Handelsblatt International correspondent Torsten Riecke analyzes interesting data and trends from all over the world in his weekly column. You can reach him at [email protected]
(Photo: Klawe Rzeczy)
London When James Carville was once asked what he would like to be in another life, former US President Bill Clinton’s adviser said without hesitation, “The bond markets, because then I could bully anyone.”
British Prime Minister Liz Truss, who has just resigned, is the latest in a long line of democratically elected politicians who sought to defy financial markets and were quickly forced to back down. While Truss was formally in office during her 44 days at 10 Downing Street, she was never really in power, but the markets are exactly the opposite: They never have a government mandate, but always seem to have the last word on the economic policy course of nations to have.
Truss’ hair-raising idea of trimming an already highly indebted economy for growth with credit-financed tax cuts was, even for non-economists, clearly stupid. It’s no coincidence that financial pros have dubbed the risk premium on UK government bonds the “moron premium” for the past few weeks, which means that morons are paying more interest.
One might think that with Truss’ resignation that would be the end of it, but the dork premium for Her Majesty’s promissory notes is still there. On the one hand, this has to do with the fact that after the days of chaos in London, international investors are still not sure that the British will show the predictability and stability that creditors would like to see from their debtors.
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Who could blame them for their distrust when influential sections of the governing Conservatives in London are now also coming up with the curious idea of making ex-Prime Minister Boris Johnson, who was only sacked in the summer after many scandals and violent turbulence, the successor to his successor. In any case, analysts also explain the recent sell-off in pounds and British government bonds with the fact that the markets fear a comeback of Johnson and a return of chaos.
Even if Johnson ultimately thwarts the political comeback of the century and Britain is thus spared renewed chaos, it is not only the British who are asking themselves the question: Why do the bond markets in particular often have more power than the voters in a democracy?
The answer is as simple as it is forward-looking: the power of the markets is only the downside of economies that permanently live above their means. They borrow money from international creditors because they spend more than they take in taxes.
The fact that many economies have lost this truism in recent years is because their central banks have been buying up government promissory notes for years, thereby driving risk premiums or interest rates down to historic lows. The markets were powerless without the interest rate lever, all power lay with the central bankers – who, however, are not elected by the people either.
Risk premium for Johnson comeback
With the return of inflation and rising interest rates, the power of the bond markets has now returned. Whether this is a blessing, as in the case of Great Britain, or whether we will still regret it when the austerity now being demanded by the markets soon leads to deep cuts in state social security benefits in many places is a matter of long-standing debate.
However, economic politicians with new, radical ideas need not despair. They have two options: either they tame the markets by convincing investors that their plans will work out in the medium term and that the necessary finances are solidly calculated.
Or they borrow less so that international creditors can no longer interfere with them. In the end, James Carville will be right with his other legendary wisdom: “It’s the economy, stupid!”
More: Even arch-conservative circles are reassessing Brexit: Five lessons from the chaos in Great Britain