Warning: The Bond Vigilantes Are Back
Yesterday, we reckoned about the return of the ‘money multiplier’ to the economic stage.
Today, we announce the pending return of another creature of finance, dormant for decades… dead, but not buried. The latest rumors place the beast in the vicinity of New York’s Columbus Circle, hoofing for Trump Tower.
This goblin is called the bond vigilante…
Economist Ed Yardeni coined the term in 1983. Inflation had us all by the ear in the late ’70s and early ’80s. Inflation gnaws away at the value of bonds, and no bondholder wants to see inflation reduce his investment to sawdust. So the vigilantes delivered central banks this ransom note: Pay us or we sell. And enjoy borrowing money at cutthroat rates – your throat.
CNBC explains the dynamic: ‘Fewer buyers drive prices down – and drive yields up… That, in turn, makes it more expensive for the government to borrow and spend.’
Or in Yardeni’s words, ‘If the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.’
This post was published at Examiner on November 23, 2016.