The Treasury can borrow like mad because its bogeyman no longer exists

Linda J. Dodson

“I used to think that if there was reincarnation, I wanted to come back as the president or the Pope or as a .400 baseball hitter,” James Carville, a US political adviser, famously said in the 1990s. “But now I would like to come back as the bond market. You can intimidate everybody.”

Carville’s remarks came after the Clinton administration made a number of proposals designed to stimulate a moribund economy in 1993, only to see the plans derailed by concerns that bond investors would balk at the resulting increase to the deficit. 

Such investors were labelled “bond vigilantes”. Governments lived in fear that these enforcers would protest against any monetary or fiscal policies they considered inflationary by selling bonds, thus increasing yields and hiking the cost of borrowing. 

Those fears live on today. This week the Telegraph got its hands on a document in which timorous Treasury officials laid out a range of options for getting the Government finances under control after a huge increase in borrowing to deal with the coronavirus crisis. They said it was important to do so to “enhance credibility and boost investor confidence”.

The UK has understandably been hosing money around in recent months to help support the economy during lockdown. But now, Treasury officials are saying, we need to come up with a plan to get our deficit under control or those scary bond investors won’t buy any more gilts and then we’ll be really screwed. 

Such thinking is deep rooted. It is born out of the so-called Washington Consensus of the 1990s, a sort of globally agreed manual on how to run a modern economy. Essentially this posited that profligate governments could only be kept from bribing rapacious electors with expensive baubles and driving up inflation through the twin threats of an independent central bank standing ready to hike interest rates and investors who could shun their sovereign debt. 

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