The bond vigilantes are back. Or maybe they are, whoever they are. Or maybe the vigilantes are all just a figment of the left wing imagination?
What the bond vigilantes actually are is a reification -- a turning into something concrete of an abstraction -- which is used by varied “leftish” types to explain why so much progressive government goes bad. For, when one of those progressive governments borrows a great deal to “invest” in the things that must be done -- as determined by progressive politics over what must be done -- then interest rates rise. Because those vigilantes are, in fact, some cabal of dastardly capitalists who insist that progressive government should not be allowed to succeed.
We have seen this with such economic disasters as Venezuela. But we see it right now too. But, the rise in real interest rates across the world makes borrowing more expensive! Yep, it sure does. Which means that government borrowing to do this or that lovely thing for the electorate becomes more expensive, because that's what rising interest rates means. This makes left liberals and other spendthrifts sad.
But there are no bond vigilantes. Or rather there are, but it's not some cabal nor some restricted group. It's you and me. Interest rates (long term ones, not the short term ones determined by the central bank) are just a market price, the price for money. Just like the price for sugar, childcare, or t-shirts.
All us folk out here look at the price on offer and demand or supply at that price -- as our demands and supplies change then so does the price. The sugar vigilantes, the childcare vigilantes, the t-shirt vigilantes, they're just us in all our 8 billion strong glory. So too the bond vigilantes. We're willing to lend to this more or less spendthrift government at this interest rate or we're not.
Naturally, the more we think they're going to be such spendthrifts the more we ask for our price in interest to be paid and so the restrictions on how progressive -- for which read spendthrift -- a government can be.
Now, this is at one level all so obvious that it's not worth repeating. But there's still that point that economic truisms are, well, they're truisms. They're underlying logic that once we've grasped we can then -- and should then -- apply to other similar situations.
Which brings us to a report from this newspaper: “Banks, money changers, devalue taka further. As per the latest decision, exporters and remitters will now receive Tk110.50 per US dollar, up from the existing rate of Tk110.” That's acceptable as a headline which has to be concise. But as economic reality, it's not true in the slightest -- the banks and money changers haven't changed the price of the taka at all. We ourselves have changed the price for we are the currency vigilantes. As we out here are always the vigilantes in any market system.
Of those who have dollars, not enough people think that Tk110 is a good enough price for them. Of those who have takas, Tk110 looks like a low price for $1. That's why there's that reserves shortage, why Bangladesh has fewer dollars than it would like. There is no international cabal of evils trying to insist that the taka rate should be this or that. There's just a market of 8 billion people (OK, the Tk/$ market might involve fewer than that) juggling what they each, individually, think the two things are worth relative to each other.
We're back to this old thing about supply and demand and price fixing. If we try to set a price “too high” then we end up with a surplus. The taka price is too high with respect to the dollar so we've more people who would like to exchange taka for dollars. Or, the same thing read the other way, if we set the price too low then we get a shortage. The price of a dollar in taka is too low, so we've a shortage.
The only time price setting works is when the price set is the same as that market price -- and why the hell would we bother to do that? For that market price is, by definition, the one at which supply and demand meet each other, that's just what it is.
It is not the banks and the money changers who have decided to change the price of the taka in the exchange rate. It's us out here, and all the banks and money changers are doing is admitting the price change.
There are no bond vigilantes, there are no currency vigilantes. There's just us determining what market prices are. And, you know, this is a free country, a democracy, what we the people say goes, right?
Tim Worstall is a senior fellow at the Adam Smith Institute in London.