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.
Â If we listened to the bond market it would be saying something close to ‘CAPITALISM ISÂ DOOMED!!!!’ Â 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.).Â Smaller countries with big debts areÂ 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%, theÂ 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 Â 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.Â 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 USÂ 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.