Markets are inhuman (and that's a good thing)
By Scott Sumner
Here’s the Financial Times:
The leaders of Italy’s two leading populist parties took aim at global financial markets on Wednesday, accusing investors of trying to “blackmail” them by unloading Italian assets as they tried to form a new government.
A sharp sell-off that saw yields the Italian government’s benchmark 10-year bond suffer their biggest move in two years was triggered by the parties calling for a “pre-Maastricht setting” in EU economic policymaking — suggesting they would abandon the fiscal rules underpinning the euro once in government.
The FT article has a graph showing the sharp spike in the yield on Italian government bonds:
Political leaders have all the faults of ordinary people. Some are motivated by spite; a desire to seek revenge against their opponents. Others are motivated by ideology; say a belief that big government is the way to solve problems.
Markets suffer from none of these defects. They are as unemotional as the Spock character in Star Trek. They have no ideological bias. One of my favorite examples occurred in when FDR took the US off the gold standard and depreciated the dollar. The leading figures on Wall Street were opposed to this move, but during the spring of 1933, stocks rose strongly on each FDR statement that pushed the dollar lower. The October 1933 gold buying program was even more controversial, with even Keynes joining the conservative establishment in opposition. But stocks continued to rise on news of higher gold prices. Wall Street was still “conservative”, but the stock market had moved far to the left of Keynes.
Italian markets are worried that the new government of Italy is contemplating an extremely irresponsible fiscal policy, including a guaranteed annual income, a lower retirement age, and a 15% flat tax. This has nothing to do with “blackmail”; it’s a matter of markets rationally calculating the likely impact of massive fiscal stimulus in a eurozone country with very slow growth and a public debt equal to 130% of GDP.