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.
READER COMMENTS
Jeremy Goodridge
May 17 2018 at 10:31pm
Here’s an idea: pay legislators and key executive branch staff based on rgdp growth instead of a fixed salary. That might make them more spock-like.
DougT
May 18 2018 at 5:43am
It’s a bit of a stretch to say the market’s are Spock-like. Anyone who’s lived through the Financial Crisis or the Euro Crisis or the Dot-Com boom/bust or the Crash of ’87 knows market participants are people too. They’re just as subject to group psychology and contagion as any other economic actor.
It’s just that most of the time the “wisdom of crowds” prevails: irrational actors at either end of the spectrum cancel each other out, and Spock rules. But sometimes they go off the reservation and tell us, “Dammit, Jim, I’m a doctor, not a bricklayer.”
Hazel Meade
May 18 2018 at 11:49am
@DougT,
I don’t know if the irrational actors even cancel eachother out. I think it’s more that the moral predelictions of the actors cancel each other out. Markets do not care about your morality. They do not make value judgements. They only care about maximizing returns.
@Scott,
Aren’t flat taxes and basic incomes libertarian ideas? I’m tempted to think that letting Italy experiment with both would be worth it, in the long run, even if it raises deficits in the short term.
Scott Sumner
May 18 2018 at 12:11pm
Doug, You said:
“They’re just as subject to group psychology and contagion as any other economic actor.”
Good point about 1987, but the other examples do not show irrationality. In any case, I would not say that markets are just as susceptible to irrationality as any other actor; they are far less susceptible.
Hazel, Italy cannot afford that experiment, it will go bankrupt if it tries.
Basic incomes may be a “libertarian idea”, but I don’t think it’s a good idea.
David R Henderson
May 18 2018 at 1:50pm
@Scott Sumner,
Hazel, Italy cannot afford that experiment, it will go bankrupt if it tries.
True. But if it tried the experiment at 20% instead of 15%, it just might work.
Basic incomes may be a “libertarian idea”, but I don’t think it’s a good idea.
I agree that it’s a bad idea. I also don’t think it’s a libertarian idea.
Scott Sumner
May 19 2018 at 5:11pm
David, Agree about the 20% rate, but I’m more worried about the other aspects of the fiscal proposal.
Comments are closed.