which may confuse some people, but shouldn’t. Here is the graph of the June Gilt future since March:
As this story indicates, yields are now at a very low level.
Good news? Well, no. A naive, political interpretation of this would be: the Conservative government has impressed the market that it has borrowing under control. Control = less debt issued = less supply = higher price. But as Tyler and others on this blog would rush to point out, that it not the story today. For if this were the cause, we would also expect higher equity prices, which all things being equal benefit from such circumstances. Instead, the FTSE is down 2% or more. Instead, there has been a rush – again – from ‘risk’ assets to those regarded as unrisky.
The missing word – as ever – is demand. The demand we are talking about is the demand expected in the economy, that rewards money put at risk in things like equity. All the signals from the markets are that -despite yesterday’s ‘dreadful’ figures – the market as a whole is happy receiving just 3.7% for its money for a long period. And the only interpretation of that is that the market is expecting fewer great opportunities to earn its money the honest way – out there in the world of enterprise – than it was before.
Read the Economist’s blog, if the UK is getting high inflation, it may be the only major currency bloc to achieve this. (See their account of the US trends and also Krugman.) And given what problems deflation may cause, you may want to ask whether or not our policy – even if unintentional – is in fact better. Indeed, if targeting high nominal growth is what we need – as I called for in Credit Where It’s Due – then maybe Merv is doing it, just by mistake. …
Rather than trying you with my amateurish interpretations, Scott Sumner has done a fantastic, educational and counterintuitive job here. Has the euro got weaker in the last few days? If only – it has got stronger – just the dollar has got stronger still. With commodities and equities falling, and ‘money-ish’ things like gilts rising, what we are seeing is money itself gaining in value. Money demand up means money is tight, which in Sumner’s system is what causes recessions …. Read it!