Amidst all the talk of an AI bubble, bonds are back in the news. The world’s two leading business newspapers, The Wall Street Journal and The Financial Times, both feature stories this weekend warning about bond ructions and surging yields. While these warnings might only interfere with the sleep of bond geeks, they are a good reminder of the centrality of the bond market to our prosperity.
For all their financial geekiness, Robin Wigglesworth knows that bonds matter. He edits Alphaville, the Financial Times’ splendidly geekish markets blog, and he’s the author of A Fabulous Debt, a new book that tells the “epic” story of how bonds built the modern world. The bond market matters, Wigglesworth reminds us, because when it breaks — as in 1873, 2008 and very nearly in 2020 — then the whole world suffers.
So what, exactly, is a bond? Wigglesworth explains that it’s a tradable loan which the Venetians accidentally invented in 1171 to pay for a war with Constantinople. In Venice, it became a forced levy on every citizen, sweetened by its annual 5% interest payments and by the right to sell its paper on the Rialto. From there it runs through Amsterdam with the Dutch East India Company to modern America, where Thomas Jefferson’s Louisiana Purchase was financed by bonds sold by the London merchant bank Baring Brothers — remarkably, while Britain was at war with the France it was paying, and earning Barings what may have been the largest banking fee in history. Then there’s the deliciously named Scottish adventurer Gregor MacGregor, a bond bad boy who invented an entire country, Poyais, and successfully sold its bonds in London.
In spite of the shady MacGregor, the moral of the bond story, Wigglesworth reassures us, is that transparency pays. Britain could borrow more cheaply than its rivals because parliament controlled the purse and published its accounts. Europe’s greatest banker, the London-based Nathan Mayer Rothschild, who brought Prussia, Spain, Russia and the new Latin American republics to the London market after Waterloo, thus cajoled other governments into opening their books to get the same rates. Accountability was, literally, cheaper. And so the modern world — with its leviathan state and the financial muscle to conduct global wars — was born.
Does Wigglesworth lose sleep about today’s bond ructions and surging yields? Not exactly. But he is a tad nervous about the fact that tech giants have issued over $500 billion of bonds this year to build data centers. So rather than the feared AI stock market bust, Wigglesworth does raise the more apocalyptic specter of a bond bust. Not an imminent fabulous crisis, he reassures. Not yet, anyway.
Five Takeaways
• Stock Bubbles Don’t Matter. Bond Bubbles Do. The dot-com crash halved the market and produced one of the shallowest recessions in US history. When the bond market breaks, the world suffers.
• Venice, 1171. A forced war levy, softened by 5% a year and the right to sell the receipt on the Rialto. The Dutch turned it into a market — and the East India Company financed its empire with bonds, not stock.
• The Man Who Invented a Country. Gregor MacGregor sold bonds in Poyais, a land that did not exist. Settlers sailed; some died. In the middle of a bond bubble, an invented country didn’t sound outlandish.
• Transparency Pays. Britain borrowed cheaply because parliament published the numbers. Rothschild then pushed other governments to open their books — accountability with a price advantage.
• Who’s Paying for the Data Centers? Roughly $500 billion of tech bonds this year, increasingly off balance sheet. Not 2008, he says — but the obscuring of the scale is what reminds him of it.
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Buy A Fabulous Debt: penguinrandomhouse.com
Chapters:
00:00:31 Introduction
00:02:10 Is there such a thing as a bond bubble?
00:03:23 What is a bond?
00:04:11 Mesopotamia, and Venice in 1171
00:05:47 Why so long to invent?
00:08:22 Bonds and capitalism
00:10:15 The Dutch and the East India Company
00:12:07 When does a bond become a scam?
00:12:33 Gregor MacGregor and Poyais
00:15:12 Why bonds, not stock?
00:18:00 Did bonds create the modern state?
00:18:47 Transparency and cheaper borrowing
00:21:13 Conquest, colonies and slavery
00:23:46 Hamilton and the new republic
00:25:32 The Louisiana Purchase
00:27:03 The end of Baring Brothers
00:27:59 Lincoln, cotton bonds and Jay Cooke
00:29:08 $200 trillion
00:30:22 Bond markets came first
00:33:02 The original decentralized finance
00:34:19 Securitization and 2008
00:35:45 Was the Depression a bond crisis?
00:38:48 Liberty Loans and the war
00:40:02 Chaplin’s The Bond
00:42:24 Who pays for the data centers?