{"id":395553,"date":"2025-09-03T21:31:30","date_gmt":"2025-09-03T21:31:30","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/395553\/"},"modified":"2025-09-03T21:31:30","modified_gmt":"2025-09-03T21:31:30","slug":"the-guardian-view-on-fiscal-rules-and-financial-myths-britain-must-stop-fearing-imaginary-bond-vigilantes-editorial","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/395553\/","title":{"rendered":"The Guardian view on fiscal rules and financial myths: Britain must stop fearing imaginary bond vigilantes | Editorial"},"content":{"rendered":"

In 1995, Nick Leeson, a 28-year-old trader for Barings Bank, brought down the City\u2019s oldest finance house by, among other things, betting that the Bank of Japan (BoJ) couldn\u2019t keep rates low<\/a> forever after its financial crash led to a borrowing spree. The devastating Kobe earthquake<\/a> was the final blow. The BoJ cut rates<\/a>, bond prices rose and his losses spiralled to $1.4bn. His bet that markets would beat Japan brought down the bank.<\/p>\n

Barings\u2019 collapse is perhaps a spectacular example of\u00a0the \u201cwidowmaker<\/a>\u201d trade, where speculators think they can outsmart Japanese authorities. They\u2019ve ended\u00a0up with egg on their face as their gamble on Japan losing fiscal control proved misguided. Japan,\u00a0with its own currency and a central bank working with the government, shows how the state shapes markets, not the other way round.<\/p>\n

Britain seems to have forgotten this lesson with talk of \u201cbond vigilantes<\/a>\u201d. True, the UK is very different from Japan. But in economic terms there are similarities: both borrow in their own currency; both have floating exchange rates; both are net importers of food and fuel, leaving them vulnerable to imported inflation. Yet only one has built a resilient economic model around these facts. And it isn\u2019t Britain.<\/p>\n

Sterling\u2019s recent drop<\/a> has made headlines. But its long-term value, as economist John T Harvey<\/a> points out, is determined by foreign exchange trading. In the case of the pound and the yen, foreign exchange turnover exceeds trade by more than 100 times. However, interest rates, unemployment, inflation and trade flows are indicators that determine short-term currency prices disproportionately because whatever traders think is true becomes fact as it then moves the market. As George Soros<\/a> noted, traders\u2019 perceptions matter, and are driven less by facts than by whether the City regards the government as competent.<\/p>\n

That insight should liberate policy. The UK can and should run fiscal deficits to fund a green industrial strategy<\/a> \u2013 investing in domestic manufacturing, energy security and a strong export base. Investing in industrial capacity and public goods strengthens the economy, helps reduce inequalities and reduces vulnerability over time.<\/p>\n

It would also address the UK\u2019s persistent current account deficit. Britain imports more than it exports \u2013 and this deficit, by necessity of accounting, is offset by capital inflows, not because they fund government spending. The upshot is Japan is a net capital exporter, while the UK has become addicted to short-term inflows into property<\/a>, financial instruments, and speculative assets \u2013 flows that can reverse sharply, as seen in the 2022 gilt crisis.<\/p>\n

Which brings us to Liz Truss<\/a>. Her downfall wasn\u2019t caused by borrowing per se, but by doing it for the wrong reasons. Sacking Treasury officials, bypassing institutional safeguards and promising unfunded tax cuts for the wealthy during a bout of high inflation showed not boldness, but a breakdown in basic statecraft. It wasn\u2019t a macroeconomic crisis but a governance crisis.<\/p>\n

Rachel Reeves risks a different mistake: adopting fiscal rules to appease markets but that ignore reality. Rather than the self-imposed arbitrary constraints, which she already changed last October<\/a>, the Labour party should be bold and get rid of them altogether. Better the budget features a short statement<\/a> of how government plans will affect the economy \u2013 on trade, inflation and investment. It should be voters, not markets, who decide what\u2019s credible.<\/p>\n