Bond vigilantes or the revenge of the rentier?

My piece for Jacobin were I explain why higher bond yields are not at all a result of a fiscally irresponsible government being disciplined by bond vigilantes. They are, instead, a deliberate policy choice that shifts income from workers and borrowers to wealthy bondholders. Interest rates, at both end of the yield curve, are shaped by Federal Reserve policies rather than simply by market dynamics. Concerns about financial fragility are exaggerated, and the danger is that the higher yields, that lead to a higher interest rate bill, and a higher debt-to-GDP ratio, would be used politically for constraining social spending. Ultimately, this situation reflects political choices rather than financial necessity.

Duménil and Lévy and the Apotheosis of Capital

Graph below from Duménil and Lévy's (D&L) The Crisis of Neoliberalism (p. 61) [my previous post on their book here].

Note that contrary to the Fed's base rate, which is negative in real terms, the rates paid by corporations are relatively high. Note that firms my borrow to finance, not production, but to buy back stock and pay dividends, and enrich stockholders, including management. That's what happened according to D&L (see below, p. 62).

In other words, on average higher rates of interest (even if lower in periods of financial crises) sustain redistribution towards fat cats. The opposite of Keynes' euthanasia of the rentier indeed.

The revenge of the rentier

Tax week provided a lot of discussion of income distribution, and the effects of taxation on increasing inequality in the US. I just wanted to post these two graphs that show the evolution of real wages in the US, since 1950, and real long-term interest rates in the same period.

The red lines are the averages for different periods (first periods are 1950-73 for wages, and 1950-79 for interest). The average growth of real wages in the first period was 2.4% per year, falling to -0.2% subsequently. For interest rates the values are 2.1% and 4.6% respectively. If you think that the increase in interest rates is not that big, think that if you invest $100 at 2.1% after 30 years you get approximately $186, while at 4.6% you receive close to $385. That’s the meaning Keynes’ revenge of the rentier.

PS: All the data is available here. Great website by Sam Williamson.