Ross Clark is the author of “Britain is Bust: The Coming Sovereign Debt Crisis and What It Will Mean for You.”
Democratic strategist James Carville once said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Everybody, that is, except President Donald Trump. Since February, bond markets have been signaling their extreme displeasure at the U.S. government’s mismanagement of its finances. The yield on 10-year Treasury notes — a measure of the market’s confidence that the government can pay the interest on its debt — crossed 5 percent this week and hit its highest level since 2007.
Yet, far from taking this as a sign to rein in government spending, the president this month announced that every American adult citizen would be paid a “dividend” of $5,000 should the Republicans perform well in the midterms. The payout would cost an estimated $1.2 trillion. Unless the government plans to raise the money through new taxes — in effect picking Americans’ pockets just to hand the money back — or spending reductions, that sum would be added to the over $40 trillion national debt. That could spook bond markets even more.
But the United States isn’t alone, nor is it the country most at risk of a bond market crisis. Many governments have been borrowing with abandon for years. They launched huge stimulus packages during the bad times, such as the 2008 financial crisis and the covid-19 pandemic, but then failed to put their finances back in order during the good times. Trump’s attempt to buy votes through government largesse is just a more blatant version of what governments have been doing for most of this century.
When a bond crisis strikes, it can hit fast and hard. The Greek government got away with loose fiscal policy for years until, in December 2009, the ratings agencies had finally had enough and downgraded its debt. “Bond vigilantes” — a term used to describe investors who punish governments for overborrowing — responded by dumping Greek bonds. Within months, yields had risen to levels that became impossible to bear. The country took a bailout, which was followed by eight years of dramatic cuts to Greek wages and pensions before order was restored. Even now, real incomes in Greece remain lower than they were in 2009.
Could what happened in Greece ever happen in America? Possibly, but there is a country today that seems a far more likely victim for the vigilantes: Britain. While the yield on 10-year U.S. Treasurys hovers above 5 percent, the equivalent government bonds in Britain hit a yield of 5.43 percent last week — higher than most other developed countries.
Britain is exposed because it has a history of higher inflation than other developed countries, which erodes the real value of bonds. Britain also has an unusually high proportion — around a quarter — of its government debt in the form of index-linked bonds, meaning interest payments rise and fall with inflation. That makes the cost of servicing the government’s debts particularly volatile. Adding to the peril, Britain now stands alone. Having left the European Union, it has less leverage to beg the European Central Bank for a bailout if it gets into trouble.
The country also has a new prime minister, Andy Burnham, who last year frightened investors by saying that the government shouldn’t feel “in hock to the bond markets.” He didn’t seem to mean he wanted the government to pay off debt. Rather, his comment was taken to mean Britain should stop worrying about the debt and borrow even more, although Burnham disputed this interpretation in an interview this week. Burnham was not even a member of Parliament at the time — he was the mayor of Manchester and was being talked about as a future prime minister. But even so, markets reacted badly.
Bond vigilantes have targeted Britain once before. That happened four years ago, during the 49-day administration of Liz Truss. Her package of tax cuts without spending cuts spooked the bond markets, and a sharp rise in government bond yields led to the near-collapse of British pension funds. Yet bond yields in Britain today are a full percentage point higher than they were then, suggesting that confidence in the government’s ability to manage its finances is even lower now.
If Britain does get taken down by the bond markets, it will be a warning to both America and any other country with rampant debts. Most of the developed world has overborrowed, and a reckoning is coming.
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