The Battle of the Bonds

There's a historical parallel with tomorrow's expected announcement that the Bank of England is going to print more money. And it's all about war.
First, a brief lesson in history and economics (promise it won't be boring).
In centuries past, when monarchs and governments wanted to start firing cannons at the French or Spanish they issued bonds – a kind of IOU - to fund their armies
The bonds paid a set rate of interest every year on their face value, and they were great investments among the filthy rich because you knew the Crown wouldn't welch on them (after the Spanish defaulted on their debts they ceased to be a world power).
Over the centuries, the market for Government bonds has become a massive part of the global economy. Even big businesses raise money through bonds these days, and it's the returns on bonds that have a big influence on the interest rates you and me pay on our borrowing.
Invisible as it is to most of us, the bond market has a huge pull on the global economy.
So bonds are a big issue for Governments, and if confidence among buyers slips you know a country's in serious trouble.
What's this got to do with an expected announcement by the Bank of England that it might indulge in so-called quantitative easing?
Well, what the Bank will do with the new money it is inventing into existence is buy Government and business bonds which are currently held by banks.
That'll do two things.
First, it'll increase the amount of money sloshing around in bank reserves, in theory making it easier for them to lend more.
Second, the fact that the Bank of England is out there buying bonds will make them more attractive things to have – driving up the price people are willing to pay for them, lowering the return they get, and therefore stopping interest rates rocketing back up again.
That's the rough theory, anyway.
The reality? The reality is that the recession has made the world economy like a war zone. And like all wars of the past, Government bonds are once again in the front line.