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.

'to say " we shouldnt let the market rule" is pointless rhetoric of the most banal kind' - really? You think the markets should rule? You think that the CBI should have a say in how the constitution is arranged (I bring this up because I heard the CBI Director graciously saying the other day that he was quite happy to leave the constitution alone - gee thanks!)? You think that a spokesperson for the bond market should set a deadline of midnight tonight for the coalition talks to be resolved? You think that the IMF should pick our Prime Minister?

Because all of those things aren't too far off from what's happening at the moment. The future political direction of this country is at stake and two foully anti-democratic forces are attempting to decide its direction: an elderly American billionaire and a few thousand people whose sole motivation is profit.

Thought you were talking about the Lib Dems when you said a small group of people dictating to us MadameLindt!

Thank you for the Paul Mason blog. Very interesting.

One thing does strike me. The assumption that the markets will react badly to a LibLab Government is based on nothing more than the fear that the cuts made will not be strong enough.

Gordon Brown has repeatedly said that he is not for cutting spending, that we should buy our way out of a crisis, as other countries are also doing.

Germany is doing this, they are heavily investing in infrastructure, schools, kindergartens... thus keeping those people in jobs who are reliant on these industries.

My DH works for a multinational with strong presence in Germany, they have full books for the next year (after a catastrophic year last year) because the government is investing in building work.

It is a very different approach to that which those who run the markets wish for. But no one knows right now which is the best way.

The markets have always ruled. Man's actions depend on incentive, which is represented by money. Just read the many threads on the election- most voters (left and right)are voting for their party for their own financial reasons. We are all the market.

What the global markets are saying is "Actually, you guys have a lot of debt and an annual budget deficit, so it looks like it's going to get worse. I'm worried I'm not going to get repaid. Therefore, I'm thinking about putting interest rates up."

Therefore, the next government can either

1. Cut spending and start paying it back
2. Risk soverign debt crisis
3. Default.

If you think there is another way out of this, I'd love to hear it.

Couldn't agree with you more policywonk.

The ordinary people of this land fought hard for their right to vote and one of the reasons they did was to have state protection of both a physical and a moral nature against exactly this sort of situation.

Well the other way is exactly what has been described by MmeLindt as happening in Germany - it is exactly what Gordon Brown and Nick Clegg wanted to do.

We do not know what the correct solution is to our situation but there are more than the three options outlined above.

MmeLindt - "..Germany, they have full books for the next year (after a catastrophic year last year) because the government is investing in building work"

The only reason the UK cannot do that is because we have already borrowed far to much. Germany has sound finances and so can afford to borow and stimulate its economy. We cannot. That is what the bond markets do. They call the shots if a country lives beyond its means.

policywonk - the fundamental problem with all socialism is that it wants to control everything including markets. Unfortunately, it cannot ultimately control the international financial markets.

Every single Labour administration this country has ever had has finished with a gigantic financial mess. The reason is clear. Labour Govts ultimately run out of other people's money and the bond markets an dtax payers eventualy say no.

I do not think we should allow the City to dominate our country in the way it has under this Labour Govt. The City has to pay its way and pay its taxes and work for the benefit of society. In that sense I agree with you but we still cannot ignore the markets. They are more powerful than any Govt and Nial Ferguson has written extensively on the long history of that over the centuries.

TheBride, it seems to me that the position you state is an outline of your own personal politics, not a universal state of affairs. I've never voted on the basis of my personal financial position, and I'm sure a great many other people would say the same.

ABD I absolutely agree that GB should not have run up the deficit in the way he did, and that this has put the UK in a vulnerable position WRT the markets.

But I also think that there are plenty of things that could be done to bring speculation under control and make it a less anti-democratic force.

Also remember that the rate on government debt is the lowest investment rate of return in the country (it's seen as the risk free rate because governments- touch wood- tend not to default).

Other commerical lending rates are worked out at a premium to that rate, so if the rate on government debt is high, then investors require a higher return to invest in the country. This is bad.

If, say, a wind turbine manufacturer was thinking about a new plant, and one option was Germany and one was the Uk, but the Uk had a much higher rate of return than Germany due to it's higher risk free (gov) rate, it's less likely Wind Turbine plc would invest in us.

Therefore, ordinary joe who wants a job making wind turbines stays in the dole queue.

(And yes, control of the market would have to be internationally-based, not nationally-based. Is a long way from being beyond the wit of man though.)

It seems to me that the time to decide that we didn't want the markets unduly influencing our political systems was before we borrowed all this money.

Once we did that, we hitched our fortunes to the City didn't we?

We can't have it both ways. Gordon borrowed to spend on public services. That money tied us to the markets.

I confess I am a speculator - but a nice one.

The trouble with regulation is the regulators have to be cleverer than the players.

How's that ever going to happen?

PW - I agree it is not beyond the wit of man, but isn't it too late?

At this juncture we have already borrowed the cash and have to deal wiht the things in the here and now.

exactly Litchick. If we'd never borrowed the money, the markets that lent it to us would never have mattered.

Yes Lit we do. In the current situation, what particularly annoys me is people (usually observers/small-scale speculators without a great deal of influence - not a dig ABD though appreciate it might read that way) saying 'Clegg MUST decide or the markets will punish us!' when what they mean is, 'I wanted the Tories to win, I had the champagne in and everything, and I am beyond furious'.

If there is anyone on here who has a job, a house, a mortgage, a pension, a credit card or an overdraft, borrowing to buy a car or indeed any other kind of econmic activity you are 'in the financial market' whether you like it or not.

Govt decisions will affect the financial markets' view of the UK and that will immedialey affect you and your financal positon. Voting for a Govt inevitably requires everyone to take account of their financial position.

... meant to add to previous post: because those people have been predicting meltdown for the last four or five days, and guess what? No meltdown.

Thank you for this thread, has definitely helped me to understand the situation. My brother does this for a living and has tried to explain but didn't manage to be so lucid

Seems to me that for a moment we do have to take the markets into consideration, Gordon Brown has put us in that position by borrowing and by spending so much.
That doesn't mean that we just allow that situation to continue, and one of the best ways of doing that should be to ensure that future governments are more financially prudent so that we are not beholden so much to market forces that extend beyond our borders.

Gosh! A Tory/Lefty Translator. How clever

Yes, PW. That is pretty much the thought (but without the champagne) I had on the school run.

It is not the fact that the markets are important, we are all agreed on that. And the explanations on this thread have helped me understand that better.

It is the constant assertion that the pressure of the markets is the reason for pushing a Tory Government.

Governing a country is such a complex matter, it is disingenuous to reduce it to just one issue.

But having an overdraft/pension/cc etc equally shouldn't be taken to imply acquiescence in the notion that the bond markets should dictate to elected politians. As per my previous point to TheBride, I simply don't vote on financial considerations; I don't see a single good reason why I should. There are far more important things IMO.

The fact that we are, en masse, a credit-using population doesn't mean that we've had some sort of mass referendum in which we've agreed that the markets get to decide stuff. Although ignorance plays a certain part in this.

Alouiseg -- the trouble with a lack of regulation is that:
a) banks go bust and everyone loses their shirt
b) food gets adulterated and people die of poisoning
c) pharmaceuticals don't do what they're intended to do or said to be able to do and people die
d) planes fall out of the sky
etc etc

Sure, regulation is difficult, but in a very different context, someone once said: "It is not incumbent upon you to complete the work [of perfecting the world], but neither are you at liberty to desist from it"*. There's lots of good reasons why no country has ever experimented with a completely unregulated financial sector, despite the challenge of trying to keep up with large-brained and strongly-incentivised workaholics trying to earn more dosh.

On another note, your OP says that the UK has borrowed an enormous amount of money, and specifically mentions that we've borrowed more than Greece. You imply by that, that we've borrowed more than we should. I think that's right, but it's not proved just by showing we've borrowed a large amount. As the securities fans will say, what matters is the size of the debt relative to the income stream generated against it (plus the payback timing). The UK is a much bigger economy than Greece and hence its borrowings can be much bigger than those of Greece. But they can still be (and are) too big.

*Rabbi Tarfon