Stop calling people who “demand higher interest rates” on sovereign debt vigilantes. It is not that being a vigilante is a bad thing – despite the connotations of that term. Rather, stop calling them vigilantes because they are not vigilantes.
When the Greeks spend like drunken sailors, and when the American government spends like drunken sailors, and the political agenda in each country creates an environment which is completely unfavorable to promoting robust long-term growth – then of course the prospects of a country piling up ever larger piles of debt are likely, and the possibility that a country may not be able to fully service its debt is increasingly likely.
So, if you are an investor, and you have a choice of places to park your “money” you are not exactly going to have Greek government bonds at the top of your list. And it is only in a world of dwarfs where you might be attracted by the prospect of American debt. But over time, you would much rather place your money in a money market mutual fund, or if you are institution with a lot of capital, you might prefer to open up repo accounts which have as collateral some other safe asset (if there is such a thing).
Let’s get back to the nomenclature. A vigilante is someone that takes positive action, typically violent action, to secure the justice that political interests are not promoting. The latter is where the bond market participants might rightly be called vigilantes. However, the “bond market” is not a “we” nor is anyone in that group pursuing justice as properly understood. What does it mean for an investor to seek justice from Greek debt issuers or American debt issuers? While no doubt some shameful accounting practices and an ability to repudiate debt with no court to compensate the bondholders who lose when such debt is repudiated (i.e. if the US goes “bankrupt” there is no orderly liquidation of assets to pay off bondholders – rather, the bondholders en masse get less or nothing) are justifications for justice seeking activities, this is not what the “bond market” does.
Further, the bond market does not actively seek to reprimand he Greeks or the Americans. This is the case for two reasons. First, the bond market (George Soros notwithstanding) is made up of millions of investors, none of which have much impact on the prices of loanable funds, but the collective actions of which certainly do. To attribute vigilante-like characteristics to abstract notions of the market is akin to attributing the foul smell near a paper plant to a particular molecule being emitted in the smokestack (and that analogy is not all that accurate).
Second, the participants in the bond market ought not be called vigilantes for a behavior that amounts to “doing nothing.” Participants in bond markets do not “force” Greek or American debt issuers to pay higher interest rates on newly issued debt. The reason interest rates increase is that at given interest rates and prospects for a country’s economy, fewer people wish to purchase that debt. In other words, commentators and government officials condemn the bond market “vigilantes” simply because they are people who do not wish to engage in a transaction. Would we want to call non-growers of marijuna, “Marijuana market vigilantes” because their lack of interest in supplying marijuana to the market ends up in higher prices for marijuana than otherwise would be? Would you call me a medical market vigilante because I decided to teach economics and eschew the AMA apparatus? After all, medical costs increase because I am not providing those services. And should we take active measures either politically or socially to put an end to such dastardly vigilante-ish behavior? I’ve even acted in a positive manner to repudiate the actions I find offensive. A former employer of mine was an unstable, many-faced, embarrassment. Did I attack him with a sock of quarters when he did things outside our company’s interest? Did I attack him with a sock of quarters when I saw him mistreat workers? No … I left. I refused to continue in the relationship with him. Rather than calling me a vigilante, many folks who know me at a minimum called me sane, and some even principled, and some others think I should have acted more like an actual vigilante instead of just quietly refusing to be a part of something that was offensive to me.
Which brings us back to the bond markets – in what sense is the refusal to purchase debt at existing prices (i.e. supplying loanable funds to the market – the debt issuers are the demanders or buyers of loanable funds) unlike any other potential transaction in which a seller refuses to engage in that business Even market friendly folks use to term bond market vigilante to describe what is going on. I’d politely suggest that they drop the term, and reserve the term vigilante for far more realistic cases.
Here is an historical case of interest, and one which ought to get more play.
Here is where the sock full of quarters reference comes from.
There are limits on government’s ability to control interest rates, even big governments such as ours, and any attempt by the Fed, as in 1977-79, was doomed. The Fed can control short-term rates for a while, but in the end it will always be at the mercy of how the world discounts the value of the dollar. Right now, there is little demand for credit, so borrowers who want to borrow for more than a year, yet alone finance a machine for ten years or a mill for twenty, are holding back. So are the people with cash, who are unwilling to lend any business for twenty years at 4.5%. Nobody wants to borrow and nobody wants to lend because the future is a big uncertain mess. Eventually this will change, and everybody will run for the door.
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