Max Jerneck: The market does not decide on fiscal policy
In a debate article in the Swedish paper "Dagens Industri", CSR researcher Max Jerneck has taken a look at the old myth that the bond market determines how much a government can spend, which Liz Truss' tax U-turn has revived.
However, it's important to take the monetary policy into consideration here. The market can trick the interest rate up, but only to the extent that the central bank allows it. With unlimited ability to subsidize bonds, the central bank can always get the interest rate where it wants. In other words, the role usually attributed to the bond market is played by the central bank.
In summary, the UK's rising interest rates were not due to an unsustainable national debt, but to the fact that an inflationary budget was presented at the same time as the Bank of England sold government bonds, which, in conjunction with the regulation of margin collateral at highly leveraged pension funds, triggered a self-reinforcing selling spiral. The scenario was similar to those which Swedish authorities recently intervened to prevent on the Nordic energy exchange.