From: Ann Pettifor <annpettifor@substack.com>
Date: Wed, 7 Oct 2026 at 02:34
Subject: The Bond Market’s Premonition: High Rates, Defaults, Slump & War
To: <peterchallen@googlemail.com>

Forwarded this email? Subscribe here for more The Bond Market’s Premonition: High Rates, Defaults, Slump & War The K-shaped global economy that enriched the rich and impoverished the rest now threatens collapse. ANN PETTIFOR OCT 7 READ IN APP  Image credit: Illustration by Stephen Kelly / Getty Images Bond markets are warning. Global bond markets are in turmoil – generating financial instability worldwide – and warning of a clear threat. Namely that high, real rates of interest – the flawed, neoliberal approach to restraining supply-side inflation – will, if applied to the world’s vast quantities of private and public debt, lead to another global financial crisis and slump. That in turn will worsen global trade imbalances, heightening geopolitical tensions and lead to war. We should not be surprised. This is not the first time that mountains of debt, based on central bank backing for deregulated, ‘easy money’ creation, has ballooned into a vast credit bubble, only to be burst by high, real rates of interest. Bond markets are anticipating those high rates and their consequences, and struggling to get ahead of central bankers.Once again, both the Federal Reserve and the Bank of England are proposing to follow Paul Volcker’s example and raise rates at a time of great financial and geopolitical instability. In 1979-80, high real rates succeeded only in lowering inflation by inflicting one of the severest recessions on the citizens of the United States. A recession that led to the highest level of unemployment since the second world war, and to the destruction of many of America’s valued industries. Yet today’s powerful central bankers refuse to acknowledge and learn from the lesson of Paul Volcker’s mistakes and failure. Central bankers are powerful. They have the power to determine the ‘price’ of a bond, and with it the power to raise the cost of capital and of borrowing. And they have the extraordinary power to create new money – or liquidity. Central bankers are FAR more powerful than bond markets Central bankers can, with colleagues on a monetary policy committee, use their great power to determine whether the rate of interest should rise or fall – which profoundly affects the ‘yield’ on a trader’s bonds. That power can be devastating for the expectations of traders in bond markets, as I explain below. That is why we must put an end to the hysteria that surrounds so-called ‘bond vigilantes’. Bond traders are not as powerful as central bankers. They are subordinate to the actions of central bankers and are forced to react to central bank signalling and to the meetings and actions of central bankers. They react most fiercely to rumours, signals and other forms of CB communication that suggest rates are going to move – up or down. As I write this, the governor of the Bank of France Emmanuel Moulin is inciting panic in French bond markets. He did so with this statement given to the Financial Times of 6 October, 2026: – – – – Whoever is elected president will face a situation in which interest rates are high, – – – – the cost of servicing the debt is high, the deficit has to be brought back below – – – – 3 percent, and the debt has to be cut. The governor is telling global bond markets that the Bank of France is proposing to alter the yields (interest) on their bonds by raising interest rates, and that austerity will ensure fewer new bonds will be issued. Rising rates and a shortage of bonds means that prices of bonds issued at existing, lower rates, will fall and yields will rise. Those changes will cost bond traders dearly. That is why they are reacting. They are ‘front-running’ the central bank. In other words, they’re selling their bonds as fast they can, before existing bonds lose value. And the unelected, unaccountable governor of the Bank of France is deliberately fuelling those firesales. But I am getting ahead of my purpose with this post….. High rates and The Mighty American Consumer John Maynard Keynes, back in 1936, both understood and explained in The General Theory that financial instability was the result of expensive (‘dear’) money. As Geoff Tily highlights in this Progressive Economy Forum report, Keynes understood that money lent at high rates is not always a deterrent to borrowing (or lending), but high rates reduce the chance of repayment. Unpayable private debt inflation (on the balance sheet) can be a consequence of ‘dear’ money. Keynes’s thesis is demonstrated most clearly by developments in the credit markets of the world’s most powerful economy, the USA. In a WSJ article titled: The Mighty American Consumer Is Crashing Through Inflation and Driving Growth Jeanne Whalen and Matt Grossman argue that despite declines in consumer sentiment, US consumer spending is growing faster than disposable income. How is this spending to be paid for? Largely by drawing down savings and taking on record levels of debt, explains the WSJ. – – – – – Americans’ savings rate has been trending down and is now at the – – – – – historically low level of 4.1% of after-tax income, versus almost double – – – – – that before the pandemic. Meanwhile, Americans are taking on  – – – – – record levels of debt to fund their lives. To demonstrate that high rates are no deterrent to spending, the authors note that average interest rates on credit cards rose to 21% in February, from 14.6% in February, 2022. This is already leading to defaults. In 2025 5.6% of credit-card holders were 60 days or more behind on their payments. These default rates rose to the highest level since 2018 for residents of lower, middle and upper-income communities alike. A deranged opinion piece by Alyssia Finley in the same issue of the WSJ – Hurray for Higher Mortgage Rates – argued that in another corner of the credit market, defaults on mortgage payments and foreclosures represented a “silver lining” for US consumers. – – – – – The Trump team deserves credit… for curbing government mortgage-relief – – – – – programs that repeatedly waived payments for delinquent borrowers.  – – – – – Foreclosures rose as a result, by 47% over the past year for mortgages – – – – – backed by the Federal Housing Administration.This isn’t a cause for panic. – – – – – Foreclosures, suppressed by the Biden team, have merely returned to – – – – – pre-pandemic levels. This has freed up more homes for buyers and returned – – – – – demand and supply to a healthier equilibrium. [My emphasis] Given the reckless economic ideology that informs this post, may God help the Mighty American Consumer, borrower and home buyer. Understanding bonds, the bond market and ‘yields’ or interest rates. Bonds are tradable loans that generate income – a fixed ‘yield’ – which roughly correlates as interest on the bond. In other words bonds are assets distinctly different from gold. Gold, like bitcoin does not generate income. Its price rises or falls depending on the amount of money invested in, or withdrawn from, the asset – a process known as ‘pumping and dumping’. But holding gold or bitcoin does not yield income. In that sense these assets, unlike bonds, are barren assets. Like bonds, stocks and shares too can be traded and dividends gathered, but they represent just the tiny ownership piece of a company. Bonds are different. Unlike a ham sandwich that loses value with time, they are an asset that stores value. Bonds pay a fixed interest (known as a coupon) to the buyer of the bond and then repays the principal amount back when the bond matures – at the end of the bond’s term (1 year, 10 years, 30 and even 100 years). Bonds – especially government bonds – are meant to be dependable, dull and safe. Robin Wigglesworth explains in his excellent new book A Fabulous Debt that Ian Fleming chose the name Bond for his spy because he thought it was “the dullest name I’ve ever heard.” But bonds are not dull at all. “They have funded everything from wars, ports, highways, and coal mines to electric cars, Netflix TV series, and the data centers that now power artificial intelligence” writes Wigglesworth. Because bonds can be traded, the price of the original bond (or asset) can fall (or rise) when sold on. This tends to happen when central bank rates rise or fall. While the interest or yield on the bond remains fixed, the price of the bond falls – or rises. When the price of the bond falls, the yield rises relative to the falling price. The reverse happens when the bond’s value is sold at a higher price than valued at origin, when the yield falls. So when we hear of yields rising on government bonds, it is a sign that bonds are being sold below their initial value. Those sales – dubbed ‘bond selloffs’ – indicate a lack of confidence – some would say panic – in both the value, and the issuer of the private or government bond. That lack of confidence causes the fixed income (interest/yield) rate to rise.In early April 2025, as I explain in The Global Casino, the yield of the US Treasury bond due in 2035 jumped from a low of 3.8 percent to a high of 4.5 percent on 9 April thanks to President Trump’s shenanigans on tariffs. This was an earth shattering shock for the international financial system as Wigglesworth argues in his new book. – – – – – It was akin to a nuclear plant’s warning lights suddenly starting to flash – – – – – crimson because of a catastrophic breakdown in its coolant system. – – – – – (Pg xi of The Fabulous Debt.) This matters because markets in both private, corporate bonds and government bonds topped $150 trillion by the end of 2024, rising from 98% of global income in 2000, to 135% of global GDP by end-2024. That’s a lot of money. Its destruction would indeed be shattering.Since then global bond markets have become even more dangerously volatile. That volatility is often largely blamed on inflation – both consumer price and asset price inflation. Which leads to the next question: What is driving inflation – and why are bond markets panicking? The causes of inflation are complex and varied. When the right-wing press warn that the new leader of the Labour Party Andy Burnham is returning the British economy to ‘the bad old days’ of the 1970s – they are warning of inflation and blaming attempts by workers to keep wages in line with rising prices. But the ‘return to the 70s’ attack is a stale and discredited old chestnut. Workers wages were not the cause of inflation in the 1970s – they were merely responding to it. Nor are wages the cause of inflation today. As my PRIME colleagues Prof. Victoria Chick, Dr. Geoff Tily and I explained in 2011, – – – – – The inflation of the 1970s began just after the Keynesian post-war – – – – – mechanisms for the regulation of finance started to be dismantled. – – – – – In Britain, controls on banking and capital mobility were relaxed, and – – – – – liberalised arrangements were restored, beginning with Competition – – – – – and Credit Control (1971) (evaluated as “all competition, no control” – – – – – by most economists). The root cause of the inflation of the 1970s – – – – – was the massive expansion of the money supply that followed the – – – – – deregulation of credit control, as both Friedman’s monetarism and – – – – – Keynes’s General Theory, Ch. 21, predict. In other words workers had nought to do with it. The 1970s inflation rose as a result of decisions by both the US and UK central bankers to remove restraints (regulation) over lending. Decisions that led to the expansion of ‘easy money’ or credit, at rates that were to rocket upwards after 1979. The chairman of the Federal Reserve in 1970, Arthur Burns, had rejected proposals for regulation that would have curbed reckless lending. Instead the Fed fell back on the “markets know best” argument and let a laissez-faire attitude rule, as Rana Foroohar explains in her book, Makers and Takers. (Pg 49] This meant that in the 1970s, the Federal Reserve “encouraged banks to extend riskier and riskier loans” writes Christopher Leonard in The Lords of Easy Money. To achieve this goal the FOMC (Federal Open Market Committee) kept interest rates low, in part because there had been two recessions between 1970 and 1975. As Leonard writes. – – – – – The most obvious effect of this policy (of ‘easy money;) showed – – – – – up in rising prices for consumer goods like food, fuel and electronics. – – – – – In 1973, consumer price inflation was 3.6%. By 1979 inflation had – – – – – surged to 10.7% per year.… – – – – – But the Fed was not just inflating consumer prices. It was inflating – – – – – asset prices as well. The dangers of asset price inflation The rich on the whole own assets and benefit from unearned income generated by assets like property, including bonds.The majority of asset-poor workers live on earned income alone.Government bonds (assets) are used as collateral on banks’ balance sheets. The rising value of assets encouraged banks to use that collateral in the 70s to undertake more aggressive lending; and borrowers to borrow more.Until they stopped – and the system crashed. The Great Inflation of the 1970s was so destructive writes Leonard, because it was actually two kinds of inflation that were intertwined, and which fed off each other. Paul Volcker explained why in his memoir: – – – – – The real danger comes from [the Fed] encouraging or inadvertently – – – – – tolerating rising inflation and its close cousin of extreme speculation – – – – – and risk taking, in effect standing by while [asset] bubbles and – – – – – excesses threaten financial markets. [As above, Pg 56. My emphasis.] Having encouraged riskier lending, the Federal Reserve then, under the new leadership of Paul Volcker slammed on the brakes in 1979 with nosebleed rates of interest. By October that year short-term rates were 11.6%. By the end of the month, they would be 16 percent. In less than a year, they reached the high of 20 percent. [Leonard, Pg 56] Volcker believed that these high rates would not damage the economy. He was catastrophically wrong. High rates meant that unemployment rose to 10 percent and homeowners took out mortgages at 17 percent interest rates or higher. As a result, many could not afford a roof over their heads. The prices of assets like farmland, used as collateral, fell by 27 percent, as high rates of interest rendered the repayment of debt leveraged against the diminishing value of the land (collateral) non-viable. The collapse of asset prices used to underpin bank loans led to the failure of the entire system, writes Leonard. [Pg.57]. The Federal Reserve explains it more starkly: – – – – – The 1981-82 recession was the worst economic downturn in the – – – – – United States since the Great Depression. Indeed, the nearly – – – – – 11 percent unemployment rate reached late in 1982 remains the – – – – – apex of the post-World War II era (Federal Reserve Bank of St. Louis). – – – – – Unemployment during the 1981-82 recession was widespread, – – – – – but manufacturing, construction, and the auto industries were – – – – – particularly affected. Today’s inflation Today’s inflation has similar drivers. The question is this: will the threat of higher central bank rates driving higher bond yields have the same consequences as that of 1981-2? Today, cost-push inflation is caused by falling supplies of e.g. oil and diesel, driven by ‘bottlenecks’ arising from both the Russian invasion of Ukraine and the US invasion of Iran. This inflation is damaging to low-income, asset-poor households. But today’s cost-push inflation is dwarfed by the wealth-effect driven asset price inflation that has so enriched the already-rich. And just as in the 1970s, it is the collapse of asset prices that is the main trigger of financial failure and an ensuing slump. The role of unregulated lending The role of ‘easy’ unregulated money is in large part to blame for today’s “extreme speculation and risk taking” in debt and asset markets, as non-bank lending (or ‘shadow bank’ lending) exceeds levels of regulated bank lending. Non-bank lending is lending largely unchecked by central bank rules and regulation. According to the BIS between 2009 and 2023, financial assets held by non-bank creditors surged from 167% to 225% of global GDP. (Non-bank creditors or lenders include hedge funds, asset management funds, private credit, private equity, mutual funds and pension funds). Over the same period, regulated banks’ total assets grew more modestly, from 164% to 177% of global GDP. In Fortune magazine the FT’s Robin Wigglesworth provides an example of how non-bank lending has changed. – – – – – America’s biggest lender is no longer a bank, it is actually  – – – – – BlackRock, an investment group. At the end of 2025, BlackRock – – – – – holds roughly $3.2 trillion in bonds on behalf of its customers, – – – – – which range from central banks, sovereign wealth funds, and – – – – – huge insurers to humble pension plans and ordinary people – – – – – saving for a rainy day. That outstrips the $3.1 trillion of debts that – – – – – JPMorgan holds on its balance sheet. In fact, over half of those – – – – – debts are in the form of bonds. Just as in the 1970s lending by both central banks and non-banks has led to an increase in the money supply that has fuelled today’s massive bubble in asset prices, with non-bank lending playing a bigger role than in the 1970s. That has in turn led to America’s K-shaped economy when the rich, those active in the tech and other luxury sectors, benefit from inflated stock markets, inflated real estate and other asset values, and strong purchasing power. In contrast, low- and middle-income households endure wage stagnation, while the inflation of essentials like food, rent, gas and diesel, lead to dependence on debt or “buy now pay later” services. For most medium and low-income households their share of the US economy has fallen to 50 per cent of GDP, its lowest level since 1947. This contrasts with richer households that now enjoy a net worth close to an all-time high of 546 per cent relative to GDP. If you want to know why there are billionaire oligarchs, when before there were few? Blame asset price rises fuelled by ‘easy’, deregulated credit creation by non-banks. The US money supply has grown at almost double the pace of the previous two years, supporting reflationary assets such as stocks and exacerbating wealth-effect-driven inflation, as Brij Khuhrana explains in the FT. The argument can be extended to Global household wealth which hit a record $570 trillion in 2025, up $40 trillion from 2024. What must be done….? That is a question to which I must devote a new, and probably longer post. Or even a book! In the meantime… to lower inflation and reduce wealth inequality, government must use the regulatory tools of both the central bank and the criminal justice system to rein in and dampen rising asset prices. How can that be done? First, by lowering interest rates and raising and enforcing regulation over credit creation. Second, by increased government intervention in, and management of, financial markets, particularly non-bank institutions. A priority must be constraints on cross-border capital mobility. Second, central bank mandates for tackling inflation – price stability – using high interest rates should be abandoned. Instead governments should set up new central bank mandates that prioritise full employment while incorporating climate considerations in central bank operations. In place of the central bank an Inflation Control Office should be set up., as the 99% Organisation proposes. It would use tools, including a tariff shield and a windfall tax on big energy companies, to support today’s energy-vulnerable and helpl lower the impact of inflation. And as explained in The Global Casino, there can be no cheaper form of government intervention than inaction: governments should follow Harvard Law Professor Stout’s advice and refuse to allow the use of the power of the law to enforce private, non-bank contracts. That would bring ‘non-banks’ back down to earth pretty quickly. Private debt inflations preceded the Great Depression and the Great Recession, respectively. The will do so again. It is far too late, but nevertheless useful to be reminded of what Keynes argued back in 1937: “The boom, not the slump, is the right time for austerity at the Treasury” – and, we would add, at the central bank too. (Keynes, 1937, p. 390.)

– – – – – There are no big non-profit donors or corporations backing my work. – – – – – And that is the way I want it to be. However with more financial support – – – – – I could do much more. So if, as a free subscriber, you have benefitted – – – – – from my work, and can afford an annual subscription, please be assured – – – – – your donation will be both appreciated, and will make an important – – – – – contribution to keeping this Substack free for many others. If enough – – – – – donations roll in, we plan to hire tech support for a regular podcast. – – – – – Upgrade to paid