Bonds: has the debt become too big?

Summary

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Business Daily: "Bonds – Has the Debt Become Too Big?"

BBC World Service | Host: Ed Butler | Air Date: January 13, 2026

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Episode Overview

This episode explores the mounting global burden of government debt and the power of the bond market. Host Ed Butler is joined by financial experts—including Gillian Tett (FT columnist and King's College head), bond trader Luke Hickmore, and economist Stephanie Kelton—to discuss the consequences of ever-increasing national borrowing, who holds the real power in economic policymaking, and whether the bond market is dictating terms to democratically elected governments. The episode draws on recent UK political history and global debt statistics to consider the risks and trade-offs facing both politicians and the public.

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Key Discussion Points & Insights

1. The Scale of Government Debt

• Main Point: Advanced economies are now facing debt levels higher than at any point since WWII.
• Gillian Tett (01:33): “The debt burden is now larger than at any point since World War II, and by a number of measures is actually exceeding what happened during World War II. And that creates really big challenges.”
• Debt-to-GDP ratios are highlighted for major economies:
  • France: 113%
  • United States: 120%
  • Italy & Greece: High ratios post-Euro adoption
  • Japan: 250%
• Factors: Large welfare states, slow growth, central bank intervention, and relative ease of domestic borrowing.

2. The Liz Truss Episode: When Markets Revolt (02:07–04:36)

• Case Study: October 2022, then-PM Liz Truss announced large, unfunded tax cuts—leading to a bond market sell-off.
• Luke Hickmore (02:50, 03:17):
  • “45 billion of unfunded tax cuts…would have meant more borrowing down the road to fund it.”
  • “Gilts went up by 1.2%...that would have increased the cost of borrowing by the government by tens of billions...We’ve seen what happens when the bond market is not happy. They react very, very quickly.”
• Outcome: Bank of England intervened too late; Truss resigned after 45 days, toppled not by voters, but market pressure.
• Liz Truss (04:36): “It was clear to the world that the economic institutions did not back my economic policy…we weren’t able to fully enact [our policies].”

3. The Drivers and Dangers of High Debt (05:41–09:42)

• Explained: How governments accrued such high debts (spending, growth, global crises).
• Gillian Tett (05:41–06:59):
  • France: High spending, slow growth, politically hard to cut welfare.
  • USA: Dollar’s global reserve status encourages more borrowing.
  • Italy/Greece: Euro adoption lowered borrowing costs, reducing incentive to reform.
  • Japan: Central bank and local savers “keep the show going” despite stagnation.
• Rising Interest Payments: Now a major worry, swelling government borrowing costs.
  • Gillian Tett (08:41): “If rates are ultra low...it’s pretty cheap to keep servicing debt...But if interest rates start to rise suddenly, then you can see the interest payments suddenly explode…governments can actually get into a death barrel.”

4. The Power of the Bond Market (10:36–12:18)

• James Carville (10:45): “...the truth of the matter is I’d like to come back as the bond market because I can intimidate everybody.”
• Bond Market Size: $145 trillion—bigger than the world’s annual GDP and stock market.
• Luke Hickmore (11:30): “In terms of their importance, bond markets for the broader economy…I don’t think that can be overstated.”
• Democracy concern:
  • Ed Butler (11:41): Asks if a small group of unelected traders shape fiscal outcomes.
  • Luke Hickmore (11:52): "I don’t think [it's] an undemocratic bunch...Countries must have a sensible approach to their fiscal policies...That’s our job, deciding the risk."

5. Challenging the “Bond Market Discipline” – Modern Monetary Theory Perspective (12:18–16:01)

• Stephanie Kelton's View:
  • Deficit spending is not inherently bad for rich nations controlling their own currency.
  • Kelton (12:52): “You said could lead to inflation. Absolutely it could. Has it historically? No.”
  • Kelton (13:46): “If you can get full employment and relative price stability with a budget surplus, fine. If you need a deficit, that’s fine too…keep your eyes on the prize…good balanced economy and let the budget move the way it needs to move in order to achieve those outcomes.”
  • Kelton (14:27): “I think the bond market has become too much of an ogre…If a central bank is fighting that agenda in a way that leads to volatility...that is a problem.”
  • Metaphor: Bond traders as tantrum-throwing children—politicians too quick to give in (15:00–15:39).
  • Kelton (15:39): “In a way. And I’m saying…the fact that the government issues these interest-bearing accounts...it’s a privilege to own these. So I think it’s a mistake to think that the government is somehow dependent on financial markets. It's really the other way around.”

6. Consequences and Dilemmas for Policy (16:01–19:04)

• Gillian Tett (16:19): “To deal with a debt burden, you have to really start talking about trade-offs...you can’t have a big welfare state…if you don’t have the revenues or the growth to support it.”
• Populism and the Blame Game:
  • Financial markets perceived as shadowy, harmful elite; this fuels discontent.
  • Tett (17:07): “There’s…a rising sense of fury at global financial markets..."
• The Risk of Major Defaults or “Debt Jubilees”
  • Historical recurrence of debt write-offs, going back to Mesopotamia.
  • Tett (18:01): "History shows that whenever you have a financial system based on a currency that has no capacity constraint, the debt levels tend to keep growing and...there’s [eventually] either a social explosion...or mass default...or inflation."
  • What will happen as debts keep growing in rich countries remains an open question.

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Notable Quotes & Memorable Moments

• Gillian Tett (01:33): “The debt burden is now larger than at any point since World War II.”
• Luke Hickmore (03:17): “Gilts went up by 1.2%. It doesn’t sound a lot, but that would have increased the cost of borrowing…by tens of billions.”
• James Carville (10:45): “I’d like to come back as the bond market because I can intimidate everybody.”
• Stephanie Kelton (15:39): “Bond traders are spoiled children?...The government issues these interest bearing accounts...it's a privilege to own these.”
• Gillian Tett (18:01): “History shows that whenever you have a financial system based on a currency that has no capacity constraint, the debt levels tend to keep growing and growing, growing until there’s either a social explosion or there’s mass default, or there’s some other form of write offs or something like inflation.”

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Timestamps for Key Segments

• 01:19 – Episode opens on the global debt burden
• 02:07–04:36 – The Liz Truss bond market crisis
• 05:41–07:37 – Ranking the world’s most indebted rich countries
• 08:22–09:42 – Why debt is more dangerous as rates rise
• 10:45 – James Carville’s bond market quote
• 12:18 – Stephanie Kelton challenges mainstream thinking
• 13:46 – Kelton on budget deficits and the real goals of fiscal policy
• 14:27–15:39 – Bond markets as “ogres” and tantrum-throwers
• 16:19–18:01 – Tett on the hard trade-offs and the risk of default
• 18:01–19:04 – Historical analogies for debt write-offs

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Concluding Thoughts

The episode paints a complex picture: While government debt has soared, the true threat may depend on who holds the power—bond markets, central banks, or elected officials. The experts disagree on how much deference governments should show to markets and whether panic over rising debt is justified. Yet all concede the challenges ahead may force the public and policymakers into tough choices and, perhaps, radical change.

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Transcript

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[Ed Butler]

There, I'm Ed Butler. Welcome to Business Daily from the BBC World Service. Today, in the second of our programs looking at the global bond market, we're assessing how countries manage their debt levels and what a lot of debt there is.

[Gillian Tett]

The debt burden is now larger than at any point since World War II, and by a number of measures is actually exceeding what happened during World War II. And that creates really big challenges.

[Ed Butler]

The mountain of debt isn't just high. The amount of interest indebted governments are having to pay on those loans has spiked as well in recent years. Is the bond market holding governments, holding.

[Stephanie Kelton]

Us all to ransom this idea that bond markets are in charge? And if they throw a big tantrum that forces a government to then betray the commitment it has made, that is a problem.

[Ed Butler]

Do we have a problem with bonds? That's Business daily from the BBC World Service. Prime Minister It's October 2022, and after unveiling what had been seen as a disastrous mini budget to launch her premiership, reporters are watching the British Prime Minister Liz Truss.

[Gillian Tett]

Every move Is this your last Prime Minister's questions? Is it time to resign?

[Ed Butler]

Liz Truss had cut taxes and increased borrowing without explaining how it would be paid for.

[Luke Hickmore]

Luke Hickmore is a leading bond trader with Aberdeen Investment. It's one of the UK's biggest traders in government bonds, or gilts as they're also known.

Liz Truss focused on growth. That was their main thrust in the budget. The way they wanted to do it though was tax cuts in the system they hadn't thought about. These are the cost cuts we've got to do to get these tax cuts through, or even these are the measures we can do to increase growth. The numbers were big, 45 billion of unfunded tax cuts and that would have.

Meant more borrowing down the road to fund it.

Yes, absolutely right. So gilts went up by 1.2%. It doesn't sound a lot, but that would have increased the cost of borrowing by the government by tens of billions of pounds every single year that we couldn't afford. We've seen what happens when the bond market is not happy, not relaxed. They react very, very quickly.

[Ed Butler]

And react they did. With the price of government debt surging, the bank of England initially hesitated before intervening with a promise to buy up $90 billion of government bonds. But too late. The writing was on the wall for Liz Truss.

[Liz Truss]

I have therefore spoken to His Majesty the King to notify him that I am resigning as leader of the Conservative Party.

[Ed Butler]

Yes. After just 45 days in office, Liz Truss became Britain's shortest serving Prime Minister. Forced out by her own party colleagues because she'd misjudged not just Britain's creditworthiness, but also the power of the bond markets to effectively determine the country's economic fate. Hers is a salutary tale. A sound economy is, after all, built on confidence. And if the bond market didn't have any in the Prime Minister, then nor could anyone else. Here she is months later, reflecting on the day Barclays with the podcast the Rest Is Money.

[Liz Truss]

It was clear to the world that the economic institutions did not back my economic policy. I was sitting there as Prime Minister with a clear set of economic policies, with a Chancellor with a clear set of economic policies that really we weren't able to fully enact.

[Ed Butler]

We'll return to the power of the bond markets in just a minute, but first let's have a quick reminder of how the UK and other major governments got into this situation. The story of bonds is, after all, also a story of huge and growing national debt. Imagine, if you will, an old fashioned music hit parade where instead of songs, the chart topping numbers are those of the most indebted countries in the world. The FD columnist and head of King's College, Cambridge Gillian Tett guides me through the top five debtor nations, how much they owe, calculated in relation to their GDP or national output. Coming in at 5 with 113% debt to GDP is France.

[Gillian Tett]

France has a large public sector, which means it's spending a lot. Its economy has not been growing particularly rapidly in recent years, and it's very hard for the government to either cut the size of the state or to cut Welfare.

[Ed Butler]

At number four, the IMF reports we have the United States 120% debt to GDP.

[Gillian Tett]

Well, there's lots of different ways of measuring what the debt to GDP is in the US but however you look at it, it's dramatically larger than it was a few decades ago. And the real concern is that because the dollar is a reserve currency, there's a temptation for any government in Washington to assume it just can keep printing dollar bonds and dollars to finance the debt indefinitely because it assumes the rest of the world will always buy it.

[Ed Butler]

Third and second on the list we have two European Union, Italy and Greece.

[Gillian Tett]

When Italy and Greece became part of the euro system, their borrowing costs fell because they seemed to be linked to the German economy and others. And so that's reduced the pressure on them to really tackle their debt burden.

[Ed Butler]

But topping the charts by a hefty margin, the rich world's most indebted country of all, Japan, with debt reaching two and a half times the its annual output.

[Gillian Tett]

Well, Japan has seen its debt burden soar partly on the back of two decades of stagnation. And it didn't feel much pressure to actually tackle the debt burden because not only did the bank of Japan buy a lot of government bonds which enable them to keep the whole system going, but also a large part of the Japanese debt is owned by Japan's own savers. And thus far they appear to be remarkably patriotic or patient. And they keep buying bonds even though it hasn't been returning very much in the way of investment.

[Ed Butler]

Now, these are all IMF figures. Other ways of counting government debt have countries like China with even higher numbers. And some poor nations have found themselves up to their necks too. But rich countries have always managed to get away with these historically large debt piles, or at least they have so far.

[Gillian Tett]

The critical problem right now stalking much of the Western world has been an explosion in debt relative to gdp. And that creates really big challenges about how on earth the world is going to get out of this debt burden. And really whether it can get out of this just through austerity or through clever fiscal policies or growth, which is if you like the good medicine, or whether it's going to end up having to either default or resort to inflation in a way that would really hurt investors.

[Luke Hickmore]

The reason debt, I suppose, has become so problematic for many governments has been because interest rates, bond rates, have gone up, haven't they? Quite sharply since the pandemic. I mean, I was seeing a figure that the US interest payments now are totaling nearly a trillion dollars. That's more than Washington is spending on its military.

[Gillian Tett]

Absolutely. I mean, the real issue to understand about debt burdens is firstly, it really matters who owns the debt, because if it's your own citizens, you can usually bully them into keeping buying the debt. And if it's in your own currency, you have an awful lot of control because you can essentially print more of your own currency if you need to, or your central bank can gobble up some of the debt. The second big question is what level of interest rates are you paying on that debt? Because if the rates are ultra low, as they were in the last 15, 20 years, then actually it's pretty cheap to keep servicing debt. It's a bit like having a mortgage in your house with 0.5% interest rate. You just pay a small token amount each month and it doesn't matter how big the debt actually is in nominal terms. But if interest rates start to rise suddenly, then you can see the interest payments suddenly explode. And when that happens, governments can actually get into a death barrel where they end up with so much debt they just can't repay the interest and end up essentially drowning in debt, like a household who's taken on too big a mortgage.

[Ed Butler]

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[Gillian Tett]

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[Stephanie Kelton]

See Terms.

[Ed Butler]

I'm Ed Butler and today we're looking at the global debt burden and how the bond market seems to control an ever larger stake in how governments operate.

[James Carville]

If there was ever reincarnation. I used to think I wanted to come back as the Pope or the President or foreigner baseball hitter, but the truth of the matter is I'd like to come back as the bond market because I can intimidate everybody. Everybody's watching these fluctuations in the stock market and going, oh my God, oh my God. When the real thing to watch that's more lasting is the bond market.

[Ed Butler]

The words there of James Carville, a former advisor to the Clinton administration, speaking on the Politicon podcast. While the world's stock markets are now worth a combined $127 trillion, the bond markets are even bigger, valued at 145 trillion. That's more than the world's annual GDP.

[Luke Hickmore]

In terms of their importance bond markets for the broader economy. I don't think that can be overstated.

That's Luke Hickmore again, the bond trader working with Aberdeen Investments.

[Ed Butler]

I put it to him that having.

[Luke Hickmore]

Such a small number of unelected money men like himself effectively running national government policy wasn't in the interest of democracy.

In the uk, there are five big investment houses who are large in fixed income. It's not, I don't think, a situation where you've got an undemocratic bunch of people deciding on the fiscal outcome for a country. I think as a country having to have a very sensible approach to its fiscal policies to make sure that they can continue to fund at a sensible level, because that's our job, is deciding the risk.

[Ed Butler]

But others aren't so sure. Some say the hand wringing about national debt misses the point and that policymakers are giving the bond markets way too much power. Professor Stephanie Kelton, who's been an Advisor to the U.S. democratic Party on economic issues, has written a book, the Deficit Myth, in which she argues that spending more than you receive in taxes isn't necessarily a bad idea. Surely, I ask her. The debt can go on climbing forever. Governments can be printing more and more money to pay for it, and that could lead to ever higher inflation, couldn't it?

[Stephanie Kelton]

I think you said it exactly right. You said could lead to inflation. Absolutely it could. Has it historically? No. The US government has been running budget deficits almost my entire life. Has inflation been a problem over the last 40, 50 years? With the exception of the COVID pandemic and the oil price shocks of the 1970s, the answer is no. In fact, in countries around the world for the better part of the last three decades, the thing that central banks have been trying to do is push inflation higher.

[Ed Butler]

What is the sustainable answer then? If you're saying people are getting things wrong and perhaps there's too much austerity.

[Luke Hickmore]

Going on to cope with a fear.

[Ed Butler]

Of these rising debt levels, what should.

[Luke Hickmore]

They be doing to adjust in a.

[Ed Butler]

Progressive way the economies of their nations?

[Stephanie Kelton]

Well, I think the goal is to achieve a balanced economy. If you can get full employment and relative price stability with a budget surplus, fine. If you need a deficit, that's fine too, because that's not what matters. You got to keep your eyes on the prize and that is do you have reliable, safe public infrastructure, good health care system, good educational system, good balanced economy and let the budget move the way it needs to move in order to achieve those outcomes.

[Ed Butler]

Do you think the bond market has become too much of a kind of ogre then an ogre figure to politicians?

[Stephanie Kelton]

Yes, I do. I think that it becomes a problem when a democratically elected government wants to carry out a mandate. And if a central bank is fighting that agenda in a way that leads to volatility, that rattles markets and that forces a government to then betray the commitment it has made to the electorate, then I think that is a problem.

[Ed Butler]

Is it fair to say that most central bankers and finance ministers of the rich world nations don't agree with you on this?

[Stephanie Kelton]

I don't know. I think this idea that bond markets are in charge and if they throw a big tantrum then you're powerless against them. You know, as a parent watching kids in the grocery store with their parent and you know, at some point a kid has a meltdown and starts screaming and crying and it gets embarrassing. And at that point the parent's got to make a choice, do I finish my shopping or do I leave the basket half full of food and walk out of the store because I'm embarrassed. I feel like politicians allow the bond market to have a meltdown, a tantrum, they give in to the child.

[Ed Butler]

You're saying that bond traders are spoiled children?

[Stephanie Kelton]

In a way. And I'm saying, you know, the fact that the government issues these interest bearing accounts, which is what gilt edged bonds are, they're interest bearing accounts with the government risk free. It's a privilege to own these. So I think it's a mistake to think that the government is somehow dependent on financial markets. It's really the other way around.

[Ed Butler]

Professor Stephanie Kelton well, it's certainly true that investors do very well out of the bond markets and that the world's pension funds, for example, depend heavily on the interest that they receive. But most mainstream economists now accept that debt levels for some of the biggest nations are getting out of control. Here's Gillian Tett again.

[Gillian Tett]

To deal with a debt burden, you have to really start talking about trade offs because you can't have a big welfare state or a program of support for your citizens if you don't have the revenues or the growth to support it. The problem is that no politician really has much incentive to stand up and be honest with people and talk about the trade offs that need to happen. So unless there's a shock from outside like a bond market crisis, it tends to be very hard for governments to actually make the difficult decisions they need to.

[Luke Hickmore]

It's interesting you saying that, because we have seen a rise, haven't we, in populism in many Western nations, People on the political right, on the political left. Some people associate that with the rise of the power of the bond markets, which is very little understood by the public at large.

[Gillian Tett]

Well, there's certainly a rising sense of fury at global financial markets and elite financiers because the problem is that, as you say, many people don't understand how the bond markets work. It's much easier to believe that there's some kind of shadowy cabal of financiers who are screwing up the global economy and hurting you, rather than blaming an individual politician or political party at the moment. So unfortunately, there's a lot of finger pointing going on. At the end of the day, bond markets are in many ways just a mirror to our own societies and they show us unpalatable truths.

[Luke Hickmore]

We've heard about defaults in emerging economies, poor world economies, Argentina, Zimbabwe, Sri Lanka and others. I suppose the question for the immediate future, given these debt levels, given bond yields going up in many cases, is there a risk of a major nation defaulting now?

[Gillian Tett]

There is definitely a rising risk of a major default the next decade or two. History shows that whenever you have a financial system based on a currency that has no capacity constraint, the debt levels tend to keep growing and growing, growing until there's either a social explosion or there's mass default, or there's some other form of write offs or something like inflation. And you can go all the way back 5000 years to Mesopotamia when people used to record the debts on clay tablets. And periodically when the debts got too big, the rulers would quite literally wipe the slates clean. You've had that with say, emerging market debts in the last few decades, where rich countries would quite often forgive poor countries debts just to keep the show on the road. But what will happen in the future with rich countries debts? Can we have a mass debt jubilee and quite literally wipe the slate clean like they used to do in Mesopotamia? Is there going to be mass restructuring? Is there going to be some form of default or inflation? We just don't know. But history shows that there really is no way to easily get out of debt.

[Ed Butler]

Financial Times columnist Gillian Tedd While most people don't think a major default is likely, the consequences of of appeasing the debts could yet prove painful and an enduring drag on global growth. That's it for our two part examination of the power of the bond market on Business Daily from me, Ed Butler and the rest of the team. Take care.

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[Stephanie Kelton]

See terms.