I spoke about the threatened demise of the Bond Market on Life Matters on Monday, which is where you will find several good references.
I am philosophically inclined to agree with Alex Erskine who refers to bond traders as "basket weavers and candlestick makers" who almost deserve the same fate as they've been prescribing for others workers made redundant by the progress of technology and new work practices.
If they weren't so arrogant (arrogant as a bunch - a few individuals in the bond market are humble) it'd be easier to feel sorry for them.
BUT the more I thought about this preparing for Life Matters the more I realised that, unpalatable as it is, we need a bond market.
And more. We need, yes we really need, the government to invest for the sake of it, and to borrow to raise the money.
Nicholas Gruen of Lateral Economics makes the point in a paper not on the net, although a dot-point version of it is.
He says for the Australian Government, as for any organisation, there is an optimal level of debt and an optimal level of funds invested. These should be decided quite separately from the question of whether or not the government should own a phone company.
Given the government's long-term investment horizon it makes sense to borrow at around 5 per cent and invest for an average return over the longer term of 10 per cent. Who wouldn't?
More importantly: there can be big benefits to the wider economy from the government doing so.
Buy buying Australian stocks when they are cheap and selling when they look pricey (an sensible practice) the government can deepen and smooth out volatility in the Australian stock market.
This is what the Reserve Bank of Australia does in the Australian Foreign Exchange market.
To the extent that the arms-length government investor put funds into the Australian stock market it would also would be helping to raise equity prices closer to their true value, reducing the debt-equity premium.
Everyone wins? That's how it looks.
I can see no good reason why the government should deny itself the right to invest and deny itself the right to raise funds. Indeed, it seems to me that the business of government is too important to deny it these rights.
What if a real crisis arises and the government suddenly needs to borrow - without a bond market it would find it hard. Australian might well regret the boldness of the brash Australian Treasurer who paid off his debts.
Update: Nicholas Gruen's paper IS on the web - here.
