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Hey Bond Vigilantes: You are wrong

June 2, 2011

The empirical data has an anti-Bond Vigilante bias

What are these guys smokin’?  You’d think they would at least try to see if there was any relationship between what they think and the real world.

But they didn’t even bother getting off the couch after smoking that bong hit of fine neo-classical.  That’s the only conclusion you can draw from looking at this chart.  They didn’t even bother to look at the data.  They didn’t do the reading.

Over the last 60 years, there is a very, very strong correlation between total government spending and bond yields.  I started off with this simple, easy to follow chart. It shows the relationship between total spending as a % of GDP, and how much the U.S. government pays investors to “borrow” the money.

Only, this strong relationship just happens to be the exact opposite relationship that 99% of financial people think is the case.  Higher levels of government spending have resulted in lower bond yields for the last 50 years.  Lower levels of government spending resulted in higher bond yields over the last 50 years.  The data isn’t really disputable.

It turns out we can use math, too.  According to R, this correlation is strongly negative.  It’s -.60.  The R squared is significant at the 95% level.

But I am not here to geek out.  I am here to slam Bond Vigilantes.  These people are wrong.  They do not know the historical record, they are empirically wrong.  We have 60 years of data easily available, and more if you want it for the United States.  They could look up these numbers very easily from FRED.

Bond Vigilantes are Wrong over Generations of data

We have a cool chart that shows how crazy these people really are.  I chose Niall Ferguson as the poster boy, because of his insulting rant about how Austerity is working for the U.K and destroying the value of the U.S. Dollar.  His only problem is the anti-Bond Vigilante bias to the facts: The U.K. is rapidly falling into a recession caused by government austerity measures.  Mr. Ferguson teaches history, but doesn’t seem to know the most obvious relationships between government spending and the real world.

If you don’t know Niall Ferguson, he is a Harvard professor of economic history.  He is important and influential person, and he’s objectively wrong over a period of generations.

Does this mean we should spend, spend, spend?  Of course not. Remember, Past performance is not indicative of future results.

  1. Clonal Antibody
    June 2, 2011 at 4:01 pm


    Can you isolate the two clusters that seem to go in opposite direction in the second chart, and see if there is something about those time periods that is special? You can identify those points in the first chart

    Also what happens if you exclude those points from the analysis?

  2. TC
    June 2, 2011 at 4:08 pm

    Which points do you mean? Do you mean the cluster closest to the middle? I could try.

    BTW – I’d almost prefer to do a kernel regression on this. I think that this would be appropriate for the noisy data that we have.

    • Clonal Antibody
      June 2, 2011 at 4:44 pm

      One cluster around GDP (0.3-0.4) – Yield (4-9)
      2nd cluster around GDP (0.55-0.65) – yield (4-9)

    • Clonal Antibody
      June 3, 2011 at 9:55 am

      The two clusters are from 2001-2007 and the other from 1987-1993 — Both very significant periods — the one really to be excluded is the 2001-2007 bit.

  1. June 2, 2011 at 4:02 pm
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