Liam Halligan says: "The UK remains in grave danger of a sovereign bond market meltdown." This puzzles me.
I don't disagree that there's a good chance of bond yields rising over the long-term. But a return to normalish interest rates that is anticipated by the market - an upward sloping yield curve implies that investors expect yields to rise - is not a "meltdown."
Instead, Mr Halligan is, I guess, making a stronger claim - that government bonds are now mispriced; long-term real yields of around zero are not pricing in any "grave dangers."
But if there's one market you'd expect to be efficient it is, surely, the sovereign bond market. It's a large, liquid market in which there is little private information and countless intelligent buyers none of whom have pricing power. But Mr Halligan seems to be saying that even this market is inefficient, that it is misallocating trillions of pounds of capital; the world sovereign bond market is worth some £26.6 trillion (pdf).
If you think sovereign bond markets can misallocate resources on a massive scale, you got to believe that ordinary markets for goods, labour and services are even more prone to huge misallocations.
It's quite coherent to believe there's a "grave danger of a sovereign bond market meltdown" if you are sceptical about the functioning of markets generally. But how can you do so if you believe in free market policies? (It should be obvious that I'm not having a go at Mr Halligan specifically here; I suspect lots of conservative-minded folk think similarly).
One possibility is that you think that governments and regulators are even more incompetent than private sector agents, and so even if the market is inefficient, state intervention is more so. But I'm not sure this applies in this case. Mr Halligan is claiming that someone does have the ability to identify market malfunctions - himself. Why can't the state draw upon such reserves of competence?
Another possibility is that markets are "micro efficient but macro inefficient". This might be true of asset markets - for example it's possible for gilts to be overpriced even if (say) seven year issues are correctly priced relative to five-year ones. But to claim that goods and services markets are micro efficient is surely a big ask.
A third possibility is that one recognizes the ubiquity of market failure but favours limited government for other reasons - say because you value (negative) freedom or because even malfunctioning markets are conducive to economic growth.
This is, I think, coherent. But there is, nevertheless, an inconsistency here. Mr Halligan wants the government to do something about the (possible) failure in bond markets - cut spending. But he - and more significantly those who think like him - seem relaxed about the failures in goods and labour markets that cause at least 2.5 million people to be out of work.
It's strange how some market failures demand action and some don't, isn't it? If I didn't know better I'd suspect the right of merely pursuing class interest without regard to intellectual consistency.
Another thing: Mr Halligan claims that such a meltdown would have disastrous effects. This too is questionable.