I thought about it and read and reread the post trying to figure out why it ate me so thoroughly. And how could my hero go so wrong? Then it hit me, and I had to write this post.
My hero, one of them at least is named Edward Harrison and he's an econ beast! But he, like Krugman is on the outside looking in as an academic. In the post he says: "Where the bond vigilante story is flawed is in thinking the bond vigilante has power."
Don't worry, I'll link to the post later, but what he misses is that bond vigilantes are like Vulchers, they don't need power, they wait for your bond market to die and then they pounce. Their best skill is knowing when a market is dead before anyone else does.
The whole premise of the post was that sovereigns with debt in their own fiat currencies can always depreciate their currency if they get into a bind. He called it a "bond vigilante relief valve" but what it really is is a life support.
He points out that the only reason governments had to raise interest rates in the old gold convertibility days was to stop the out pour of gold.
This is true and now that there's no gold convertibility in theory you can hold off bond vigilantes indefinitely. But in practice the more you depreciate your currency the higher the chance of inflation.
This higher chance of inflation is what now puts upward pressure on interest rates. He also references MMT (Modern Monetary Theory for you non econ geeks, but would a non econ geek even get this far down into this post? Probably not.) The MMT'ers think money comes from the government. In reality money comes from trading something of value for it. Whether it be your labor or something else.
If this were true the government wouldn't need to tax it's citizens. MMT'ers like to point to charts like the one below and say government deficits are the private sectors surplus.
That's because inflation isn't a surplus, it's just inflation. If I pay more for the same amount of goods and you only look at the amount I spent and not the amount of goods I got for that larger amount of money, it will look like I bought more goods than ever before, when all I did was pay inflated prices for the same and maybe even less goods than before.
The Krugman article my hero referenced points at Japan's low interest rate as proof that governments have nothing to worry about. But Japan has turned into a zombie country. They've been fighting deflation for 20 years! The main reason Japan's interest rates are still so low is because there's no sign of real growth in Japan for as far as the eye can see!! This is a good thing?
Japan's low interest rates say that the country has no prospects for growth. Their massive deficit spending wasn't on things that produce growth. They should have spent that money on things that would have moved the country forward on growth. Instead they built bridges to nowhere.
Bond vigilantes are waiting for Japan's citizens to get so old that they need to sell all the Japanese government bonds they hold. That's another reason Japan has been able to keep bond vigilantes at bay. The people save a huge amount of their money in JGB's.
Americans don't do this. So a nice chunk of our debt is held by foreign countries and there in lies the fertile ground for bond vigilantes.
In theory the government can buy all it's own bonds and as my hero points out hyperinflation is the biggest worry in that scenario. But inflation leads to higher interest rates and hyperinflation leads to hyperinterest rates. One only need look back at the late 70's and early 80's for proof of this. Granted the oil embargo added tremendously to that inflation and it's unlikely that will happen again, but what's to say something else won't be the added trigger?
Something like China letting the yuan float? They're already cutting back on buying UST's as proven by the latest Monthly Treasury International Capital Data reported by the UST. If you look at that chart from right to left you see a trend. China is holding less long term UST's then they did in the past.
The US and China need to trade places or re-balance their trade relationship. As we buy more than we sell and they sell more than they buy. In order to do this China needs to let their currency appreciate. They need to do this so they won't have to depend on the U.S. to buy so much of their goods in order to keep their people working. They want to be self sufficient.
If we in the U.S. haven't gotten our shit together by the time China no longer needs us; the Bond vigilantes will began to circle. With fiat currencies their timing needs to be perfect, but they can still pick bones clean.
Instead of gold now it's confidence. They wait for confidence to start pouring out of your bond market and they help you raise your rates, the hard way. They jump all over your bonds short selling the shit out of them until your central bank does something about it. And if their timing is just right and enough confidence is pouring out of your economy that relief valve is more trouble than help. You try to depreciate your currency they'll help you there also! Short sell that shit into oblivion!
Here's a link to the article that got me started here.. Read it here let me know what you think..