Markets or Mark Carney: Which matters most?
For several years, the Treasury and the Bank of England have been encouraging us to believe that the long-term cost of government borrowing was the rate that mattered most - not just to Britain's public finances, but to the health of the wider economy.
We were supposed to want that long-term cost of government borrowing to be as low as possible, because a low rate meant the government's fiscal policy was sound, and businesses and households were getting access to as much cheap lending as they could possibly use.
Now the long-term cost of borrowing is rising apace. But both the chancellor and the Bank of England governor are doing their best to convince us that there's no reason to be alarmed.
You can see why Bank of England governor Mark Carney would be keen to suggest that rising government borrowing costs are nothing to be afraid of. Whether he should actually believe that is another matter.
A survey out today suggests his "forward guidance" on rates is starting to get through to the wider public. The latest quarterly poll on public attitudes on inflation and interest rates, commissioned by the Bank, shows that only 29% of respondents expect interest rates to rise in the UK in the next 12 months.
You might think that was a bit discouraging: after all, not even those over-excited people in the City think rates are going up in the next year.
But that 29% figure is actually the lowest since November 2008. Amazingly, fewer people now expect an early rise in rates than in May 2009, in the depths of the recession. At that time, some 45% expected rates to go up in the next 12 months.
So, maybe, Mr Carney's go-slow message on rates is getting through to the wider public. But - as everyone now knows - market interest rates have been moving in the opposite direction since the new governor made his pitch.
This week, the interest rate on 10-year government bonds rose above 3% for the first time since 2011.
It would be nice to think that it was all the good news on the UK economy that was driving that rise. And certainly, that has played a part. I wrote about what investors or may not think about the economy here.
No doubt the chancellor will be "bigging up" that good news in the big speech he's planning to give on the recovery early next week. (Though today's dispiriting trade data rather broke the spell; that slowdown in exports to emerging markets I mentioned earlier in the week could be happening even sooner than expected.)
But the single largest reason why the 10-year rate has gone up - not just this week, but nearly every week in the past three months - is that the interest rate on US 10-year government bonds has gone up in response to that crucial "tapering" talk from the head of the US central bank.
Many in the markets think the Federal Reserve will start to slow down its creation of money in a matter of weeks. If so, the latest decent jobs data is unlikely to dissuade them.
In early May, the implied interest rate on US 10-year government debt was 1.9%. Now it is just over 3%. In May, the UK 10-year rate was 1.9%. Now it is just over 3%.
This is no fluke. As a senior European Central Bank economist pointed out at Jackson Hole a few weeks ago, the correlation between movements in the government borrowing rates for the major advanced economies - US, Britain, and Germany - is getting on for 90%. (See chart.)
Some of that correlation comes from the fact that these economies tend to move together economically. But it is also because, for international investors, US, British and German bonds are close substitutes. So demand for them often moves up and down together, even when their economies do not.
You might think this rather suggested that the UK would not be able to remain independent of the Federal Reserve after all. If US policy drives interest rates upwards over there, key borrowing rates are likely to rise here as well.
It is not just Britain's 10-year rate that has risen in lock-step with America's; since May the yield on five-year government debt has also risen one percentage point in both countries, to 1.8%.
In his recent speech in Nottingham, Mr Carney did not deny that long-term interest rates had been affected by the musings of the Fed. But he came close to suggesting that didn't really matter to the effectiveness of UK monetary policy.
The key thing, he said, was that the Bank controlled Bank Rate. And "70% of loans to households and more than 50% of loans to businesses are linked to Bank Rate".
That assertion raised some questions for me and for some others I have spoken to.
It is true that the latest official statistics show just under 69% of household mortgages and 53% of outstanding loans to non-financial companies were at a floating rate.
Looking back, it is also true that the average interest rate on those kinds of loans has moved around a lot less in the past few years than the forward rates in the markets.
At the end of July (the latest figures), the average interest rate on outstanding floating rate mortgages was 2.95% - almost exactly what it was in February 2009, just before the Bank cut Bank Rate to its current level and started printing money.
But, as that example rather demonstrates, the Bank of England's policies are not the only factor affecting the interest rate that businesses and households are charged on their loans.
That is particularly true when it comes to the rate charged on new lending - a rate, presumably, which the Bank is keen to influence with its forward guidance.
In fact, Funding for Lending, and the government's Help to Buy initiative, have helped push down the interest rate quoted for new mortgages over the past year by nearly one percentage point in some cases. But those schemes happened precisely because the Bank could not push down those borrowing rates any further using Bank Rate.
You could say something similar about quantitative easing (QE) itself. Having done all it could at the short end, a key goal of QE was to push down long-term corporate borrowing costs as well, via changes in the price of government bonds. The idea was that if you push down the return from lending to the government, you encourage institutions to lend to companies instead.
Ever since the Bank started the whole QE experiment, back in 2009, it has highlighted falls in government bond yields as evidence that it is working.
But that was then. Now the government's cost of borrowing is rising. Sharply.
That has important implications for the cost of servicing Britain's public debt. It also has implications for the UK financial institutions who hold so much of that debt.
But the governor of the Bank of England wants all of us - and the financial markets - to believe it does not have major implications for the effectiveness of UK monetary policy.
Mr Carney wants us to believe the UK can steer a different course from the US Federal Reserve if it needs to, without fear of the kind of market ructions that emerging market countries have been suffering. He may be correct. But the markets don't seem too sure.