ARI SHAPIRO, HOST:
There could soon be a new financial posse riding into town, the bond vigilantes. Our colleagues over at The Indicator From Planet Money Paddy Hirsch and Wailin Wong explain who they are and what they want.
WAILIN WONG, BYLINE: For as long as there's been government, there have been groups of people unhappy about the way that administrations do business - lobbyists, interest groups, crowds in the street.
PADDY HIRSCH, BYLINE: Yeah. Some of these groups have more leverage than others, but none has as much leverage as the bond vigilantes.
ED YARDENI: The bond vigilantes will take law and order into their own hands if they don't believe that the government's fiscal and monetary policies are doing the job.
HIRSCH: This is Ed Yardeni. He's the president of Yardeni Research, an investment research firm, and he's been investing and watching Wall Street since 1978.
You are the creator or the originator of this phrase, bond vigilante.
YARDENI: Well, that's guilty as charged.
WONG: Ed came up with this phrase, bond vigilantes, to describe a group of big investors - think your pension funds and heavyweight investment firms - who had been battered by inflation in the '70s. They were worried that the government's fiscal and monetary policies in the '80s could trigger more inflation.
HIRSCH: Yeah. So they kind of formed this unofficial posse to force the government's hand, you know, to keep it from borrowing too much, from juicing the economy too much, all of which, of course, could fuel inflation. The bond vigilantes were and are armed with two weapons, a pair of six guns, if you will - holstered on their right hip, bond purchases, and, on the left, bond sales.
WONG: For bond purchases, they can just not turn up for the treasury auctions. That decreases demand for those U.S. bonds. The treasury will have to offer higher interest rates to entice other buyers. As for bond sales, the vigilantes can sell the bonds they already own. Then prices fall, and the treasury will again have to offer higher interest rates to juice demand. These actions have the net effect of costing the government more money, a lot more money - no wonder the bond vigilantes have so much power. But we've been racking up debts for years now. So why have the bond vigilantes decided that now is the time to make a comeback?
MARILYN COHEN: Now you've got a new administration in. They want to get certain things done. But I don't hear the words, cut the spending.
HIRSCH: This is Marilyn Cohen, the CEO of Envision Capital Management and Investment Firm. She says the way she sees it, the bond vigilante posse has drawn up on the outskirts of town.
COHEN: If, under the Trump administration, spending continues with abandon, then the bond vigilantes will say, OK, guys. Get on your horses. We've got to take this into our own hands.
WONG: Trump has talked about some big tax cuts. They won't be cheap. Ed says they will likely have to be paid for with new borrowing, and the tariffs Trump has talked about could also cut into tax revenues. That would force the government to raise money by going back to the bond market.
HIRSCH: Yeah. And if the government does end up having to borrow more or if the economy begins to stall and the government decides to juice it with stimulus, those bond vigilantes could decide to saddle up. But, Marilyn Cohen says, we'll get plenty of warning if they do.
WONG: Wailin Wong.
HIRSCH: Paddy Hirsch, NPR News.
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