Ed Butler (2:34)

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

Luke Hickmore (2:41)

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.

Luke Hickmore (2:50)

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.

Luke Hickmore (3:13)

Meant more borrowing down the road to fund it.

Luke Hickmore (3:17)

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 (3:39)

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 (3:54)

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

Ed Butler (4:02)

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 (4:36)

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 (4:52)

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 (5:41)

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 (5:59)

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

Gillian Tett (6:06)

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 (6:32)

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

Gillian Tett (6:37)

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 (6:49)

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 (6:59)

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 (7:37)

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 (7:54)

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 (8:22)

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 (8:41)

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 (9:42)

Julian. Ted, you're listening to Business Daily on the BBC World Service. There's nothing like the American Express Platinum card.

Gillian Tett (9:52)

Find out your welcome offer after you apply, which could be as high as 1,75,000 dol thousand points.

Advertisement Voice (9:58)

Learn more and find out your offer@American.

Gillian Tett (10:01)

Express.com explorer-platinum terms apply.

Advertisement Voice (10:04)

Well, the holidays have come and gone once again. But if you've forgotten to get that special someone in your life a gift, well, Mint Mobile is extending their holiday offer of half off unlimited wireless. So here's the idea. You get it now, you call it an early present for next year.

Advertisement Voice (10:19)

What do you have to lose?

Advertisement Voice (10:20)

Give it a try@mintmobile.com switch limited time.

Advertisement Voice (10:24)

50% off regular price for new customers. Upfront payment required $45 for three months, $90 for six months or $180 for 12 month plan taxes and fees. Extra speeds may slow up to 50 gigabytes per month when Network is busy.

Stephanie Kelton (10:33)

See Terms.

Ed Butler (10:36)

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 (10:45)

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 (11:09)

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 (11:30)

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

Luke Hickmore (11:36)

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

Ed Butler (11:41)

I put it to him that having.

Luke Hickmore (11:43)

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

Luke Hickmore (11:52)

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 (12:18)

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 (12:52)

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 (13:28)

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

Luke Hickmore (13:35)

Going on to cope with a fear.

Ed Butler (13:38)

Of these rising debt levels, what should.

Luke Hickmore (13:40)

They be doing to adjust in a.

Ed Butler (13:43)

Progressive way the economies of their nations?

Stephanie Kelton (13:46)

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 (14:19)

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

Stephanie Kelton (14:27)

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 (14:53)

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 (15:00)

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 (15:36)

You're saying that bond traders are spoiled children?

Stephanie Kelton (15:39)

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 (16:01)

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 (16:19)

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 (16:48)

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 (17:07)

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 (17:40)

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 (18:01)

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 (19:04)

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.

Advertisement Voice (19:38)

Well, the holidays have come and gone once again, but if you've forgotten to get that special someone in your life a gift, well, Mint Mobile is extending their holiday offer of half off unlimited wireless. So here's the idea. You get it now, you call it an early present for next year.

Advertisement Voice (19:53)

What do you have to lose?

Advertisement Voice (19:54)

Give it a try@mintmobile.com Switch limited time.

Advertisement Voice (19:58)

50% off regular price for new customers. Upfront payment required $45 for 3 months, $90 for 6 month or $180 for 12 month plan taxes and fees. Extra speeds may slow after 50 gigabytes per month when network is busy.

Stephanie Kelton (20:07)

See terms.