Is the Bond Market Saying that Capitalism Has No Future?

The short answer to that question is that I don’t know. I am not a believer in the infallibility of financial markets and perfect information and all that stuff. But the bond market is surely speaking loud and clear.

As an aside, the media focus excessively on the ups and downs of the stock market. But bond markets are at least as accurate a barometer of capitalist sentiment.

 If we listened to the bond market it would be saying something close to ‘CAPITALISM IS  DOOMED!!!!’  Hyberbole? Perhaps not. As of today or at least the last few days yields on goverment bonds for core capitalist countries have fallen to all time historic lows. A Government of Canada ten year bond yields less than 3% (2.94%) well down from 3.7% in April. US and German 10 year bonds yield even less, and the Japan yield is just under 1%. Even the UK – with the biggest deficit in the G7 – is paying just under 3% on ten year bonds. (Data from Bloomberg.). Smaller countries with big debts are still in trouble but even the PIIGS countries can borrow for much less than a few weeks back. If you assume that central banks are committed to inflation targets of about 2%, the  bond market is saying that you should be happy to get a pre tax rate of return of under 1% on a long term ten year or even longer term investment. Big investors – banks, pension funds etc. – are apparently snapping up long term bonds simply to preserve capital in real terms.

The apparent goal of mere preservation of capital over a long term horizon suggests that capital thinks that we are on the verge of a deflationary crisis, in which case low nominal returns become positive, and/or nominal GDP growth will be very low meaning that equities are very over valued even if they have only modestly recovered from Great Recession lows. In either case, the level of pessimism is stunning. If financial markets are even remotely right and the real rate of return on capital over the next decade is going to be in the range of 1%, then the implications in terms of the underlying dynamism of the system become quite stunning. If the real growth rate for advanced capitalist countries is south of 1%, then we surely face severe secular stagnation, rising unemployment, massive crises of retirement systems  etc etc.

 

An entirely plausible alternative is that the financial markets have become way too pessimistic, and that a bond market bubble exists which will be unwound.  Smart money might cash out and push interest rates back up. But the fact of the matter is that financial capital seems to be shifting in a big way from equities to soveregn bonds with exceptionally low returns. The capitalist financial markets are effectively saying thst capitalism has a very dismal future, and they may well be at least haf right for once.

 

If they are right, then the markets are acutely schizophrenic. Bond markets only a few weeks ago demanded fiscal austerity and then became terrified of winning what they had demanded in Europe, at the G20 Summit in Toronto, and in the US  Congress. Fiscal austerity is, in their judgment, derailing the recovery. The markets got what they demanded, and recoiled at the results.

 

Such are the contradictions in play today, and who knows what tomorrow holds in store.

5 comments

  • Armine Yalnizyan

    Thirty years’ fetishism about economic growth, to the exclusion of any other “national projects”, is not over; but perhaps we are entering a period where stability is the best we can hope for in “advanced” [read “old”] industrialized nations.
    It begs the question: what model of capitalism has no future?
    Maybe ours, in North America, but not that of the Chinese, Indians and South Koreans, which are all doing just fine, thank you.
    In fact, the future of capitalism looks a lot like the past, just new players.
    Waves of corporate consolidation and super-profits are back on the menu, as if the crisis of confidence and liquidity never occurred.
    The pessimism of which you write is perhaps more about uncertainty, and simply hanging on to capital until we can see in which direction the global economy is going to surge next.

  • Good point but I doubt the BRICs have enough independent weight in the global system to offset stagnation in the US, EU and Japan.

  • Studying economic history gives a lot weight to Armine’s point, as capitalism has an uncanny ability to get past obstacles. however, potentially we are at a new point in history- realizing at many other seemingly turning points in the history of capital it has mutated and survived. But we do have to realize this has been a quite short history, and typically the problems were, pushed about and solutions were found. The one that bothers me though is the fundamental fetishism with debt. If capital accumulation must actually go back and cannot somehow make profits exclusively on productive investment, without a fundamental change in the philosophy of debt, its way forward seems quite messy and it is difficult to see how it will make it over these hurdles.

    Public debt, household debt, wage stagnation in the north and a real lack of demand from the less developed, I just do not see where the demand will come from that will right side the ship. If however there is a liberation in the notion of debt, both vertical and horizontal, and focused on meaningful investment, then we could see a movement. I just do not see the culture that inspires economic solutions transforming in time to come up with a solution until it is forces to- i.e. a whole lot more pain and suffering. It is about power within a global synthesis of economic ideals, and it will not be given up or transformed until that power is taken by those with workable solutions or at least the hope of solutions.

    I think it will take an even greater change in mindset than the great depression, as after studying it for quite some time now, I like the creativity and compassion of FDR like new dealers, but even they could not save capital from itself. The power bent until a destruction broke out and profits could be restored on the backs of the largest destructive force ever unleashed on the human race. That really is something to think about and ponder. Recalling and remembering the Americans nuking Japan a week or so back, made me think quite deeply about this slow crawl to the abyss that we currently on.

    And to think just a month ago, every G20 save a handful were singing such a chorus of austerity, and it cost what to sign that song? 1 billion, and here we are no even a month or so from that space and already change in a global sentiment is underway. It truly is a sign that nobody is awake at the wheel. Potentially that will be the global undoing, the magnitude of the change is beyond the cultural trans-formative abilities of the knowledge infrastructure. Leadership potentialities would be a great starting point in finding a solution. We do not even have the potential thoughts for sustainable social and green change in place.

  • actually that should have been “forced to change”- sorry

Leave a Reply

Your email address will not be published.