Notes on the Global Condition: Of Bond Vigilantes, Central Bankers, and the Crisis 2008-2017


Adam Tooze over at his website:

In May 2009 as the scale of the fiscal shock became clear, Bloomberg and the Wall Street Journalreported that markets were up in arms. Yardeni was once more to the fore warning that “Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control ….” On May 29 2009 the WSJ announced that in light of “Washington’s astonishing bet on fiscal and monetary reflation” the bond vigilantes were swinging back into the saddle. “It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets.” “When in doubt,” the Journal advised its readers, “bet on the markets.” It was a message that had particular resonance inside an Obama administration staffed by veterans of the Clinton years and haunted by memories of the 1990s. In May 2009 Obama commissioned his budget director Peter Orszag to prepare contingency plans for a bond market sell off. Orszag was a protégé of Clinton-era Treasury Secretary Robert Rubin. In the locust years of the Bush Presidency, Orszag had worked with Rubin to craft an agenda of budget consolidation for the next Democratic Presidency.

In early 2010 the appearance of “Growth in a time of debt”, a highly influential paper by Professors Carmen Reinhart and Ken Rogoff, added intellectual weight to fear of the bond market. The two former IMF economists claimed to have identified a critical threshold. When debt reached 90 percent of GDP, growth declined sharply leading to a vicious downward spiral. As Reinhart and Rogoff warned: once debt reached critical levels towards 90 percent of GDP or above, there was always a risk of a sudden shift in market attitudes. “I certainly wouldn’t call this my baseline scenario for the U.S”, Reinhart admitted in one interview – “but the message is: think the unthinkable.” On Fox TV historian Niall Ferguson invoked the collapse of the Soviet Russia to make the same point. A world power could be brought down by financial excess with catastrophic speed. Ferguson’s message to American audiences was stark: “The PIIGS R US”.

More here.