Why governments should not be in hock to the bond market

My starting point is not what Andy Burnham said but points recently made by Chris Dillow. Here he argues that we shouldn’t worry about the bond market per se, because that market is just an early warning system for future problems that any government should be worring about anyway. In that sense, the bond market is no different from, and less important than, an OBR forecast. For example, if the government were to start borrowing more to increase public spending, interest rates in the bond market might well rise, but this is only because additional public spending would generally increase the demand for resources, putting upward pressure on inflation. The government should worry about raising inflation, not the bond market anticipating this. I think this argument is basically correct, but it needs a bit of elaboration. In particular, while arbitrage means the bond market is generally a predictor of future inflationary pressure, there are circumstances in which other factors might…