Transcription
We start with the drama that is politics in the United Kingdom, as the fifth prime minister in eight years is fighting to avoid yet another turnover at Number 10, and the markets are keeping score. How much say does the gilt market have in who gets to run the country? John Authors is Bloomberg's senior editor for markets.
So John, there's a lot of political upheaval drama playing out in the United Kingdom right now. At the same time, bonds are selling off, gilts.
Yes, uh, the yields have gone up. Is there a connection between the two, and if so, what?
Yes, there's certainly a connection, um, which is that, uh, Britain has, even more than where we are here in the US, the rest of the Western world, it has a fiscal problem. We don't have much, uh, headroom left to spend money in the UK. Any sign of concern about political instability will, in its own right, worry bond markets, and specifically at the moment, because K. Star is in a lot of political trouble. Any challenger, even those who you could argue are to his political right, will want to do something to show they've made a difference once they take over from him. And that's going to involve spending some more money on something. That's going to involve being more lenient on fiscal policy than Labour has been so far. So plainly, the risks are towards more fiscal spending. That's plainly something the gilt market dislikes. There's a long history of, uh, friction between a, a Labour government that, you know, has its, uh, origins in in socialism and the unions and bond markets. Naturally.
There is also a more recent history between the Conservative government and the bond market. Yes. Read Liz Truss. We remember that. But one of the things you pointed out in one of your columns is actually the yields on gilts right now are above where they got to under Liz Truss.
Exactly. I mean, that there are, uh, to be fair to the current Labour government, there are reasons for that, in that interest rates have risen across the world since then. And what really can endanger a financial accident is when yields rise very fast, which is absolutely what happened under, under Liz Truss. She, she took the market by surprise and, uh, and thereby slipped on a banana skin, whereas what we've got at the moment is more of a slow-motion car wreck with Labour. But yes, the, the ultimate fact is, is true. The, the, uh, uh, the higher the yields go, and they are now even higher than, than, uh, when they toppled Liz Truss, the, the less room for maneuver any government has, uh, and to some extent, this is a, this is a systemic problem for the UK because as we've just said, that this trust was a, was and is conservative. This is universal across the parties, a certain lack of trust, uh, and the British two-party system is breaking down at present. And both Greens, who are basically a British woman of the, the AOC, Bernie Sanders left, and the Reform Party of Nigel Farage, who are obviously very similar to the, the Donald Trump, MAGA right, both of those are on the face of it more inclined to splash money around and do things that the bond market really dislikes than the incumbents. There's a, a very worrying dynamic about the entire British political situation, or at least it's very worrying if you're, if you're a gilt investor.
We know from your, uh, column that you are a student of popular music, and I don't know if you remember the Aretha Franklin song, "Who's Zooming Who?"
Yes, that's the 1985. I remember that. I was, that was actually my first time in America. But anyway, carry on.
But, but if you take the bond market, the gilt market on the one hand, and the political system on the other, who's zooming who? I mean, you've explained how the, the political turmoil can affect the gilt market. Is the gilt market affecting what's going on in politics as well, at the moment?
I mean, certainly in the Liz Truss incident, yes, that was very much the case that it was the bond market that basically said, "No, you can't do this," and forced the, the expulsion of first the Chancellor and then the Prime Minister itself. This time around, that's less clear. You could certainly say that at this point, the, the bond market has become a kind of a sea anchor or a straightjacket for whoever is in charge, but it will be more uncomfortable for a, you know, a party of the left that actually has fewer hang-ups about spending taxpayers' money. Um, but, you know, the overall, the overall position is, is difficult either way. Uh, the other thing that's quite interesting compared to history is that it used to be, uh, the currency market. So Harold Wilson having been forced to devalue the pound and then going on television to say that the, the pound in your pocket, of course, isn't worth any less, which absolutely wasn't true. And then Labour government of the '70s being forced by a run on the pound to, to, to, to go and borrow from the IMF, and John Major's government basically never recovered from, uh, the Black Wednesday attack on sterling by George Soros and others. So it used to be the currency market that really inflicted pain. Uh, and now that currencies do tend to float more gradually, more, more, more easily. And now that we've had many years of being used to extremely low bond yields, that, you know, cheap money is being treated as a fact of life or a birthright almost, it's the bond market that has now taken over as the anchor, the great limitation.
The United Kingdom has a historically high ratio of debt to GDP, but they're not alone in that. They may be a little bit more than some of the rest of us, maybe a little less than some as well. Uh, is what we're seeing in the UK simply what's going to happen in other parts of the world, including the United States, just sooner?
Yes, there's a reason that the UK has more of a problem, uh, or more of an instant problem, uh, which you can explain easily enough from geography and history. The UK is an island which got rich by trading with other people. The US is basically a continent that got rich by trading with itself. So exports have always been a much more important part of the, uh, the UK equation. When you have, uh, pressure on the currency, when you have inflation elsewhere, it will affect the UK much more swiftly, much more dramatically. It has, it is much more dependent on the generosity of others than, than the States. That said, um, America's share of GDP, debt, public debt as a share of GDP was, in round numbers, 20 years ago, before the global financial crisis, 60%. Called, you know, occasionally great alarm. The Simpson-Bowles, if you remember that, attempts to cut the deficit. It's now 120%. Um, and whatever you think of, uh, the, the relative merits of Joe Biden and Donald Trump, both of them spent money, whether through tax cuts or, uh, fiscal largesse, or both, in a way that suggested that this just wasn't an issue. It will become an issue at a time. The US is a, is a bigger, more closed economy than the UK. It can, and it has the exorbitant privilege of, of the dollar. It doesn't, it's not as, it's not disciplined by, uh, by potential runs on the currency like the UK is. But ultimately, if you're borrowing more than you have and can't generate the money to repay it, you're either going to get very bad inflation, or you're going to go bust. You're not going to go bust, you're going to get very bad inflation. And that, that is ultimately the risk that afflicts this country too.
You were a, a young lad, a young boy during the Wilson time. Yes. And the crisis when there was really high inflation in the UK, and as you say, the pound was devaluing.
And I think some would say that was a, a predicate for what happened with Margaret Thatcher and a fundamental revision of the economy. Is there any prospect that could happen again in the UK? Could we have a new Thatcher?
We certainly can't see her yet. Although that being said, uh, if you think back to '75, '76, Margaret Thatcher gets wins the leadership of the Conservative Party in '75. Uh, doesn't actually get the, the general election where she becomes Prime Minister until '79. Um, she certainly didn't seem to be quite the radical departure that she would turn out to be, uh, in '75. So maybe there is somebody out there who is hiding in plain sight already. I think the points I would make about the, uh, Thatcher regime. I'm, I was 12 when she got in, 24 when she left. I'm, my generation of Brits still basically think she's running the world. And you could also argue there's an analogue to that in the States, which didn't get into anything like as much trouble in the '70s as Britain did, but did get into a lot of trouble. Paul Volcker is the key figure who changes America around. He is appointed by Jimmy Carter.
As was Alfred Kahn on deregulation.
Yes. And, um, would the American economy have boomed the way it did in the '80s if you hadn't then had Ronald Reagan, who really believed this stuff, who was a really enthusiastic advocate for it? Almost certainly not. But it was much easier for him to do what he did because he actually had the building blocks in place. Again, the, the, the, the regime had accepted that the game was up and shifted before you then had the really exciting, um, you know, free market politician, Thatcher or Reagan, uh, to take things forward. So I think the key moment is when is the game up? When does the market, does the economy force a change? It's conceivable it could happen here that that Donald Trump grasps that you just need to actually start cutting entitlements and, uh, cutting back on defense budgets or whatever. But I think it's more likely that circumstances force a change from the, uh, regime, and that's the critical change rather than that voters elect in the person who will make the.