Of angry voters and bond pussy-cats

Governments have thrown more cash at keeping voters happy in the last few years than ever before. One would expect voters to repay the favor with some show of gratitude. One would also expect those who lent the governments the money to be getting seriously jittery.

But that is not  the case. All the G7 governments, expect for perhaps ever-congenial Canada, are battling to preserve their political authority as confidence in them quickly wanes. In France Sarkozy’s ratings keep testing new lows as he faces what seems like weekly mass protests against pension reform. Italy’s Berlusconi faces also what seems like weekly no  confidence votes in parliament, and manages to barely scrape by. Even mighty Merkel is slogging through the political wilderness in Germany. Britain’s new government is struggling to prove itself. In Japan, the prime minister Kan barely survived a challenge to his authority from a rival “shadow sho’gun”. And finally, in the US, Obama’s democrats are widely expected to suffer painful losses in the mid-term elections. How’s that for gratitude after throwing billions at voters to keep their livelihoods from going up in smoke during the financial/economic crisis?

While governments get no respect from the people who elected them, bond markets are giving a huge vote of confidence in them. Governments spent far more than they had coming in over  the last few years and yet the so-called bond vigilantes are far from getting geared up to teach them a thing or two. Indeed, the bond vigilantes, who so memorably struck fear into the hearts of the Clinton administration, have become bond pussy cats.

So why are voters and bond investors not playing the roles one would expect them to play at this point in the economic cycle? We would suggest that it is quite simply because the recovery has proven to be so disappointing despite all of the cash governments pumped into their economies over the last few years. Economies may have emerged from recession, but people are feeling neither more prosperous and nor secure about the prosperity that they have managed to hang on to. Likewise, bond investors are equally unconvinced that recovery has firmly taken hold and are pricing for a real possibility of deflation. In that light, it’s hardly surprising that voters are angry and bond investors compliant.

 

Advertisement