HAMISH MCRAE: Savers rescued by might of the markets

It was swift, brutal and effective. And it shows you where power lies in the world. The financial markets decided that UK economic policy had to change, for they would not finance the increased borrowing Liz Truss’s Government proposed at any acceptable interest rate. So they made her change it. They also forced her to sack her Chancellor, Kwasi Kwarteng, and perhaps – who knows? – will, in effect, end her premiership too. 

That is for the future. What we know now is that both the great quotes of James Carville, Bill Clinton’s election-winning strategist, are true. The more famous one is, ‘It’s the economy, stupid’. If Liz Truss’s Government does indeed fall, it will be her handling of the economy that delivers the final blow. 

The other concerns the bond market. He said: ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.’ 

Bruised: By allowing a surge in inflation to take place, governments have in effect been filching money from savers

Well, that was true in the 1990s when he said it, but actually has not been right since the financial crash of 2008/9. The hold that the bond markets had over everybody was that if governments or companies needed to borrow they had to do what the markets wanted, or they would not stump up. 

But after that crash the central banks invented the twin ideas of near-zero interest rates – below zero in Europe – and of quantitative easing. If governments needed money they got the central banks to print it for them. 

That is history now. When I learnt my economics in Dublin in the 1960s, I was told that if central banks printed too much money that would create inflation. I was also taught that the lags in economics were uncertain and could be very long. 

In this case it took a decade for inflation to come through – but it has done so with a vengeance in the past year. The result? The bond markets have got their power back. And on Friday, they used it. They may want more blood. When the news filtered through that Kwasi Kwarteng would be sacked, the pound rose and, more important, the yield on 10-year gilts dipped below 4 per cent. 

For some minutes it was down to 3.95 per cent, within a whisker of the equivalent on US treasuries. Then the news came through the new Chancellor would be Jeremy Hunt and the rate went back above 4 per cent, and by the close on Friday it was over 4.31 per cent. True, US rates came up too, but the point is that the gap between US and UK yields had widened. So markets are far from being reassured. 

For many people the fact that these anonymous things, the markets, are so powerful will be troubling. What right do they have to dictate policy to elected politicians in established democracies? I see it rather differently, for they represent the collective interests of the world’s savers – ordinary people who set aside money for their old age, for their children, for emergencies. 

And they use those savings to invest in projects and enterprises that will bring a return, be they governments investing in roads and hospitals or companies developing new vaccines.

By allowing this surge in inflation to take place, governments have in effect been filching money from savers, including from their pension funds if those funds were heavily invested in bonds. 

The markets are of course imperfect and this is not to idolise them. It is simply to say they provide a vital check on governments that take financial risks with taxpayers’ money. 

What has happened in the past few weeks may seem very bad news for politicians, who have been reminded of the limits of their power. But it is surely very good news for savers. 

I don’t know what will happen to this Government, and it will be a shame if the sensible ideas it has to boost growth are blown to bits by its macro-economic stupidity. I am afraid, too, that investors have some rough months ahead. But I feel more comfortable financial discipline is being reimposed by the heavy-hitters of the global bond markets.