We shouldn't be driven by speculators

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The market for government bonds works in what looks to most of us a very strange way. Despite the newspaper headlines about rising interest rates, the interest rate is actually fixed for the whole term of the bond. What appears to make the interest rate change is that the bonds can be traded, and the price at which they are traded doesn’t necessarily bear any relationship to the amount which the government accepted into savings when it issued the bond or the amount which it is obliged to return to the saver when the bond matures. So a £100 bond issued at 3% for 30 years will cost the government £3 a year in interest, and the government will refund £100 at the end of the term. In the meantime, that bond may have been bought and sold many times at varying prices: for anyone buying at less than £100, the interest rate will look higher than 3% and for anyone buying at more than £100, it will look lower than 3%. But, to the government, it is always £3 per year. For any new bonds, the government might need to match the apparent interest rate being paid on existing bonds, but changes in the bond market price do not and cannot affect the cost of existing commitments.

It means that headlines about rises in the rate of interest increasing the cost of ‘borrowing’ and putting huge additional pressure on the government can be misleading. They only increase the cost of ‘borrowing’ on any new bonds issued, not on all bonds currently in existence, although one wouldn’t necessarily understand that from the headlines. There are a number of factors which have pushed the rate for new bonds upwards, not all of which are in the control of the Chancellor. Many of them are part of global rather than local trends. The extent of the impact of the required higher rates depends on whether, and to what extent, the government is obliged to issue new bonds to cover its spending. The Chancellor and government choose to believe that they have no choice in the matter, a conclusion which pushes them inevitably in the direction of austerity and/or tax rises, which just happens to suit their own ideological view. It isn’t the only view, though. As Professor Richard Murphy points out, the government could simply stop issuing bonds and wait for the price to fall, as it inevitably will.

Murphy isn’t alone in challenging the tyranny of the bond markets. There was a letter from another professor in Wednesday’s Guardian addressing the question of bond markets very succinctly. To quote Professor Kushner, bond traders “…strive to reduce long-term stability to short-term volatility in order to multiply transactional opportunities”; in other words the price (and therefore the headline interest rate) is very largely being driven by gamblers and speculators out to make a quick buck rather than by investors making long term decisions. A half-decent Chancellor would seek to isolate us from, rather than fall into line with, the interests of such casino capitalism. It really is time to challenge and smash the hold which these people have on economic policy rather than allow them to cripple the ‘real’ economy in which most of us live in order to satisfy their greed and selfish interests.