Modest Discourse on Economic Vigilantism

I am generally a fan of Ed Yardeni but I disagree with his assessment of the recent sell-off in US government bonds, a so-called reappearance of the "bond market vigilantes." Dr. Ed attributes the reawakening of the Bond Market Vigilantes to the Obama-McConnell tax cut deal. I think this is totally off the mark. I have been expecting the BMVs reappearance for awhile now and I thought that seriously degraded creditworthiness would be the impetus for their return. I conceded that I misdiagnosed the BMVs' psyche, what really awakened them was inflation fears, more specifically, as Scott Grannis has posited, the combination of an improving outlook for economic growth combined with massively expansionary monetary policy. The problems with Yardeni's analysis are many but the first is timing. He doesn't notice the presence of the BMVs until just now. Granted the sell-off of a few days ago was quite something, but the BMVs' presence was more than noticeable well before the Obama-McConnell tax cut deal was struck. The second flaw in Yardeni's argument is one of magnitude. Dr. Ed thinks that the tax cut extensions putative negative effects on the deficit are the proximate cause of the BMVs' ire. Even conceding that the tax rate extensions will hurt the deficit (I disagree on this point) of all the profligacy that has emanted from the Obama White House and the Pelosi Congress, this tax deal is pure peanuts. Compared to all the other destructive fiscal policies that we've seen since 2006 and since Obama took office, this is the least of our worries. Basically, if creditworthiness were the true focus of treasury investors, no way could this have gotten them all worked up and into vigialante mode. If anything, the brightening prospects for growth that the tax rate extensions augur, placed against the background of QE2 and negative real interest rates, are what have accelerated the reemergence of the BMVs.

On another note, I have talked for nearly two years about the 'job market vigilantes" (see here, here, and here). My basic view is that a mix of policy and rhetoric emanating from the likes of Obama and the Pelosicrats has crushed the animal spirits of the economy and created a strong backlash from these job market vigilantes. While the toxic cocktail has been more parts policy than rhetoric, it is unwise to dismiss the role of rhetoric. While reality has forced Obama's hand on policy, he still clearly hasn't learned the role of rhetoric and you could make the argument that there is still enough poisonous rhetoric in the cocktail to make it toxic to the animal spirits of the economy. Dan Henninger notices this in today's column and wonders just how toxic the cocktail still might be... "But they've gone FDR and John Steinbeck one better. In the world of the Grapes of Wrath Democrats now gagging over Barack Obama's "sell-out" to the rich, the new economic royalists aren't limited to "the Ishmael or Insull." Now it's any single person or married couple in America with a pre-tax income at $200,000 or $250,000.

Will the nation's new economic royalists step forward, rope in hand, to produce enough economic activity to help Mr. Obama to a second term of retribution? Maybe not. According to the National Association of Manufacturers, some 70% of manufacturing concerns in the U.S. have owners whose business is taxed at the individual rate (S corporations and the like). These are the people expected to commit capital to new hires and equipment."

In thinking about the Obama-McConnell tax plan holisitically, which includes Obama's presser the next day, I am put in mind of an analogy from my principal hobby...if I give you a glass of fine wine and add some sewerage water, it matters not to its discreased appeal whether I add it via a beaker or a medicine dropper. Or in other words, an ounce of shit can be just as polluting as a gallon.