Government Bond Markets: Unfeeling Psychopaths or Rational Keynesians?

We're blaming the fire alarm for the fire.

With the latest round of “markets can’t handle democracy” after a minor selloff in BTPs (Italian government bonds) following their election, the idea that “government finance is too important to be left to the markets” is emerging from the swamp of Guardian comment threads, and shambling back into the mainstream. With all but a few Austrian dead-enders acknowledging that austerity has been disastrous for growth, the accusation of market culpability is a serious one.

The case for the prosecution is that government bond markets irrationally panicked at modest debt increases following the 2008 financial crisis, demanding appeasement in the form of “austerity”, ideally targeted at the poor and vulnerable. (One may need to sprinkle the preceding sentence with the word “neoliberal” to get the full flavour). This case was made most recently in a paper by Paul DeGrauwe of VoxEu, and is noticeable for attracting sympathetic comments from normally sensible people.

Professor DeGrauwe argues convincingly that the countries which instigated the largest austerity programmes suffered the worst damage from markets in terms of both quantity and price of fresh borrowing (his Figure 1 below). He goes on to note that none of the austerity measures introduced pacified markets.

He draws the slightly eccentric conclusion from this that markets love and demand austerity. Possibly for reasons of space he omits that the two biggest rallies in EU peripheral sovereign debt before the ECB’s Outright Monetary Transactions (OMT) were driven by monetary actions—the injection of ECB liquidity into the market via SMP and later LTRO. But he does note that the prospect of unlimited monetary intervention by the ECB in the form of OMT is what appears to have convinced markets that investing in the periphery is safe.

So there you have it: fiscal measures did nothing to convince markets to buy peripheral debt; monetary measures were repeatedly successful.

Yet the conclusion drawn is that:

Austerity dynamics were forced by fear and panic that erupted in the financial markets and then gripped policymakers.

What worked: hint - not austerity

What worked: hint – not austerity.

Panic is a funny word. Jumping out of a moving bus can look like panic. However, if the driver—let’s call him Jean-Claude—is absolutely adamant that he wants to drive said bus off a cliff (think of M. Trichet’s threats to pull the repo-able status of Greek debt and later refusal to allow the ECB to get involved in a rescue), and the conductor (Wolfgang) is similarly vehement about fiscal assistance—jumping out starts to look quite rational. The ECB (especially) and the core countries spent most of 2010–mid-2012 declaring an absolute refusal to assist the peripheral nations. As a result, Europe’s money supply began to resemble a badly-sloping field, where all the liquidity is drained from one end (the periphery) and swamps the core.

Where’d all the money go?

The huge underperformance of peripheral growth owes at least as much to monetary as to fiscal factors. Hence, despite the UK’s utterly dire fiscal performance—and misguided austerity, my homeland never suffered remotely the sort of spread explosion that Euroland saw. Similarly, Denmark—even whilst retaining a peg to the Euro—didn’t suffer contagion. The “panic” Professor DeGrauwe refers to looks a lot more like a rational response to a thoroughly dysfunctional system. The end of this panic coincided nicely with the introduction of monetary measure—the OMT—with the potential to provide Italy with the sort of central bank support that the UK has enjoyed.

From Wikipedia. Look, I’m busy.

In this case, blaming the markets is actually blaming the alarm for the fire, and measures to control spread volatility like measures to prevent fire casualties by removing the alarms. Professor Paul Krugman has been vocal about the indisputable absence of “bond vigilantes” from markets spared the various monetary perversions that Euroland is subject to. The fit between spreads and recession looks a whole lot worse once you include countries which aren’t in the Euro. Looking at the above chart, lifted off Wikipedia, UK fundamentals nestle in the middle of a group of countries which were in deep trouble, whereas Japan has so much debt it’s literally off the scale of the chart (at 230 per cent of GDP). But neither has seen any significant rise at all it its credit spreads. I suggest therefore that Eurowonks stop throwing stones in glass houses.

This piece was originally posted on Some Of It Was True…, and is reposted with permission.

Xavier Rolet, the Chief Executive of the London Stock Exchange, poses for photographs in front of giant letter blocks spelling the word 'Bonds'. Photograph: Getty Images

Pawe? Morski is a fund manager who blogs at Some of it was true…

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Miners against coal: the pit where former Welsh miners are protesting alongside climate change activists

The Merthyr Tydfil miners’ long history of struggle is spurring them on to a whole new form of action.

The retired miners and factory workers at the working men's club in the Welsh town of Merthyr Tydfil are no strangers to hard times. Our second son was born during the 1984 strike and we had nothing for 12 months, one member tells me. The town continues to struggle with unemployment – last year the rate for men was nearly double that of the UK as a whole – over three decades on from the miners’ strike. But these days the atmosphere at the club is more resigned than radical. A singer croons his way through “Only the Lonely”, while talk at the bar is of better times: days when work was plentiful, days when, “you went down the mine a boy and came up a man”.

When the deep pits closed in the 1980s, Merthyr became a dumping ground – quite literally. Not only is the nearby landfill one of Europe's biggest, the valley is now home to the largest opencast (open-pit) mining operation in the UK. Its towering spoil tips throw a Mordor-esque shadow over the community below, coating homes and lungs alike in dust. 

Even former miners lament the small number of poorly-regulated jobs the Ffos-Y-Fran pit currently provides. Opencast is lorry driving, not mining, is a sentiment I hear repeated across the town, from the club bar to chip shops to the office of the miners’ union itself.

Just as the town's fortunes rose with coal, so they have plummeted as the industry has declined. While the fuel still accounts for around 10 per cent of UK electricity generation on any given day, last year generation fell to its lowest level since the 1950s. The need to decarbonise also looks set to reduce demand further. The effects of last December's Paris climate agreement – and its aim to limit warming below 2C  are already being felt in Wales: the Aberthaw power station is a key destination for Welsh coal, but recently announced plans to reduce its output.

The club's secretary can only think of one member who still works in the mine. Others I encounter chase shifts at the local meat-packing factory, or have to travel for over an hour outside the town. Support for jobs unsurprisingly usually trumps support for climate change deals: “If it brings in work, we don’t have a problem with it,” is the general consensus inside the club. If someone tells you they're against the mine, they're probably from England, not Wales, says a resident of the nearby village of Fochriw. 

The people of Merthyr, however, are also no strangers to fighting perceived injustice. In the early nineteenth century, Merthyr's thriving ironworks made it the largest town in Wales. But when depression hit in 1831, low wages and sudden dismissals drove many to despair. By the start of June that year, thousands gathered to march against the iron masters and coal barons. And for the very first time, the red flag of revolution was raised on British soil.

185 years later, while club members sipped their drinks, others are writing Merthyr's history afresh. Up on the hills above the town  beyond the litter-strewn fields and the “Danger: No trespass” signs  around 300 campaigners from across the UK gathered to call for an end to coal.

Led by the climate activist group Reclaim the Power, many of the camp’s young attendees work for Westminster MPs and NGOs. A litter-pick was followed by the rapid erection of communal kitchens and sustainable loos. There were safe spaces, legal training, and warnings not to disturb the nearby nesting birds.

On Tuesday morning, the activists occupied and (temporarily) shut down operations at the mine – tying themselves to machinery and lying across access roads in an attempt to symbolise the red line that carbon emissions must not cross. Their action is the first in a fortnight of global anti-fossil fuel protests  from plans for train heists in Albany, to protesting in kayaks in Vancouver. And while global reach counts for little without local support, the climate campaigners at Ffos-Y-Fran are not alone.

Since 2007, members of the United Valleys Action Group (UVAG), a group of local residents and ex-miners, have also fought the mine's planned expansion into the nextdoor valley. On Tuesday, many joined with the activists to blockade the entrance to the mine's headquarters. One member, 56-year-old Phil Duggan, has worked in the pits from the age of 16. And while he is “no tree-hugger”, he is tired of accepting jobs at any cost.

I don't want my children to suffer the ill health I have,” he says. “To some extent we [ex-miners] have been able to claim compensation. But the way things are going now you're not going to be able to claim anything. The deregulation of employment is making people desperate  we're going back to an era that our fore-fathers unionised to put right.”

In a strange twist of fate, it’s these Merthyr miners history of struggle – their long fight to protect their livelihoods and communities  which now spurs them to action against new mines.


Phil Duggan entered the pits aged 16. Photos: India Bourke

Wayne Thomas at the National Union of Mineworkers says he recognises that, unless carbon capture technology can develop apace, the Paris agreement looks set to speed up  coal's decline. But he also believes that British coal has its place in responsibly managing the transition to renewables – a place that includes reducing foreign imports, cleaning up the dirty acts of private mining companies, and putting control back in the hands of local communities. If you're going to phase out an industry, you've got to put something in place to limit the damage.

For evidence, he need point no further than the co-operatively run mine at Tower colliery, where an independently-managed fund ensures that, when the time comes, the opencast site will be carefully regenerated. Sadly, the same cannot be said of the privately-owned operation at Ffos-Y-Fran for certain.

Last year, the Welsh Assembly voted in favour of a moratorium on opencast mining. The government has yet to act, but this may change depending on how the balance of power falls after Thursday's elections. Assembly candidates from both the Green party and Liberal Democrats voiced their support for the UVAG campaigners at a meeting in one of the villages effected by the new pit proposals.

Utlimately, the decline of some of Welsh coal's main customers  the steel works at Port Talbot and the power station at Aberthaw  is likely do more to undermine UK coal than the red lines campaigners draw. But, along the way, new alliances between climate idealists and unions could breathe new life into both movements. In the words of Merthyr Tydfil’s ancient motto: “Nid cadarn ond brodyrdde”  Only brotherhood is strong.


Chris and Alyson, founders of United Valleys Action Group.

India Bourke is the New Statesman's editorial assistant.