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Calling All Vigilantes

What's wrong with this script?

At first blush, it seems okay. The wild bunch is acting up, creating an awful ruckus, letting loose with their firearms every which way, filling the air with blue smoke and foul talk, spritzing the law-abiding citizens with cheap booze and sarsaparilla, scaring the daylights out of the ladies and the little ones, and just plain raising Cain all around.

As for the sheriff and his deputies, they plumb lit out of town the first time the ornery oafs said "boo!" to them.

Got the picture?

Fine. Stage is set. To the pounding tones of the William Tell Overture, the vigilantes, unshaven, mean-looking fellows but, hey, with hearts of pure gold, should come riding high in the stirrup to the rescue and send the bad guys skedaddling to the next county, maybe even the next state.

Law and order restored.

Just a moment -- hold it! Something's really out of whack. The vigilantes are here, okay. But instead of chasing the bad guys...why, they're bellying up to the bar!


A real-life version of this familiar flick gone haywire is playing out, not in Tinsel Town but in Wall Street. Those doughty enforcers of financial law and order, the bond market vigilantes, suddenly seem to have lost their zest for the job. Sad to relate, they've become so fixed on a mad chase for an endangered specie -- the long Treasury bond -- that they no longer have the time, energy or desire to answer the alarm.

And that old alarm has been sounding like a banshee in full howl. The economic expansion sets a record for longevity -- 107 months old -- but, instead of demurely accepting the congrats showered on it and shuffling on to the nearest rocking chair, the unregenerate geezer makes like a whirling dervish.

New factory orders take a flying leap in the latest reported month, the biggest jump in seven years. The purchasing agents disclose that their price index in December shot up an eye-popping 4.3% to 72.6, the highest level since the spring of '95, in the process extending the skein of rising prices to nine months in a row.

Topping off this heels-clicking display of animal spirits was Friday's spectacular January jobs showing: a staggering 387,000 addition to the nation's payrolls, a mere 135,000 more than the economic seers had been predicting. And to gild the numbers, not only were more people working than most everyone thought, but they also were earning more money, too-average wages were up a fat six cents an hour.

All this is redolent of an economy approaching full boil, with the disquieting intimations of inflation that such an intemperate state implies. Moreover, as the accompanying chart suggests, those intimations are beginning to take on just a touch of corporeal bulk.

We're indebted to the Economic Cycle Research Institute, that unnapping watchdog of inflation, for the data that our staff artist Diane Sipprelle has transmuted into graphic form with her usual deft touch. What you're gazing at is the progression of monthly readings of the Institute's Future Inflation Gauge, from February '97 through January 2000.

As you can see, of late the trend has been emphatically up. Indeed, the worthy Anirvan Banerji, co-director of research at the institute, tells us that last month's reading hit a new peak for the past 10 years.

In the good old days (a week or two ago), the call would have been heard loud and clear, and the bond market vigilantes would have responded instantly and with their customary elan and eclat. But instead, in sad disarray, they could only run hither and yon, pathetically incapable of any concerted action. More animated scarecrow rather than vigilante.

What so spooked that noble gang, as we all know, was the treachery of the U.S. Treasury, which peremptorily decided to cut down on the supply of 30-year government bonds, with an eye toward taking them out of circulation entirely, under the rubric of reducing the national debt.

That threw the government bond market into a terrible tizzy. To begin with, it raised the specter of scarcity, and the whole world immediately had to own at least one long bond. Further, the news put an awful fright into many an actuarially minded institution-pension funds, insurance companies and the like -- that routinely stock their portfolios with 30-year governments so as not to lose any sleep about meeting their extended obligations.

And then there were the short sellers, numerous and typically with very heavy positions. Some of these shorts were the usual investment wise guys -- the hedge funds -- and, the story is, a few really got their clocks cleaned. (As of this writing, none has been carried out yet, but don't give up hope, it's still early in the day.)

More importantly, financial outfits like banks and brokerage houses that have big commitments in corporates and mortgages and prudently try to hedge those holdings by shorting government bonds were painfully squeezed.

Larry Summers, the Treasury Secretary and architect presumptive of the plan to dry up the pool of long-term governments, after carefully surveying the chaos mumbled some reassuring words that probably caused only minimal further damage to the market. (No need to ask why that man yonder is smiling; his name is Bob Rubin.) We suppose things may yet sort themselves out and a semblance of equilibrium, if not sanity, will return to the government bond market. But that's not for sure, and, in any case, once the apple cart is upset, it's hard to get the apples stacked nice and neat again.

The real tragedy would be if the bond market vigilantes proved to be so demoralized that they can't get their act together any time soon. A real tragedy for Mr. Greenspan, especially. For it would mean that if he decided to get serious and uptight about inflation, he couldn't count on them, as he has so often in the past, to bear the brunt of the burden. And, alas, the chairman doesn't have much practice when it comes to doing the heavy lifting on his own.