We have plenty of evidence that governments are afraid of bond markets. In the US, fears of the retaliation of the bond market have driven the fiscal policy of both parties. The Republicans want immediate cuts in spending, and their pet economists bray about an impending inflation that never comes. These intellectually dishonest hacks refuse to change their minds in the face of overwhelming evidence and increasingly sarcastic statements from people who got it right, like Paul Krugman, here, here, and here (among many). The Obama administration refused to see reason either. It adopted a policy of short-term stimulus, including tax cuts for the filthy rich, followed by drastic spending cuts on a time frame guaranteed to cause further economic distress. Which it did.
It’s worse in beleaguered Greece, Spain, and the Eurozone generally. Their troubles begin as the bond markets set higher and higher interest rates for new issues of sovereign debt, and eventually, the country is brought to its knees. Bond holders get paid and governments inflict pain and suffering on their citizens. These bond vigilantes have enough cash to crush the Greek government, and to shake the confidence of Spain, leading to adoption of policies that have produced economic disaster.
The term “bond market” in this context is misleading. When people talk about the bond market in this context, they really mean a small group of people who control tons of money. Where does all the money come from, and just who is trading it? There is plenty of money out there. The Tax Justice Network estimates a minimum of $21 trillion hidden offshore, plenty of money to crush most economies. That, of course, also has its insane defenders. From the Wall Street Journal blog Washington Wire
And Andrew Quinlan, president of the Center for Freedom and Prosperity, a group that promotes international tax competition and financial privacy, said, “Tax Justice Network and other opponents of tax competition assume that all earnings belong first to governments, which is why they seek to prevent even legal wealth management techniques if they result in less money for spend-happy politicians.”
I wonder how much Romney and his pirate crew contribute to the Center for Freedom and Prosperity.
Other massive piles of financial assets are held by Sovereign Wealth funds, pension plans, endowments and foundation. These things take on a life of their own. They don’t self-liquidate. They are buckets of money used to pay massive sums to their managers and sprinkle some money on causes their donors like.
But that isn’t all. Most of the hedge fund speculators are leveraged. They borrow money from Too Big To Fail banks that exist only because of government support. They get tax deductions for any interest they might pay. Currently, there is about $2 trillion in hedge funds. With an average leverage of 2.5, they control about $5 trillion.
Governments sell bonds regularly. In mid-May, Italy sold $5.25 billion of bonds. It expects to sell about $215 billion in 2012. Considering that a bunch of the bonds will just roll over into bonds from the new auction, the amount of money it takes to screw these countries isn’t that great, at least in the context of the money in the hands of speculators.
So who is doing the speculating? It’s a subset of that crowd of nameless faceless traders at giant megabanks, hedge funds and investment advisers around the world. These people cheat at every opportunity. Maybe it’s a few million in an insider trading scam, or maybe it’s gaming the California Electricity markets for a few tens of millions. Or maybe it’s billions, like JPMorgan Chase’s Bruno Iksil, or even trillions, like those “rogue traders” manipulating LIBOR. Their bosses can pretend not to see, so no one is responsible. They are, in short, the scum of the earth. And, of course, none of them ever go to jail, so there isn’t any reason for them to do anything but cheat and lie.
Governments around the world do the bidding of a group consisting largely of criminals, gambling with money they got from other criminals, including people evading taxation. Those traders get their power from the richest people in the world, people whose interests are inimical to the rest of us. This is the fist behind the velvet glove of campaign contributions, the power that keeps modern governments under the heel of the rich.
Too bad we can’t tax that money away from these thugs.