I have often written about the power of “bond vigilantes.”  The clearest historical example is that the bond vigilantes determined when World War II would begin.  To build-up his military, Hitler borrowed heavily by issuing government bonds.  When the bond vigilantes stopped buying German bonds, Hitler knew his military would never be any stronger, and it was then time to begin the war.

George Soros was the famous bond vigilante who “broke the Bank of England” in 1992 by betting the English pound was over-valued.  The Bank was spending billions to keep the pound strong, especially against the German mark.  The more Soros bet against the pound, the more the Bank had to spend to support the pound.  Finally, the Bank stopped wasting money, and Soros pocketed a cool billion dollar profit.

In 2011, many of us were concerned about the bond vigilantes during our debate debacle to raise the debt ceiling (which led to today’s sequester debacle).  If the vigilantes or barracudas had started betting against the dollar then, the Fed wouldn’t have had the “firepower” to defend it without causing serious inflation — which would only weaken the dollar later instead of then.

Today, there is honest discussion as to whether the bond vigilantes still have that power to move governments.  When they represented the buyers of government bonds, they were important.  Now that the Fed buys up to 75% of all bonds issued by the U.S. government (quantitative easing), and other central banks do the same, the power of the bond vigilantes is reduced.

This is not good!  Bond vigilantes enforced market discipline, and we need that.

Last week, the Fed released minutes of their last meeting.  The stock market fell when it read there was honest discussion about ending quantitative easing (QE).  The stock market likes the “sugar high” it gets from QE.  I felt the market was wrong to fear the end of QE, which would be a short-term negative but a long-term positive.  Bring it on!