Prez’s economic mess could bring doom

The bond market just took a hit on Liz Truss, so watch out Sleepy Joe, you could be next.

The implosion of the UK Prime Minister is certainly something for ever. She arrived with a burst of optimism that she would reverse the country’s economic malaise with Thatcherite tax cuts.

Unfortunately, Truss omitted some steps, including Thatcherite cuts in government spending. The bond market revolted. After less than two months in the job, she is now a run-of-the-mill politician.

It’s a lesson in how markets impose their own discipline on undisciplined political leaders like Truss or, possibly soon, the guy we have in the White House.

Yes, the real power lies with bond investors. They control things by setting interest rates on various government bonds that all other borrowing rates are pegged and the economy responds. If they think the value of their holdings will be eroded by inflation or deficits, they revolt by selling. Interest rates rise and the economic consequences can be devastating.

Recall then-President Bill Clinton’s famous surprise during the first year of his presidency about how debt investors – or as he put it, “a bunch of shitty bond brokers” – had a veto over his spending plans. After Clinton’s economic team convinced him that merchants did, he used the proceeds from a tax increase primarily to reduce the deficit, and the economy eventually recovered.

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Biden Truss
New York Post photo composition
The bond market has become jittery in recent weeks.
Joe Biden faced criticism over rising US inflation.
The Washington Post via Getty Im

I give Truss some credit for at least considering the bond market’s reaction to his fiscal and fiscal plan, even if it was weak. Last month, shortly after officially taking over as prime minister, she appeared confident in trying to sell it to New York bond investors, sources said. Good times were about to happen, she assured a finance manager I spoke to.

Markets will love to cut corporate taxes and more. The burst of supply-side stimulus will allow her to tackle what has afflicted the UK economy – sluggish growth and massive 10% inflation, otherwise known as the stagflation she received from her predecessor, the recently ousted Boris Johnson, whose Tax and spending policies contributed powerfully to the country’s economic distress.

“It looked like she was about to take over the world,” added the finance manager.

course reversal

Fast forward a few days and Truss was quickly reversing course. Bond traders have had enough of unprecedented spending amid the pandemic and recovery, along with super-low interest rates and money printing by the Bank of England. The UK’s debt is now around 98% of the country’s £2.4 trillion gross domestic product. You read that right: the amount of debt owed by UK taxpayers to investors is as large as the economy itself.

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In other words, it was not a good time to cut taxes without also cutting spending. Traders began selling Gilt, the British version of the US Treasury bond. Yields have greatly increased; UK pension funds laden with debt tied to risky derivatives had suffered massive losses, and a collapse of the UK financial system was looming as the market imposed its own discipline by selling gilts and raising interest rates.

Johnson is a favorite to become the next prime minister.
Truss inherited a stagflation economy from Boris Johnson.
Getty Images

The Bank of England was soon worried about a “Lehman” moment. Overnight, the BOE went from selling debt to ending the inflation it helped create to printing money once again. This epic reversal of monetary policy was followed by Truss’s own epic reversal.

Realizing that those damn bond dealers hated her plan, she went from Thatcher back to imposter Boris Johnson.

No more tax cuts or cuts of any kind, she announced. In fact, tax increases are on the table. None of this has helped her stand out in the cruel world of British politics, which is far more capricious than ours, even if bond traders backed down.

Word got out on Wednesday night that she was out, I reported for the first time. On Thursday, she announced her resignation after just 44 days in office.

Sleepy Joe Biden should be writing down Truss’s strings. Inflation is raging here as it is in the UK. Biden kept spending and until recently the Fed kept printing money. US debt is a staggering 125.9% of our GDP, or more than $31 trillion, according to USdebtclock.org.

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To combat the inflationary spiral created by Biden’s spending (and his own easy money policy), the Fed (like the BOE initially) is raising interest rates. The bond market isn’t collapsing, but it’s getting nervous.

Recession coming soon

Yields on 10-year Treasuries have risen significantly over the past year, showing that these pesky bond traders think recession-inducing inflation and deficits are coming sooner rather than later.

If inflation doesn’t peak and the Fed continues to rise, the bond market could sell off significantly, presenting one of those Lehman moments with mounting losses for investors and economic stagnation that the British tried to avoid. Add in massively higher interest costs in the US to pay off the huge debt and you can see the problem we are in.

There are important differences between the UK system and ours, of course. Our economy is much stronger thanks to American innovation in technology, etc. There will be no pressure to unseat Sleepy Joe mid-term, although he could run for re-election in the midst of a financial storm.

That means Biden must be very scared. The bond market is starting to see you as its next victim, and these “shitty bond traders” often take your woman or man.

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