Robin Wigglesworth: Why Bonds Are Behind Every Financial Boom and Bust

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Today’s guest on The Long View is Robin Wigglesworth. Robin is the editor of the Financial Times finance blog, Alphaville. He’s also the author of Trillions, which is the definitive book on the past, present, and future of passive investing. Robin’s joining us today to discuss his latest book, A Fabulous Debt, which is a history of the bond market. The history of the bond market is marked by war, peace, market mania featuring a very colorful cast of characters, and so much more. Robin is such a brilliant writer that he really brings every aspect of a history to life. One of the highlights of the show was when he was talking about the huge amount of capital spending we’re seeing in artificial intelligence and how it parallels the railroad boom in the 19th century. He made the point that debt-fueled capital spending sprees tend to end quite badly, although the scale of capital investment in AI this time around is still quite a bit smaller. As Robin points out, history rarely repeats, but often rhymes, and we might be living through one of those rhyming moments today.

Episode Highlights

• Why the History of Bond Market Matters
• Venice and the Birth of Bonds
• How Britain Shaped America’s Financial System
• The Poyais Bond Scam
• Railroad Capex and AI Spending
• Jay Cooke and The Father of Junk Bonds
• The Rise of Credit Ratings
• How Bond Markets Replaced Banks
• How Much Debt Can the US Carry?

If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.

Transcript

Ben Johnson: Welcome to The Long View. I’m Ben Johnson, head of client solutions with Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.

Johnson: Today’s guest on The Long View is Robin Wigglesworth. Robin is the editor of the Financial Times Finance blog, Alphaville. He’s also the author of Trillions, which is the definitive book on the past, present, and future of passive investing. Robin’s joining us today to discuss his latest book, A Fabulous Debt, which is a history of the bond market.

Amy, there’s an old adage that says, “Don’t judge a book by its cover,” and I think that applies probably as much to A Fabulous Debt as any other book. I think at face value, a lot of our audience might think, “Oh goodness, a book about the history of bond markets. How boring could that possibly be?” I think what we’ve discovered in our conversation with Robin is that it’s anything but. The history of the bond market is marked by war, peace, market mania, features a very colorful cast of characters, and so much more. I was really fascinated to hear Robin share the history of bonds with us today.

Arnott: Yeah, that’s a great point. Robin is such a brilliant writer that he really brings every aspect of a history to life. And for me, one of the highlights was when he was talking about the huge amount of capital spending we’re seeing in AI and how it kind of parallels the railroad boom in the 19th century. He made the point that debt-fueled capital spending sprees tend to end quite badly, although the scale of capital investment in AI this time around is still quite a bit smaller.

Johnson: It was a really interesting point, and history rarely repeats, but often rhymes. We might be living through one of those rhyming moments today. Without further ado, let’s dig in with Robin. Robin, welcome to The Long View. Thank you so much for joining Amy and I.

Why the History of the Bond Market Matters

Robin Wigglesworth: Thanks for having me on, Amy and Ben. I’ve been looking forward to this.

Johnson: Robin, we’re really excited to dig into this just expansive exploration that you’re publishing here, looking into the origins and the evolution of the bond market. I want to start by asking you about the origin story of the book itself. In the introduction, you share a quote from American novelist Toni Morrison who said that, and I quote, “If there’s a book you want to read, but it hasn’t been written yet, then you must write it.” My question is, was your motivation in writing this book entirely self-serving? This is just a book that you’d always wanted to read, but no one had yet written.

Wigglesworth: Well, I’m no Toni Morrison, obviously, but yes, it is entirely self-serving. This is a book that I wanted to read myself. Fixed-income bonds. It was my first love as a financial journalist. My first job out of university was writing about Islamic bonds of all things—“sukuk,” they’re called. And I just thought it was fascinating, both sukuk and fixed income in general. I just think it’s exhilarating, and it’s almost like the hidden wiring of the global economy. I’m not saying everything makes perfect sense when you understand the bond market or capital markets, but at least more things are less mystifying, essentially. And so, I always read a lot about the bond market. I’d read lots of books about Mike Milken or Lewis Ranieri, a bit of Alexander Hamilton.

But then in 2018-19, I was playing around with the BIS database as all cool people do like to do on a Saturday night. And I realized there, from their data at least, that the bond market was not just bigger than the stock market—that’s been the case for a very long time—but it actually is bigger than the banking system. For me, that was electrifying because I think there are so many things that flow from that, essentially, that the entire financial system is ordered around the idea that banks are the central engine.

Really, now when you look at credit and debt, it’s less than half the total. In fact, lots of bank assets are, of course, in the form of bonds. Then, I had this sense that this is an important story. And then, I realized actually I had over the years read so many things about bonds and bond market history that maybe I could try and stitch it all together into one coherent, compelling narrative so that people realized the enormous sense of how bonds have shaped the world we live in, in so many ways that I think people don’t really appreciate, but is particularly true in the US.

Arnott: You shared that Ian Fleming actually chose the surname Bond for James Bond because he thought it was the dullest name he’d ever heard. But you also write that the bond market has often proven just as prone to fits of delusional mania and periodic disasters as a stock market. Why do you think people often still think of bonds as a boring but necessary part of finance?

Wigglesworth: Well, there are probably two components to that. One is that bonds ideally should be boring. Most of the time they are designed to be boring, even if they have quite often been anything but. We want the bond market to be boring because when the bond market is exciting, it’s usually not a great time.

And then the other thing, the aspect is just complexity. Even quite a lot of people in the finance industry, my impression, actually, think the bond market is a little bit annoying, and bond yields can go up and down for good and bad reasons. It doesn’t always feel as intuitive as the stock going up, for example. And therefore it’s quite easy to relegate to the nerves of the financial system. I think that’s massively wrong. I think the bond market is fascinating in its own right, but also massively important.

But I do think ever since 2008, there’s been a greater appreciation in the equity world that the bond market is really, to use the Lord of the Rings metaphor, the one ring that rules us all. And whilst the equity market—it’s important, it’s dramatic, it’s glamorous, it’s fun. I love the stock market world as well, but if I had to choose one thing to write about for the rest of my life, it’d be the bond market every day of the week.

Johnson: Robin, as much as bonds are the main character of the book, it seems like, inevitably, you introduced this whole sort of cast of supporting characters, spending some time talking about the intersection of fixed income and equity markets, the development of global central banks, currencies and currency rates, fixed and pegged, and gold shows up. Did you fully appreciate when you set out to write the story of bonds that you would have such an expansive cast of supporting characters that you would have to provide treatment to as well?

Wigglesworth: I’d say yes, but that was the biggest pitfall I was wary of because, on one hand, I did want to tell a broader story than just bonds. Bonds are sort of the hero, my protagonist, but I wanted to tell a more expansive story about how finance and the economy has evolved and to help people understand where we are today and what the future might look like.

I think history is fascinating and important in its own right, but really what makes it compelling is because it is vital for us to understand what’s going on today. I wanted to tell that broader story, but I also was very wary of going down little rabbit-hole side quests, essentially, on the parallel evolution of banking and money and central banking and all sorts of other aspects because really you could use the bond market to tell just a 20-volume story of the history of global finance.

I didn’t want to go too far down those rabbit holes, except when I felt it was really essential, so there is obviously a fair bit of central banking there, especially toward the end. You can’t not talk about money because one of the original selling points of bonds actually was that it was a little bit like fancy money back in an era where there was obviously no electronic money, and there was quite often a shortage of specie. Alexander Hamilton, he used bonds as sort of a, I think in the musical, Lin-Manuel Miranda called it a financial diuretic for the revolution-wracked economy.

But I think it was essential to the story I want to tell, but I had to, in journalism terms, there’s this expression called kill your darlings, that we all have these things that we fall in love with, little turns of phrase or sections or themes that we love but might actually not be essential and, in fact, are distracting to the reader. I had to murder just an insane number of my darlings when I was writing this book, but hopefully I’ll have material for a second or third or fifth or 10th edition at some point.

Venice and the Birth of Bonds

Arnott: If we go all the way back to the birth and early development of the bond and bond markets, you use a metaphor of a horse and carriage where you write that the Venetians were the first to invent the wheel, but it was the Dutch who realized that if you put four wheels together, that made it a more useful wagon. And then later on the British tethered horses to this wagon and charged ahead. If we go all the way back to the beginning in 12th-century Venice, why was that particular time and place so conducive to the birth of bonds?

Wigglesworth: Well, there had been sort of things that kind of walked or quacked like bonds before the Mesopotamians traded clay tablets of loans. The Romans invented annuities, but I think this first “prestiti,” as it was called in Venice, is really the granddaddy because you can see a very clear intellectual lineage from that bond in Venice to the other Italian city-states. They spread across Europe and were iterated by the Dutch, the British, the Americans, and so on. But you can see a very clear sort of lineage, as it were, a family tree there. Venice is just unique and fascinating. I mean, obviously one of the favorite things about writing a book is all the research you get to do. And Venice, I knew the abstract story that it was a very commercial, important town in the Middle Ages. And I’ve visited Venice; it’s beautiful. Have either of you been there?

Johnson: I have not.

Arnott: I haven’t, no.

Wigglesworth: Well, it’s crawling with tourists, which is maybe unavoidable when it’s so beautiful, but it is an incredible, unique city. And it was unique at the time. It was founded by immigrants and refugees basically fleeing the Vandals, literally the Vandals. And they settled in this swampy sort of armpit of Italy because nobody else wanted to live there. They built the town precariously on stilts hammered into the swamp lands. It’s largely almost like a floating city, and they had no real nobility. They weren’t rich in natural resources. There’s salts and fish; that’s about it. But they’re genius, and I still don’t understand exactly how it happened, how this occurs, and magically there was commerce.

They owed their fealty as Catholics to the Pope in Rome. Their suzerain at the time was actually the Byzantine Emperor in Constantinople, today’s Istanbul, but essentially, their only loyalty was to trade. They would trade with absolutely everybody, the Ottomans, the Mamluks, everybody they would trade with, and that annoyed everybody. I think it was almost inevitable that a city-state of such relentless, enormous wealth, ingenuity, and commercial drive was where the first bond was going to be born, even if it was just, frankly, an accident, how it actually came about.

Johnson: Well, I’ve never been to Venice. I’ve been to another famous city known for its canals in Amsterdam. And I think one of the first branches of this bond family tree was born out of the sort of Dutch iteration of the Venetian invention. To borrow from your metaphor, the Dutch realized that having not just one wheel, but putting four wheels together made for a stronger wagon. How specifically did the Dutch parlay that Venetian invention of the bond to use it ultimately as the basis for what became the Dutch Golden Age?

Wigglesworth: Well, so the Venetians invented the bond by accident, like I said, because it was actually a war tax that they raised proportionately from all their citizens to pay for a war against Constantinople. And they made the receipts for this tax tradable, and it was a war loan, essentially, that they paid. And because they lost that war, that temporary war loan became permanent, but it paid 5% interest, and you could trade the receipts. That ended up being quite a valuable thing.

And the Venetians, they built on this. They decided this was a valuable thing. People could use it as collateral for trade, but they never really embraced the full potential as much as the Dutch. In Venice for a long time, only Venetians were allowed to buy the city’s own bonds, basically the prestiti, the Monte, mountain, as it was eventually called. Whilst the Dutch made it a real market, a vibrant market where lots of other people were doing it: Dutch towns, provinces, water utilities, eventually companies. The Dutch East India Company, the first global conglomerate, pioneered the stock market as well. It was the first listed company, but it also pioneered corporate bonds.

You suddenly see people really embracing the power of bonds to essentially pool vast amounts of small sums into one big titanic sum, essentially. I think that was incredible, and no coincidence that the Dutch had kind of taken over the Venetian crown as the most mercantile, most ambitious, most commercially minded people in Europe at the time. And though they then took the bond and really started to show off to other Europeans the power of it, because it existed in Germany as well around then, it spread from Italy to the Germanic states and to France, where they’re called “rentes,” and had entered Germany. But the Dutch were the ones that used it first to keep the country dry. I mean, large parts of the Netherlands are below sea level. All the dikes, the waterways that you see still to this day, almost all of them were paid for by the sale of bonds by the local waterworks.

They used that ability to pay for their own financing, raised financing, lots of financing to fight a war of independence against Spain, which was the hyperpower of Europe at the time. It was an 80-year war. It took a long time. It was a fantastically, horrifically destructive war, but they finally won independence, and it’s because they could finance themselves almost to infinity and pay for, frankly, a lot of German mercenaries, a lot to fight for them as well. Whilst the Spanish crown went bankrupt, I think in those 80 years, three or four times out of six times and often couldn’t pay its soldiers. There were banker strikes, and basically it was financially stricken. The Dutch showed that if you take paying your debts quite seriously and nurture a vibrant bond market, then that can be an immense asset at times of crisis and war.

How Britain Shaped America’s Financial System

Arnott: If we fast forward to 1694, you have the establishment of the Bank of England, which was kind of the first step in Britain playing a major role in the evolution of global bond markets. What were the major contributions that Britain made with respect to bonds?

Wigglesworth: Yes. I mean, Isaac Newton lived around then. He always said that, “If I’ve seen further, it is because I stand on the shoulders of giants.” I think one of the genius bits of British people—it used to be, at least—they’d just unashamedly copy great ideas from other countries and take their best people for a long time as well.

And the English had fallen behind the Dutch around this time, and they rather cheaply just basically imported a Dutch prince, William of Orange, to be their new king. It was a bit of a Protestant because the current king was Catholic, and there was all sorts of controversy around that. But really, alongside a Dutch prince, they also imported and almost copied and pasted lots of Dutch inventions when it came to money and financing. And they set up a central bank that was partially modeled on the Wisselbank in Amsterdam.

One of the most impactful things that they did was—and there was no one single person that said, “This is what we’re going to do.” It happened almost gradually over many people doing it. But essentially, the Dutch were a collection of provinces and states and towns, and they had this very vibrant bond market, but there was no real, even though there was a country called the Netherlands then, the Netherlands didn’t really issue that much bonds. In other parts of Europe, quite often the people that sold bonds or borrowed money were the royal families; the king, it was usually a king, was synonymous with the kingdom.

But the UK obviously had shown that wasn’t the case and Parliament was taking more and more control. So, they made bond issuance the responsibility and prerogative of Parliament, of the first minister almost, although they hadn’t started calling him the prime minister yet, but of Parliament. It made those bonds the explicit obligation of the United Kingdom, even before the United Kingdom was called that. And that was revolutionary because then suddenly you had an actual, proper, clear, cohesive, geographically identifiable nation-state that was issuing sovereign bonds.

And essentially, I mean, I still think that the Venetians issued the first sovereign bonds, even though that was just a city-state, but you could very easily time it with the establishment of the Bank of England. The Bank of England was set up to buy a big fat UK government bond, which only got—it was a perpetual bond, as they used to be back then—but it was only paid back, I think, 10, 20 years ago, symbolically. It’d been outstanding for several hundred years until then.

That eventually morphed into what was called the consol market. And the consol market generally was a wonder of the age of Reformation and the ages that came afterward because it was essentially the first huge, homogeneous stock of debt that was broadly traded and accepted around the world. The first true risk-free asset was the consol market. And those consol bonds cropped up everywhere, including among Britain’s enemies in many wars. French investors loved buying consol bonds.

Even during the Napoleonic wars, they would quite often do so when they’re on opposite sides because they liked that they were the obligation of a sovereign nation-state. They liked the fact that the British had started opening the books. They’d actually start to be a little bit transparent about the government finances. The Venetians had actually done so as well, but the Brits kind of showed that this is a liability of the taxpayer as well. Ergo, the taxpayer should be able to see some of the state finances. And that gave investors confidence. And that’s why you could see that the first true risk-free asset essentially was the consols market.

Johnson: Robin, reading the book, it struck me that if the title had not already been taken long ago, that maybe War and Peace would’ve been a decent title for a book about the history of the bond market. And I think one of the examples where that is particularly apparent is just around the birth and the infancy of the United States. Alexander Hamilton, who you referenced earlier, said that public debt was effectively a national blessing. I’m just curious. What is the framing of that remark, and what role did the sort of early evolution of the bond market in the United States play in both the war and the peace end of the equation?

Wigglesworth: I think no country on earth has been so profoundly shaped and aided by the bond market as the United States of America. I don’t think actually most people even in finance appreciate what an incredible degree that is true. Alexander Hamilton, I found, well, I found them, and [Ron] Chernow found them also long before me, of course.

But Alexander Hamilton, when he was a young artillery captain, was obsessed with financial affairs. He would read and study all the time. These letters he sent around to people talking about how the British consol market, rather than being a public curse, this big national stock of permanent debt, it was actually one of Britain’s greatest sources of strength because you could always issue more bonds because, as long as you were credible, you’d always have willing buys, even if you have to sometimes pay more to entice them.

But also that bond market became this kind of financial diuretic, as the musical called it. It could be used as collateral in trade. It could be used as something that kind of walk, talk, and quack like money in an era where actual coin was in desperate shortage of. When he became America’s first treasury secretary, he put that plan into action. I think that was incredibly important for essentially getting the postrevolutionary economy of America going.

But I think the other thing that is as important is that, and I haven’t found any specific reference to the Venetians about this, but one thing that we saw in Venice was that by issuing debt or selling debt to your own citizens, you are creating citizen creditors. It gives those citizens a vested interest in the country staying together—or the city, in the case of Venice—sticking together, and gives them a vested interest in good governance as well.

And basically, by taking all those state debts that had been issued to fight the war state by state and turning them into federal obligations. This was the assumption that was super controversial at the time because the North generally was entirely bankrupt and the South had slavery and plantations and was generally able to pay back their debts after the revolution.

But by turning all these debts into a federal stock of debt, it gave all American citizens that were creditors also a vested interest in this very new, nascent federal government surviving, which we now take for granted because we always think of history as A, then B, then C, then D. But in reality, these things aren’t preordained. History could have turned out very differently if essentially all these merchants and shopkeepers and nascent industrialists around America didn’t have a vested interest in the federal government sticking together. The country could have been torn apart by all these centrifugal forces that were around at the time that did almost tear it apart later on.

And so I just think that’s incredibly interesting. People focus a lot on Alexander Hamilton founding the First Bank of the United States and all the other—I mean, he was a man of just incredible intellectualism and energy, but I do think that his decisions around the assumptions of state debts was by far the most important and transformative decision almost taken by the federal US government at its birth.

The Poyais Bond Scam

Arnott: One of the chapters in the book is called From Poyais With Love. I hope I’m pronouncing that correctly. This was built as kind of a verdant territory in what is now Honduras. What does that episode tell us about investor psychology?

Wigglesworth: Yes. I don’t like to choose my favorite chapters or stories because it’s a bit like choosing your favorite child, but this is my favorite bit. It’s just incredible. There was a Scottish mercenary called Gregor MacGregor. He’s the distant descendant of Rob Roy MacGregor, who’s a famous folk hero in Scotland. He fought in the Napoleonic wars, couldn’t settle down, then fought in all these revolutionary wars in Latin America. Fought with Simón Bolívar in the liberation of Venezuela from Spain, had all sorts of random escapades and adventures until he finally met the prince of a chunk of what is today Honduras and was gifted a piece of land that was verdant and rich and had mahogany trees and gold nuggets running in the river, a huge gold mine that the locals just didn’t care about, but they’d be quite happy to work in for free, as he told people.

And he was appointed the cacique, the prince of this almost semi-independent country. He went to London in 1821, suddenly turned up, called Sir Gregor MacGregor, the cacique of Poyais. He wore Highland dress all the time. He liked looking the part. He was the toast of town. He met the royals. He went to all the fancy clubs. He had songs sung, written, and sung about this incredible land called Poyais. He issued bonds. He compelled and tried to sell land to encourage—they wanted to colonize it, essentially bring Western know-how and carpentry and industrialism to this country. He sold it as this land of milk and honey and gold nuggets.

He even sold bonds on the London Stock Exchange, raising GBP 200,000, which wasn’t huge, but definitely was a lot more money then than it is now. Several hundred families uprooted their lives to move to this incredible country. And then they landed and discovered it was a swampy hellhole, and it was nothing. There was no capital. There was no gold. The natives didn’t want them. Most of them—some tragically committed suicide because the mental breakdown of landing there was just so bad—many others died from dysentery, from famine, from disease. And I think only 20, 30 people made it back to the UK alive.

Greg MacGregor—outrageously, I mean—he took the money and spent it on all this huge fortune, but he kept insisting, “No, no, this is real.” And he sold another bond, and he eventually had to escape to France and tried to basically do the same scam there. But it’s one of the most incredible stories. It’s basically a con artist. I mean, we don’t really know whether—he might have just been a complete and utter fantasist. That was kind of one of the most outrageous examples of fake it ‘til you make it; maybe he hoped to genuinely fake it until he made a country.

But it’s incredible, but it shows that people in the bond market can also lose their minds. This was after the South Sea Bubble. There weren’t that many stocks to speculate on. Bonds after the Napoleonic wars became the hot, cool new thing to speculate on because everybody who basically had invested in British consols in the Napoleonic wars made out bandits. They made tons of money. So, they wanted to invest in new bonds. They invested first in Prussia and then in France, and then they invested in Spanish bonds and Russian bonds.

Eventually, you had all these newly independent countries. It’s kind of like venture capital, but for fixed income. You’re investing in these grand new ventures: Venezuela, Colombia, Brazil, and including Poyais. And Poyais is kind of the ultimate example of how much people lost their minds, and what was one of the first big global financial crises that really emanated purely from finance, from financial speculation, being the South Sea Bubble that did ripple outside the UK, but this one is a true global crisis and caused banks to go bust in London and the US and Europe. Almost all of Latin America defaulted on their debts.

It just goes to show bonds can be incredibly powerful when we treat them a bit like money, but they’re not always money. And certainly not if you lend money to a country called Poyais or Argentina, but people in the 1820s, they treated these bonds as like money so you could use them as collateral for other loans. Eventually, when it all broke bad, it broke bad in a cataclysmic way. I love that story because obviously it’s just such an incredible scam, and Greg MacGregor is just, I mean, a hilarious character. I mean, it’s terrible to laugh at it now because people died, but the joke goes that the only difference between tragedy and comedy is time. Hopefully it’s OK for us to laugh at Poyais now. And it just shows, I mean, the bond market can do all sorts of dumb things as well, even though it has this self-image, this self-regard as the serious market compared with the silly stock market essentially. Yeah, that’s worth remembering even today.

Railroad Capex and AI Spending

Johnson: Robin, I think Gregory MacGregor and Poyais are an interesting example of at least attempting to fake it ‘til you make it. We’ve seen other investment cycles over the years where there wasn’t necessarily any faking taking place, but maybe the “’til you make it” bit didn’t arrive quite as quickly as many had expected.

I’m curious, when you look at that historical set of examples, you think of railroad capex in the United States as being a prominent example. What are some of the common patterns there that you’ve seen play out over time? Do any of those in your mind rhyme with what we’re seeing today in the market, I think most notably with the capex cycle we’re living through and all things related to artificial intelligence?

Wigglesworth: Yes. I mean, it’s an excellent question and definitely one that is top of mind for a lot of people, including me right now. I think one thing I saw repeatedly when I was studying a thousand years of bond market history is that debt is an incredibly powerful tool, but we do misuse it. We misuse all our most powerful tools. The bond market, maybe because it’s like a technology that fundamentally allowed you to borrow more money more cheaply; essentially, if you know you can sell a bond, the bond’s supposed to be tradable, is designed to be tradable, even if sometimes it isn’t, you’re more likely to buy it.

Ergo, you generally pay a lower interest rate by selling a tradable security versus just going to a bank and hitting it up. And you can borrow from thousands of people, but it’s a technology that allows you to borrow more cheaply and to a greater degree. That doesn’t take a genius to see how that can lead to trouble. But it can also—sometimes we do need to go a little bit nuts and build stuff. And that’s when the stock market just isn’t really, and the banking system isn’t really enough to conjure up those titanic sums. Generally speaking, all great human endeavors require a ton of money, whether they be wars or railways or now maybe artificial intelligence.

The railway is a great example because, in a similar way that the bonds almost metaphorically helped knit together the colonies into the United States of America, and the same, late 1700s, railways that were mainly financed by bonds in the US helped knit together the country physically. I write in A Fabulous Debt that the railway is like the physical skeleton of America. It really transformed the United States into the world’s superpower long before, frankly, people really recognized it inside the country and outside.

But humans in general always get overly excited. Americans, I do hope you’ll forgive me for saying, are particularly good at getting overly excited by new technologies and financial booms. And so it proved with railways. There were actually many railway bubbles and bursts, but there was one particular massive one. And why it was so destructive was because it wasn’t really equity-driven. It was driven by debt, by bonds, massive amounts of bond sales.

I mean, today, staggering sums. I once did their calculations; if you look at the size of the US economy then and now, it’d be the equivalent of selling around what, $10 trillion worth of bonds. The AI boom is still pathetic in comparison to the railway bubble. It led to a cataclysmic crash in 1873 when America’s leading bank, Jay Cooke & Co. suddenly went under, brought under by its exposure to transcontinental railways, the Northern Pacific line specifically.

I don’t think today we can understand how big a shock that was, frankly, to the global financial system at the time. This was the equivalent of JPMorgan JPM suddenly saying, by the way, we’re bankrupt. It ushered in what was long called the Great Depression. We now just call it the long depression because the Great Depression was deeper, but the long depression that came after 1873 was still the longest in American history. It was exacerbated by all sorts of silly things afterward. Obviously, the US didn’t have a central bank, so it couldn’t manage the economic cycle so well, but it was a very bad crisis.

I don’t think we’re there with AI yet, but there are so many interesting parallels in that revolutionary technology. And when we think of railways, it’s kind of hard for us to think of railways as revolutionary because it’s so everyday. It’s kind of so 19th century, essentially. But railways were a stunning achievement at the time. People genuinely thought that the human body wasn’t made for such crazy speeds as 30 miles an hour. They thought you’d go mad by driving on railways. You thought that your brain might vaporize if you cross 40 miles per hour. No country really embraced it more than the US. In Europe, railways went from one town to the next. It connected existing towns. In the US, railways created towns, it created states. Bismarck, the capital of North Dakota, isn’t it? That’s his name. That’s a marketing gimmick. It was named Bismarck to help market bonds by the Northern Pacific Railway to German investors because Otto von Bismarck was the chancellor of Germany at the time.

But I mean railways were just far bigger than AI is now. Maybe in a few years’ time, AI will rival it in size. On one hand, I’m more relaxed about AI than I am railways, because most of it’s issued by very wealthy, long-established, financially strong companies like Meta META and Alphabet GOOGL and so on. One thing that gives me a slight pause is that there’s a fair bit of financial engineering going on, a lot of off-balance-sheet liabilities that aren’t visible to investors. And the fact that railways—a railway can go bust, the company can go bust, but the track they’ve laid is still there and generally lasts for a very, very long time. I don’t think the same can be said for AI data centers with chips that seem to have to be replaced every few years.

So, maybe we’ll come out of this with a few humble tech giants and cheaper compute for everybody for all our AI needs. But I do slightly worry that as this debt part of the cycle expends faster and faster, the economic hangover is going to be that much worse because, I mean, its debt-fueled capex sprees tend to end quite badly. I don’t want to be too negative about it because journalists like me, we’re always overly shrill about these things, but I definitely think there are no reasons to be fearful yet, but there are definitely reasons to be wary.

Jay Cooke and The Father of Junk Bonds

Arnott: The story of bonds, which you go through in the book, features a really remarkable cast of characters. We’ve talked about Alexander Hamilton and Jay Cooke, but there’s also Nathan Rothschild, Michael Milken, Bill Gross, and many others. Which of these people do you think is the most underappreciated or had the most meaningful impact on the bond market?

Wigglesworth: Yeah, that’s a great question. It might be a bit like choosing your favorite child. I would say Jay Cooke because Jay Cooke & Co. obviously went bankrupt in 1873, and maybe because his fall was so—and this was an era of no limited liability. He personally went bankrupt. He went from probably America’s richest man to bankruptcy courts. Because of that, I think his legacy isn’t quite as appreciated.

I mean, he was a financier who bankrolled the North’s victory in the Civil War. I think without Jay Cooke, history could have, in theory, looked differently. I’m not an expert on the Civil War and the military battles and stuff like that, but it’s very clear in the South they saw Jay Cooke and the financing he raised for the North as enormously consequential. Ulysses S. Grant as well also thanked Jay Cooke for basically being the man who saved the Union. Though that story does come from Jay Cooke, and as you might have guessed, he was not a man of immense humbleness. He might have embellished what Grant told him.

But I mean, in the present day, Michael Milken. He’s controversial because he got kind of involved in some of the insider-trading dragnet of the 1980s. He never went to prison for that. There was other stuff, essentially, that he got dragged by the Securities and Exchange Commission and the Department of Justice for; Drexel Burnham Lambert, the bank that he turned from, not really an also-ran, because it wasn’t even near that, but powerhouse for a period, died soon afterward. Maybe because of all those legal controversies, I don’t think he gets his due in that. Also junk bonds. Mike Milken is the father of junk bonds, the modern junk bond market. And that just, because of his name, has negative connotations.

But really, I think his genuinely brilliant insight that was transformative for America and, frankly, the world today is that he felt a lot of companies weren’t able to issue bonds because they were badly rated, and that was unfair. They paid way too much and made more money for investors to lend to these kinds of non-investment-grade companies that were pejoratively called junk, but then to lend to IBM or General Electric and so on. And he turned that into not just an idea or trading strategy, but he created a market out of that. That is a stunning achievement.

There are so many other examples of great financiers and investors and bankers and analysts that had these kinds of insights that have taken it very far, but not to the point where they’ve genuinely created an industry. And yes, junk bonds were, for a large part, at least in the ’80s, mostly used by corporate raiders and there’s lots of controversy around that. But I still think today’s leveraged finance market—high yield, leveraged loans, private credit, CLOs—people like me sometimes write mean things about it because dumb stuff happens there, of course, but it is an incredibly valuable innovation.

That doesn’t mean that there won’t be silly things that happen in leveraged funds and that aren’t happening today, but that is actually a hugely valuable thing that it allows a lot of companies that can’t go to the banks or can’t go to the investment-grade bond market, that they can still access capital. That’s incredibly powerful and is a large reason why America is still today, despite all its challenges over the years, the world’s hyperpower.

And today, now in Europe, as much as they sometimes like to be snooty about American financialism and all that, in practice, Europeans would kill to have the leveraged finance ecosystem that Mike Milken helped birth. I think he’s one of those people that maybe, I mean, certainly in American financial circles, he gets his due, but more broadly speaking, as somebody who’s been a quite consequential character for the US in the 20th century, maybe he doesn’t quite get his due. Though he’s been obviously spending a lot of money on his reputation in recent years. Maybe I just think he’s a really interesting character and person and probably does not get the respect he should get, maybe because of these other quite often bad things that sort of happened around then as well.

The Rise of Credit Ratings

Johnson: Robin, I want to harken back briefly to the example of Poyais, if for no other reason than it might be one of the more extreme examples from the book, from history, of just how problematic informational asymmetry can be in markets in general. You spend some time, and I think rightly so, addressing how informational asymmetries in the bond market—just the broad sort of collection and dissemination of critical information, be it just the basics of some of these issuers and subsequently ratings on many of their credits, many of their bonds became. How critical in hindsight was that in the modernization of bond markets, and what is their impact as we see them and use these bits of information, these ratings today?

Wigglesworth: No, it was huge. And this was actually, I wrote an entire chapter, of course, on the birth of the rating agencies that I wasn’t necessarily planning on writing, but I just felt it was essential because it also allowed me to examine this exact theme of informational asymmetries, or a paucity of information. And some of it just obviously reflects the era; that there was no internet in the 19th century.

But generally speaking, I think we sometimes forget how slowly information percolated in general. The reason why Greg MacGregor was able to do his scam for so long was because people didn’t really understand. I mean, Latin America, for most people in Britain and Europe, might as well have been the moon or Mars. It was incredible; you just heard stories about it. You didn’t even read that many stories about it. There were only a few maps, and they were incredibly rudimentary.

In the financial markets, better information—or information in general, but ideally better information—helps investors feel more confident. It is the reason why we mandated so much disclosure for publicly listed companies: If you’re going to sell your shares to the public, you should need to give the public more information. The bond market obviously has slightly different rules, but generally speaking, transparency is a good thing as well.

Like I said, the Venetians, the English, they started revealing some rudimentary financial details, but still for the longest time, essentially you lent money to your local city-state or your province if you’re a Dutch burgher, or the UK if you were a British investor. Over time, as the bond market became more confusing and more international, you had Prussia and Italy and France and Russia issuing bonds; you kind of substituted the bank’s reputation. The bank that chose to underwrite the bond was kind of putting their name on the line and would quite often buy a big chunk of the bonds themselves on their own account. They’d quite often influence a company. They’d go on the board, like Jay Cooke would sit on boards. And that was how you knew that, oh, well, Jay Cooke sits on this board, and he’s famous because he helped bankroll the North. Ergo, this must be a good investment.

For a long time, that kind of worked. I mean, a great case of this is, for example, Nathan Mayer Rothschild and his descendants did not really get that involved in the Latin American bond craze because they felt there were bad credits. They wouldn’t work out, and they didn’t want imperil there, besmirch their name by underwriting all these dodgy bonds. And ergo, it’s one of the reasons why they managed to grow while other big banking houses and families suffered quite a nightmare in the 1825 crash. But of course, the Jay Cooke example showed that trusting a bank’s reputation only takes you so far.

And if you can’t trust Jay Cooke himself and he went bankrupt, well, then you’re on your own. In this void, that’s where we saw the first credit rating agency start to emerge in some of their protean form. It’s no coincidence that they emerged in the United States. I mean people, banks in the UK started sometimes grading their borrows or prospective borrows by numbers or letters, but credit rating agency as an industry that analyzed bonds and gave that information to the public emerged in the US because the US had embraced bond markets better than everybody. The information was way worse because the country was so big that if you were an investor in Massachusetts, you knew nothing about borrowing in South Carolina. That was a different country practically.

The rating agencies stepped in there. They didn’t always do a great job, but despite all the criticism they get over the years and decades and centuries, broadly speaking, credit rating agencies, at least by the major ones, have been proven to be not awful, not as awful as some people might actually think. And that’s why they are this weird thing that cropped up in the 19th century that’s still so hugely integral to the fixed-income universe today, to a fascinating degree.

How Bond Markets Replaced Banks

Arnott: One central theme in the book is that the bond market has increasingly replaced banks as the dominant source of credit. When did that shift start taking place or take form and what do you think are the implications of that?

Wigglesworth: This was the genesis for the book in many respects. Annoyingly, that BIS data I looked at actually is imperfect. It doesn’t include a lot of Chinese bank assets. Knowing that we don’t know exactly, but it probably happened at some point in the 2010s. But it’s been a long time coming. And I think really the big changes, again, started in the United States where the bond market probably has, for a very long time, been bigger than the banking system. The banking system in the US has always been extremely hemmed in by regulation or a complete lack of regulation—the wildcat banking era, for example—and a lack of a Federal Reserve, a central bank, meant that banking crisis just basically just obliterated parts of the banking system every seven years almost for a period.

But if you think about after World War II, the US was dominant; it was the center of the financial universe, and you started seeing finance becoming more creative, especially after the Nixon shock in 1971 that deanchored the dollar from gold. Credit could finally be free because it wasn’t somehow weighed down by needing to be pegged to something. And currencies were just something that traded between countries and they should float.

You can see this kind of Cambrian explosion of innovation in the financial system in Europe as well, but particularly so in the US, where you see your first Mike Milken transformed something that was in existence. There were non-investment-grade securities before he was around, but he turned it into a legitimate market that you could issue non-investment-grade bonds, which would’ve been almost unthinkable before Mike Milken. That kind of actually meant that a lot of assets and loans that normally would’ve gone to the banking system migrated out of the banking system.

Then you have Lewis Ranieri at Salomon Brothers, another just incredible character, and is also hugely transformative and probably also wrongly maligned because he’s the father of securitization. And because of what happened in 2008, that name has been, for a long time, mud, and I think that’s unfair. I think what he did again was actually genuinely fascinating, important, and valuable, which is why we still have mortgage-backed securities today. They are still a massive part of the American financial system and the global financial system. But it meant that a lot of mortgages, credit card loans, I mean, basically anything that is a cash stream can be turned into a bond. That was the magic of securitization and why you saw, especially in the United States, the financial system started shifting dramatically from being always not enormously bank-dominated to being bought 20% as banks, and the rest is the capital markets essentially in some form or fashion.

Europe has been slower. Europe has always had a bigger, more established banking network, but Europe is also changing as well. We saw this particularly after the financial crisis, which I always argue that it’s not really, we think of it as a banking crisis, but that’s reductive. It was always certainly not complete. It was as much a bond market crisis, I’d say. But really, after the crisis, banks were the focus of all populous anger, understandably so. We basically sat on lots of regulation on the banking system. That again, just kind of accelerated and squeezed risks out of banks into the markets and particularly the bond market. And that is a good thing, but it does have consequences that flow from that. And God knows, there are so many interesting ones.

One is just central banking, that we used to think QE was unorthodox monetary policy, we called it. My argument in the book is that QE is a natural, inescapable, and necessary evolution of monetary policy in a financial system where the bond market extends more credit than the banking system, that the central banks have set up the banks and set overnight rates. That makes perfect sense if you just have a bank-dominated financial system. But in something like what we have today, central banks have to care about the long end of the bond market as well. It’s inevitable.

I think the financial regulation that we have, it’s a great thing that banks are safer, but those risks don’t disappear. I mean, it’s not an original metaphor. It’s almost a cliché at this point, but if you think of risk as energy, you can’t really alter it. You can just change its form or move it from one place to the next. We move risk out of the banking system, which is good because they do all sorts of other important things, control payment systems. We don’t want banks to fall apart at the slightest crisis, but that risk hasn’t disappeared. It’s just migrated to the bond market, and that’s a better place for it. It’s usually far less leveraged, but it’s harder to see because the bond market is kind of the original decentralized finance.

It’s like when people talk about DeFi today, I was like, dude, we’ve had this for a millennium. The bond market is DeFi. That is kind of one of its ultimate strengths, but it’s also one of its ultimate weaknesses, in that the New York Fed could gather all the big banks in one boardroom at Maiden Lane and say, guys, we’re going to do X or Y. You couldn’t gather every bond investor in America, even the big mutual fund groups, in one room; you couldn’t gather it in one stadium. That just makes it harder to know where the weaknesses are and not just where the weaknesses are, but how those weaknesses will flow into other weak links and how things can cascade. It also requires—I’m less keen on this, but I think it’s inevitable—almost like a spray-and-pray approach by central banks.

One of the reasons why, when there’s a big crisis, they don’t really know what’s breaking; they just know it’s bad. It’s just tempting, well, we’re going to buy a ton of Treasuries. We’re even going to start buying corporate bonds as they did in March 2020. We’re going to do a limited repo. We are just going to throw money at the problem until the acute piece goes away. I just think that’s inevitable, unavoidable, but I wish more people were aware of it and we thought about ways that we cannot escape financial crises. The crazy thing is that I don’t think the optimal number of financial crises is zero. Then we’d have to control risk and risk-taking so violently that it would kill any sort of dynamism in the system, but we can certainly make those crises less apocalyptic and make sure that they don’t spiral completely out of control and always require spraying money at it.

I would like to see a greater appreciation, maybe more regulatory attention put on the nonbank part of the financial system because there’s very little done there. It just seems inevitable for me, at least, that the nature of financial crises has already evolved quite dramatically over the past 20 years and will continue to evolve and be primarily playing themselves out in markets and credit markets rather than the banking system.

Johnson: Robin, one of the recurring characters, or at least prototypes, throughout the book are “bond vigilantes.” In my mind, they almost feel like they’re like the Highlander of the story of bonds. They never die. They take on new identities as the years go on. Can you define what you mean by, and just what the market in general means when we talk about bond vigilantes? And are there bond vigilantes, as one might say, in the room with us now? Who are they and what are they worried about in 2026?

Wigglesworth: Well, yes, but Ben and Amy, we are the bond vigilantes. The bond vigilantes are us, right? We are usually some form of respect, either directly buying the bonds of our governments or indirectly through mutual funds or pension plans and savings. It’s a phenomenal term that, frankly, my relationship with it has waxed and waned over the years. It was first coined by Ed Yardeni in the ’80s to describe this kind of phenomenon of the bond market beating up usually poorer countries that were corrupt, had bad economic and financial policies, and the bond market would punish them by refusing to lend to them.

It’s both incredibly useful and incredibly misleading because it does evoke this kind of image of people going around beating up, possess of people going around beating up bad companies and countries for doing the wrong thing. In reality, the bond vigilantes, the bond market, the power it has really is just, it has the power to slightly increase your cost of borrowing or, in extremis, not lend to you. That’s not a superpower in theory, but of course in practice, in a world that runs on credit and a financial system that runs globally on credit, that is an awesome power as well.

I both think the bond vigilantes metaphor is unhelpful because it sort of simplifies, through an absurd degree, a very complex nuanced reality, but it is also quite handy and useful and evocative and not entirely wrong in describing why the bond market matters to normies that I think should love it as much as I do, even though it’s a hard sell at times. But what’s been so interesting is seeing that the bond vigilantes go from targeting the perennial targets like Argentina or Greece to the United States of America. Now that’s a new one, I think.

How Much Debt Can the US Carry?

Arnott: Robin, there are so many parts of the book that we didn’t have time to talk about, but before we wrap things up, maybe we can just talk briefly about the end of the book where you discuss rising global debt levels. How concerned are you about that issue and the sustainability of sovereign debt levels today?

Wigglesworth: Yes, it’s the, what, $150 trillion question now, I’d say. I’d say I’m more concerned than I was, but probably less concerned than most people in the world, if that makes sense. And I feel we have been fretting about this for a very long time, I mean, for 30, 40 years. And these things can change quite quickly. The national debt clock in New York, that was built in the late ’70s, early ’80s, I think, and people worried about America’s debt then. But literally by the ’90s, the Treasury stopped auctioning 30-year bonds because there were such big budget surpluses. People genuinely thought America would basically be debt-free, and why should they issue 30-year Treasuries and lock in that high borrowing cost for American taxpayers when the US was paying down all its debts? Things can change quite quickly.

Broadly speaking, we don’t mean the clichés, or we don’t lend money to margins. We’re lending money to each other essentially. And there are fragilities sometimes involved with that. The Trump administration going around being mean to foreigners that still buy trillions of dollars worth of Treasuries can kind of inject extra fragility, perhaps. But I actually think, especially for big developed countries and above all for the United States, there is a far greater capacity to carry debt than people think. Japan is a great example. There are nuances there in that its net debt levels are not as horrific as its nominal debt/GDP ratio might imply.

But what I worry about, and the reason why I say I’m not worried, I’m more worried now than I used to be, is that for me, the solutions, usually multiple ones, have always been letting inflation run a little bit hot for a bit longer. I mean, 2022, when inflation went up—look, I understand this seems almost heartless to say, and inflation can hurt obviously poorer households, far more than the richer ones. It’s inherently sort of very unequal impact—but the biggest reduction in global debt ever in history was 2022, because nominal GDP was growing so quickly with high inflation.

And I thought the best thing would’ve been to let that run hot for a few years, and actually then a lot of things would look a lot less stretched. And that’s not painless. Definitely there are no easy choices here, but compared with some of the alternatives, I think that would’ve been possibly a better thing. What I radically underestimated was our inability to tolerate faster inflation. We were talking about ’60s or ’70s or ’80s level inflation. We were talking high single digits in most developed countries. And that’s no fun. I hated it as well, but I thought it would’ve been better. Now, given that that seems politically unpalatable, I do worry about what are other ways around it.

My assumption has been for a few years now that when we think debt crises, we think like Argentina or Greece: you default, restructure, you move on. I don’t think that happens in a country like the United States that can literally print dollars. We always kind of have this visceral sense of an acute debt crisis, runaway bond yields, Treasury selling off as foreigners flee or people panic, and so on. And that forces a change. I don’t think it’s going to happen.

I think the US is maybe in the early stages of what I’d call a chronic debt crisis. It’s just very slow, very gradual. Basically, it starts snowballing that the US has to borrow so much. Its debt stock is so big. As a refinance, all those Treasuries issued at 1%, 2%, 3%, at 3%, 4%, 5%, 6%. Even if the budget was balanced, the US would be locking in higher and higher basically cost interest payments. And of course, sadly, the budget is far from balanced today. But then you can start seeing things snowball, that the cost of just simply servicing the debt is growing and growing and growing.

Countries have to start running just to stay on top of it. You’ve seen this, actually; one of the best examples is Canada. Canada went on a bit of a debt spree in the, I think, ’60s and ’70s, but into the ’80s. And they didn’t really get on top of inflation as much as other countries. So, they had to start jacking up interest rates. Interest rates went higher. The provinces had borrowed too much money. Ottawa had borrowed too much money. Interest rates started going up, and the debt-servicing costs, just how much it cost the economy as a whole to service government debts went from 2%-3% of GDP to 5% and then really started to snowball and hit almost 10% in the peak in the mid-90s. And then they had to go full austerity and said, “This is ridiculous. So much of our budget is getting eaten up by servicing debts. This cannot continue.”

For me, if you eyeball it, you can see it. Around 5% interest payments/GDP seems to be one of those areas where countries normally turn around and fix things, like the UK in the ’80s; all things start snowballing in a sort of dramatic way. And the US is still far from that. The US is, I think is around this year, kind of a 3.6% of GDP. I think it’s 3.5%, 3.6% of GDP is going to debt servicing costs. And that is not great. And it is definitely going higher, but it still is another decade before it hits kind of 5%-ish.

I just think the real chronic debt crisis in America, and, frankly, look, I don’t want to—I mean, you asked about the globe, and I worry about that, but we can have debt crises in France and Zambia and places like that, and it can be painful, but they’re not of global consequence. But everything that happens in the US just matters to everybody else to a far greater degree.

This debt crisis doesn’t play out in hyperinflation, doesn’t play out in runaway bond yields. It plays out as debt eroding America’s financial health and being able to spend less on other stuff it wants to spend money on. Whether that’s defense, there’s lots of focus on the fact that interest payments now consume more of the federal budget than defense does, but infrastructure, healthcare, education, all sorts of other things that the US maybe would like to spend money on, it is less able to as that kind of interest bill swells and swells and swells. It’s a chronic crisis rather than an acute one.

Maybe it’ll become an acute one. I just think that kind of classic acute debt crisis that people envisage might never occur in the US since it’s so unique and certainly won’t play out any time soon. I think we are now just—this was a very long answer to just a question that obviously we think a lot about now—but my view is that this is a chronic debt crisis that will be far slower to play out than most people appreciate, but it can still end up being quite painful nonetheless.

Arnott: Yeah. Hopefully we’ll figure out how to fix that chronic crisis before it becomes acute.

Wigglesworth: Yeah, no, I mean you can budget surpluses. You remember those things? It’s like, bring back the 1990s.

Arnott: Yeah. Unlimited spending isn’t sustainable forever.

Wigglesworth: No.

Arnott: On that note, I want to thank you so much for joining us today. I really enjoyed the book, and it’s been wonderful talking to you.

Wigglesworth: Thanks for having me on. I really appreciated it, and lots of great questions. I could talk for days about this stuff. It’s just fascinating and important. So, thank you for having me on.

Johnson: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at @MstarBenJohnson on X or at Ben Johnson, CFA on LinkedIn.

Arnott: And at Amy Arnott on LinkedIn.

Johnson: George Castady is our engineer for the podcast. Jessica Bebel produces the show notes each week and Jennifer Gierat copy edits our transcripts. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.