Last Thursday afternoon, for a couple of hours, something remarkable happened on the markets. The yield on 10-year gilts rose above 3 per cent.
By long-term historical standards that level might seem quite low. Given the prospect of inflation over the coming decade being at least 2 per cent, it would give only a modest positive real return to savers. By long historical standards it certainly is still relatively low, as you can see in the graph.
But what makes it remarkable is that the increase in rates came immediately after the Bank of England's monthly monetary policy meeting, which did not change policy and which maintained the "forward guidance" that sought to play down the possibility of an early rise in rates.
Gilt yields have risen by more than 0.5 per cent in a month and are now double the albeit artificially low levels of a year ago. So the market is in effect blowing a raspberry at the efforts of the new Bank of England Governor, Mark Carney, to talk down rates.
It is not just that no-one now believes what he is saying – that the guidance has so far at least been wrong. It is worse. Anyone who did act on his forward guidance would have lost a bundle of money. Costing people money in your first weeks in office is not a great way to establish your authority.
What has happened in the past few days has triggered three separate debates.
One, the narrowest, concerns monetary policy. There are questions as to whether the whole idea of forward guidance is a good one, whether the level of unemployment of 7 per cent is a sensible target to aim for when considering the level of interest rates, whether policy is already too loose as it may be generating a boomlet in house prices – and so on.
That debate will continue through the autumn. But in the end what happens to interest rates will be determined by what happens to the economy. If the present rate of growth is sustained it will become obvious quite soon that the risks of holding down rates are greater than the risks of increasing them.
The second debate is about the economy. The current strength has come as a surprise to some, including, I suspect, Mr Carney, but it shouldn't have. The evidence has been mounting for some months that a sustained recovery is in place and as argued in these columns it looks as though the onshore economy will grow by something like 2 per cent this year. (The total economy may grow a bit less because of the fall in North Sea oil and gas production.)
In trying to "call" what is happening to an economy you should look at a range of data, rather than focus on published GDP numbers which are almost always revised. These include things like VAT revenues, which give you a handle on consumption, car sales, which are not only the biggest single consumer durable but an indicator of confidence, and the number of people in employment.
In addition, I find it helpful to look at the money-supply numbers, which have been rising strongly since the middle of last year.
Anyway, what forecasters think about the economy does not really matter. What matters is what will happen, and the issue at the moment is whether the present strength will carry through to next year, picking up even more momentum as it goes.
If it is sustained the next question is how much slack there is in the economy: how long can above-trend growth continue without hitting bottlenecks?
The third debate concerns the pace of this return to higher bond yields and effect of these on the wider economy. Governments, particularly those who are heavily indebted, won't like it and will use whatever devices they can to hold down rates. In some extreme cases the indebted governments will default, as in effect Greece has done. (Investors in Greek government debt have lost something like three-quarters of their money.) Savers, on the other hand, will hope they at last get some return on their funds.
We are still in the early stages of what has been dubbed "financial repression", for governments are still running big deficits and rates have only recently started to move, so what can be said at this time?
The best starting point is to look at previous periods of high government indebtedness and how these have panned out.
Russell Jones at Llewellyn Consulting has just done a good study of this. He says public debt is high and still rising, and orthodox fiscal consolidation has struggled to tackle this. In addition, austerity fatigue is increasing and the need for the private sector to tackle its indebtedness will further restrain growth. So the result will be a prolonged period of financial repression.
The form this will take will vary from country to country. Outright defaults are less likely – even Greece technically has not defaulted because bondholders have "agreed" to accept less than the face value of their holdings.
Instead there will be explicit or implicit rate caps, for example imposed on banks that are required to buy government bonds. Another form could take "prudential" regulations requiring institutions to hold stock. Still another would be for government-owned institutions to buy debt direct.
One way or another, though, governments will try to wriggle out of their obligations. Given these risks for savers, I'm not sure a 3 per cent return is enough.