Wednesday, 16 May 2012

So what do the markets think?

The victory of Francois Hollande in the French Presidential contest provides a further insight into the operation of the bond markets. It is frequently argued that there can be no retreat from ‘austerity’, which in reality is simply the transfer of incomes from labour and the poor to capital and the rich, because the bond markets will recoil and long-term interest rates will soar. This is important as significantly higher long-term interest rates could, unchecked, choke off recovery.

As the new French President has made some gestures in the direction away from ‘austerity’, then it should be expected that at least French long-term interest rates would rise as a result. But French government bond yields have fallen since the Socialist victory, by 18bps (basis points, equivalent to one hundredth of a percentage point, or 0.18 per cent). Ten-year French government bond yields declined to 2.79 per cent1, lower than before the election.

Click here to read the rest of Michael Burke's post.


Paul Hunt said...

"The creation of a national debt is one of the primary ways in which financial capital establishes its dominance over the rest of the economy. Debt interest is supplied by diverting income from the productive sectors of the economy. Since all value is created by labour, labour is also the ultimate source of all debt interest. This entails a transfer of income from labour to capital."

This divereges so much from theory and practice that it would lead to beleive that the person who wrote it is impervious to reason or evidence. The building up of excessive national debt, not the issue of a sevicable volume, is the reason financial capitalism is able to exercise power over real economies and sovereign governments. A key objective of the fiscal compact is to re-balance economic power between bond market participants and sovereign governments.

If the investment financed by the issue of sovereign bonds boosts economic activity and generates a sustained increase in GDP that is greater than the stream of annual return of, and on, this investment then it will be possible to meet the coupon on the bonds without redcuing labour's share of income. In addition, since many bonds are simply rolled over - i.e., there is no annual repayment of the principal, the benefits are even greater.

In addition, in the absnce of favourable demographics or significant increases in exports, economic growth is generated by increases in productive, allocative and dynamic efficiencies. In developed economies with reasonably vibrant and resilient tradable sectors, but with the sheltered sectors dominated by sectional economic interests, this requires structural reforms - and with a focus on non-labour costs intially.

Pres. Hollande's advisers have been quite explicit about this - in addition to acquiring funds to boost productive investment.

Damian said...

@ paul hunt

"A key objective of the fiscal compact is to re-balance economic power between bond market participants and sovereign governments"
Are you sure? Perhaps we have read a different compact? The compact as it stands largely repeats what was in previous treaties and already in EU legislation. Its key objective is about maintaining the status quo. It is almost beyond belief after all the findings of groupthink how the mainstream media, politicians and the usual bunch of economists have come out in favour of a second rate document that reinforces the mistakes of the past.
There is little or no mention of financial markets or indeed the great recycling scheme that has facilitated debt in the first place. The compact does nothing to limit the extent to which core Euro zone countries can continue to recycle their surpluses. It doesn’t even mention the banking system. It is therefore largely irrelevant whether the deficit or national debt ratio complies with the treaty as flows are unaffected.
If you believe that the compact will radically alter the relationship between bond markets and sovereign states or that structural reforms such as monetisation and privatisation of state assets will not merely contribute to greater financialization and subsequent socialisation of costs, I can only suggest sitting tight and hoping for the best!

Paul Hunt said...


Many thanks for your response. I was beginning to think this blog consisted of a series of posts without any discussion - but perhaps it is the domain of the converted and unpersuadable.

I agree that the most difficult task is the unwinding of the Faustian pact between most sovereign governments in developed economies and the wosfully under-regulated global banking and financial sectors. But securing sound fiscal and economic governance in the EMU (and in the EU more generally) is equally important. And, because the latter is considered to be easier, politically, to implement - and politicians being politicians - the intial focus is on the latter. And a yet-not-sufficiently beefed up ESM, which, eventually will have to re-cap EZ banks directly, is in the wings.

This is going to be a long drawn-out process. A key initial element is to reduce the perception of risk that bond investors attach to far too many sovereigns. Again a slow process that will require co-ordinated fiscal and economic governance.

And a way to reduce the stock of national debt, with investor risk directly - and exponetially - related to its size, and to reduce the coupon demanded is to create a new set of assets out of state equity that may be somewhat more risky than sovereign debt, but will reduce the stock and reduce the risk on sovereign debt.

The state will still have to be involved as the counter-party in long term contracts for infrastructure and utility services and genuinely independent economic regulation will have to strike a balance between the interests of the investors (and management and staff) and consumers - with statutory advocacy and representation of the collective interests of consumers in these proceedings.

However democratic governance is so dysfunctional in Ireland and government is captured to such an extent by sectional economic interests that you can be comfortable and relaxed and confident it is extremely unlikely to happen.

Unless, of course, 'events' unfold that will reveal the extent to which users and consumers of infrastructure and utility services are being ripped off and the government will have to do something.