This isn’t really an essay, but it was a worksheet in my econ class. Maybe it’ll help someone…
The Vigilantes Work Sheet
1. What might cause bondholders to sell their bonds?
An American policy that proposes big spending programs and accelerates inflation may cause bondholders to sell their bonds.
2. How does that raise the deficit?
It drives up long-term interest rates, which moves inversely to bond prices, and thus, the deficit increases. When bonds, which are linked with other long term rates, such as mortgage rates, rise, the continuous rising long term rates “can stagger the economy.”
3. Why have bonds (at times) replaced stocks as the government’s focus of attention?
They are what this article calls “bond vigilantes.” As a whole, they “restore law and order to the market and the economy” when they find policies that are likely to bring back inflation. The U.S. government also does not sell stock, it only borrows money through bonds.
4. Why are bondholders so paranoid?
They greatly fear inflation after the “oil price shocks and soaring inflation” of the 1970s.
5. How does this make fiscal policy so much more difficult?
It adds another factor into deciding what is best. Policy makers must take into account the effect policies will have on the overall bond market and how that effect will affect the economy because it could either negate the policy or further it.
The Term Paper on China Inflation
... inflation pressure. At the right time, raise the deposit reserve rate and raising interest rates, issue Treasury bonds, ... mandatory settlement and sale of foreign exchange policy is restrictions. Because of the foreign exchange ... money inflow to China will cause short-term speculation behavior in capital market and ... income of export enterprises must be sold to foreign exchange bank. If foreign ...
6. Is the bondholders’ power justified? Explain.
Yes, it is justified because they work as a “correcting force” in the market. Because the largest portions of money are allocated to money managers at large companies, they would most likely have an idea of the effect policy changes would have on the economy. Generally, the average bondholder might follow the ideas of the larger holders, but it is not like the bondholders have infinite power. It is the governments job to keep their expectations high and promote policies that will not increase inflation more than necessary to maintain growth, which is what bondholders help to protect against.
