The stock market is glamorous, trading bits of ownership of corporations, many with glittering names — Apple, Microsoft, Boeing. The bond market is boring.
Or used to be. It is becoming scary in the way it affects the functioning of democracy. As in turbulent France. And perhaps eventually in the United States.
Novelist Ian Fleming named his dashing hero James Bond because this was “the dullest name I’ve ever heard.” Bonds are, Robin Wigglesworth says, essentially “tradable loans” that usually pay a fixed interest rate to the bondholder, who gets the principal of the loan back when the bond matures. These “fixed income” instruments usually do not promise exciting upsides. Instead, they offer predictable safety — unless there is a slow, or not so slow, debt repudiation by inflation.
Bonds have worked wonders, as Wigglesworth says in the subtitle of his timely new book, “A Fabulous Debt: The Epic Story of How Bonds Built the Modern World.” For centuries, and until relatively recently (the previous century), banks were the global economy’s skeleton, allocating money. The supply of money was generally limited and largely inflexible because money was backed by a scarce physical resource: gold.
(From Nathaniel Philbrick’s new book “The Rush” about the nature and consequences of the California Gold Rush: “If all the gold ever found in the world was assembled in one place, it would fill just three and a half Olympic-size swimming pools.”)
For centuries, governments sold bonds to finance wars and, in partnership with private sector investors, for infrastructure projects (e.g., the Suez Canal). In the late 19th century, U.S. railroads that reknit the recently unraveled country were built by corporate bonds (and government gifts of land).
President Woodrow Wilson used government-manufactured hysteria to finance U.S. participation in World War I by selling $21.4 billion worth of bonds — Liberty Loans — to the public. Four million people (from a population of just 103 million) invested the $21.4 billion. “Relative to the size of the economy,” Wigglesworth writes, “that would be the equivalent of $5 trillion today.”
A new epoch began on Sunday evening, Aug. 15, 1971, when President Richard M. Nixon annoyed and then bewildered Americans. He preempted a popular television program (“Bonanza”) to announce, inter alia, a “temporary” suspension of the ability to convert dollars into gold. “France,” writes Wigglesworth of this event that, 55 years later, seems prehistoric, “sent a warship to repatriate its bullion stored at the New York Federal Reserve.”
The “temporary” (often in government-speak, an adjective meaning “permanent”) end of the gold standard began a new age of bonds. Henceforth, governments, freed from “golden fetters,” would spend fiat money, backed only by the issuing government’s “full faith and credit.”
Today, political limits replace those formerly imposed by gold. Domestic public opinion can prevent an issuing government from repaying bonds with tax revenue in excess of spending, rather than by printing money. International bond buyers must be wary of default, or creeping repudiation via inflation.
“By combining the judgment of millions of people,” Wigglesworth writes, “the bond market” is the world’s cleverest economist and its best political analyst. Today, it is looking askance at France.
There, government social spending (and anti-entrepreneurial cultural habits) have prevented economic growth sufficient to pay the government’s bills. France’s government, which understands the public’s unwillingness to pay for or limit its consumption of government benefits, has resorted to promiscuous borrowing: selling bonds. This shifts onto unborn future voters (the least troublesome kind) the cost of today’s voters’ appetites.
Our modern world, Wigglesworth says, exists partly thanks to the bond market, which pools the savings of billions of people. “It takes money as its raw input and spits out factories and railways, hospitals and casinos, smartphones and semiconductors, wars and vaccines.” It also, however, encourages, by enabling, democracies’ ruinous urge to steal from the future.
Borrowing from the future to benefit the future — e.g., to win wars and build infrastructure — is virtuous. Borrowing to fund the borrowers’ current consumption is decadent. But subsequent generations will do this. Until they can’t. Then comes default, direct or indirect (inflation).
The French are protesting reality. As the bond market measures reality, French appetites for government benefits exceed the money French society is willing to give the government. So, government’s borrowing costs will rise, until they become prohibitive, and chaos intensifies. Or France gets bailed out by Germany, via the European Central Bank.
French protesters have been discussing their discontent in their usual vocabulary of automobiles set aflame. The bond market speaks less colorfully, but decisively.
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