money by speculating, seem to think that markets' reactions (which more often than not are completely different to what speculators predict) should somehow override the democratic process.

I fund it really astonishing that so many people are so complacent about this loathsomely anti-democratic impulse.

V bad form to hold MmeL up as an eg of a 'confused' poster.

Yes good point Peppa. The people braying about 'strong and stable government' are often the people taking punts against sterling. Hypocrisy, much?

Agree peppamum - I find this speculating on a nation's stability, and the slavishness to money, symbolic of the very worst face of capitalism.

There will be plenty of people making plenty of money at the moment, most of whom are the ones who cry 'but what about the markets' the loudest.

Politcal betting market and financial markets now a pointing towards a Lib-Con coalition.

Looking at political blogs it seems the Lib Dem negotiating position has been weakened since last night. Apparently it is Labour MPs in Scotland who are sayng no to a deal with SNP in a rainbow coalition.

Lib Dems have no where else to go now. Gilts now above the high of yesterday. People are putting real money behind the Lib Con deal.

And yes (reading backwards) of course there are things that could be done, particularly in the medium-to-long term, to address the stranglehold that hyper-capitalism has on our democracy.

New good anaysis on the Paul Mason blog

This from there:

"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." James Carville, Clinton special adviser, 25 February 1993.

Agree BC and PW, if the 'markets' are so imfluential in our (and other) political system, then we really ought to be having a very, long hard look at whether we want a system that allows greedy, unelected, no-national-interest fuckers to decide the level of unemployment and taxes that we (and our children) will pay for the next 20 years.

Because that is what allowing the market to rule the world means.

smallwhitecat - exactly. The arrival of an unelected EU/IMF team to direct what, how and when our Govt may spend would remove all our power to determine our own future.

Oh, God.

Sorry, I was not confused. Perhaps not quite coherent but we can blame that on DS having a play date here today.

Right. What I meant was that the markets were saved from meltdown by the bank bail out. Not that I understood that GB gave money to the markets.

I do understand your point about the markets, and their role in funding everything that the Government does. And I thank you for your explanation, as it did fill in a few blanks. I will admit that my DH is the finance genius in the household, and it is not one of my areas of expertise (although I am very flattered at being called knowledgeable).

What I do not understand though, is that you say that if Labour were to remain in power then the bond market vigilantes will punish this by demanding a much higher yield on the borrowings.

I find it astonishing that we are to be held ransom to the traders - told to cobble together a Government as fast as possible, whether it is stable or not - by the very people who almost caused the banks to collapse not all that long ago.

And the fact that a hastily formed Government may well fail within a short time would surely mean risk of another crash, if the markets are so important.

We as a nation cannot allow a small group of people with very narrow field of interest to dictate the future of our Government. They have not been elected, they do not speak for anyone but themselves.

The market is not some abstract "it" or "they". It's a "we". Ultimately, anyone with any assets or any debt is "the market".

The market has ruled the world since we first stood upright and even before that( research shows that many primates understand and implement barter systems). Money has simply simplified and made more fluid that barter system, where the value of something has intrinsically depended on 2 factors: supply and demand. This has been the case forever.

Therefore, to say " we shouldnt let the market rule" is pointless rhetoric of the most banal kind.

T

Mme Lindt - if you read my Paul Mason link you will get a reasonble explanation. One thing he appears to say it it's uncertainty the bond Market is wary of. And - a ConLib government is perceived as more stable than a Lab/lib one.

When we are told that the markets will not stand for a Labour government, then that is ridiculous too then.

We cannot allow fear of the reaction of the markets to influence political decisions.

Basically don't trust a Labour Govt because they are fiscally incontinent.

Thebride

Or as Marx puts it:

"The commodity form... is nothing but the definite social relation between men themselves which assumes here, for them, the fantastic form of a relation between things."

By the way, I am no more certain of a Lib-Lab Government being a good thing than you are. I do not think that it will come to that.

Whatever the outcome it should be a decision that is made without haste. This is my point.

Not that I want Labour to stay on. But that the fear of market repercussions should not be part of the decision making process.

The markets may have ruled the world 'since we firststood upright' (any evidence?)but for most people that meant being screwed by those with assets, like in a feudal system. Is that your evidence of markets working well? Children being sent up chimneys at 10? again, these markets work really well for thsoe with the assets.

Most people until the 70/80's didn't really have assets or debts either. And its very disingenous to say everyone who has assets or debts is 'the market'. If you look at the Sunday Times Rich List, look how much the richest have increased their wealth over the last year, while us ordinary asset/debt owners are struggling. The affect of high unemployment and high taxes will far outweigh any benefit we will get from meagre assets.

The whole point of the post war consensus in Europe was that ordinary people need the state to provide the basics so that we don't get screwed by the markets, it astounds me that people seem to have forgotten or choose to ignore that.

Peppamum- my point is that the principles of supply and demand have been here forever, and yes, there is evidence of barter systems going all the way back to primates (in one experiment they inadvertently caused primate prostitution and had to halt the experiment but that's another story). Believe me, Captain Caveman was not a socialist.

The Sunday Times rich list might be richer than they were a year ago, but they're considerably poorer than they were before the crisis.

I agree with you that the tax burden is too high but that's what you get when 25% of the country is employed by the state. That's not the market's fault. That's the expansion of government by the last administration.

I guess my point is, when the country is in debt, we cant ignore what the market thinks of the govenment because it affects the interest rate on that debt. You may hold some of that debt, in a pension or mutual fund. If you don't, many small investors and pensioners do, so the market isnt just a few billionaires in their playground. It's pensioners, public sector pension funds, small savers, ISA holders etc. By demonising it, it's easy to forget that it's of our own making.

Point is that the UK cannot afford to pay 8 - 10% interest on its debt. Once the interest rate on Govt debt exceeds the rate of inflation plus underlying economic growth a country enters into a debt spiral it cannot escape from.

The interest accumulates much faster than the economy grows until the country is forced to default. That is the situation Greece is in now and the risk that the UK faces.