Unit 3 · Level 2 · Government debt & fiscal policy
Who buys the bonds
Governments don't borrow from a magic pot. They sell bonds to pension funds, banks, insurers and foreign central banks. These buyers are voluntary. When they doubt a government's plans, they demand higher yields to keep lending, and budgets that looked fine can unravel fast. In September 2022, the United Kingdom found out live on air.
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What you get asked
When bond investors lose faith in a government's budget plans, they:
Lending is a choice. Doubtful lenders charge more for the risk, and since governments constantly refinance old debt, higher yields hit the budget shockingly fast.
Order the UK's September 2022 'mini-budget' crisis
Long-dated gilt yields jumped over a full percentage point within days, a huge move for a G7 bond market. One unfunded announcement, one doom loop, one emergency rescue.
How did the UK's 2022 mini-budget episode actually end?
Nearly the whole package was reversed, the chancellor was sacked, and PM Liz Truss resigned after 49 days, famously outlasted by a supermarket lettuce a tabloid had livestreamed next to her photo.
Investors who punish loose budgets by selling bonds and driving up yields are nicknamed bond ___.
The term dates from the 1980s. A US political adviser once joked he'd like to be reincarnated as the bond market: 'you can intimidate everybody'.
What's the big lesson of the UK 2022 episode?
A G7 country with its own currency was disciplined by its lenders within days. Governments propose; bond markets dispose. 🐜
The rest of this unit
Deficits, bond markets, and the day investors say no.