By Conrad Whitcroft – Regular Contributor
One of the biggest myths about this pandemic is that governments have globally been able to ‘banish’ the so-called deficit myth. Left-wing economists and even some conservatives are mistakenly viewing the massive public spending programmes being undertaken by the governments to shield the public from the brunt of the COVID economic crisis as proof of Modern Monetary Theory – the idea that currency-issuing governments can never truly ‘run out of money’. Last year I wrote an article outlining concerns about the ever lowering of interest rates providing a significant gap to social mobility. Now I write another to outline my concerns that the British government has finally pushed this cash cow too far.
Public anxiety about the national debts is at record lows – possibly because we are distracted by all the real anxiety caused by lockdown and the worrying statements from officials warning of masks until next Christmas, or even forever. The absence of such concern is politically convenient for even right-wing governments to take advantage of the money-printer hidden away in central banks – Donald Trump was happy for the Federal Reserve to foot the bill for his stimulus checks whilst the British government’s appetite for yet more lockdowns has encouraged even more issuing of our globally trusted government debt to smooth the hardships this has inevitably brought.
So far lenders have been happy to buy up this debt when stocks and shares are such a risky choice – pension funds are crammed with government IOUs. However, since government debt reached 99.6% of GDP at the end of last year, we have started to see a worrying rise in the cost of this debt. Lenders are now no longer as happy to accept the paltry rates of 0.27% as they were at the start of the year, instead over the course of the February have demanded ever higher bang for their buck. As I write this, the day after Valentine’s Day (no I didn’t get any cards) the premium on a UK 10-year bond is up to 0.55% with a view to rise further this week.
All of this is bad news for the government and an economy which is edging far too slowly to recovery at the time of writing. The treasury has been borrowing like there is no tomorrow but unfortunately it is no longer yesterday – creditors are not happy to lend at such low rates and, with an economy that shrunk by nearly 10% last year, who can blame them? A source at Goldman Sachs has told me that some banks are receiving begging calls from the Government’s Debt Management Office late on Fridays. ‘Please buy our debt’. True or not, if these rumours are starting to circulate, it is not good news for a government in so deep.
All this is also bad news for Rishi Sunak’s recovery ambitions. Much of his hope has been on the hidden £2 billion of ‘pent up savings’ that households have been able to set aside during these rainy days, which he is keen to utilise in order to stimulate a recovery. With much of these savings soaked into government debt via the banks that hold them, the prospect of a run on bonds is lurching perilously closer meaning that there will be no cash-prize for Rishi. Equally, the ‘Build Back Better’ programme is also reliant on government borrowing. Such profligacy could see us experiencing an anaemic recovery with deadly austerity replacing Boris’ New Deal-esque Big State Conservatism.
Furthermore, the prospect of a recovery in the UK and around the world suggests that creditors may start asking for even higher interest rates, as and when stocks and shares (and overseas investments) start to look more attractive in a post-COVID world. The Bank of England has all but ruled out long term rises in interest rates to combat inflation, suggesting that the Bank Rate will remain stagnant for some years to come. If this happens, British debt may cease to be the low-cost option for the government that it has been since the 2008 financial crash and instead Boris will have to make some hard choices between a British public desperate for recovery and a global financial system desperate for yields.
There is a human element to this sudden rise in bond yields, because many people who have pent-up savings or are looking for long-term investments to see them into the future are becoming increasingly irritated at this sustained low-interest rate environment that the powers that be have put us in – as much for their own benefit as for ours. Traders are starting to understand and act on this fatigue and may well be using it to justify higher prices for government debt. Or maybe financial institutions are simply packed to the gills with paper with interest rates that barely cover their admin costs.
This is not to say that there are no solutions on hand, the Bank of England has already bought £895bn of government debt and would be able to bail out a government genuinely struggling to turn-over its debt. Such a Troika-like move could have serious implications for Britain’s global financial reputation however and undermine the confidence in our lucrative City of London, the square mile that produces over one fifth of our GDP.
The Conservatives may love Margaret Thatcher, but today’s Tories are ignoring one of her most important lessons: “If you try to buck the market, the market will buck you.” This Tory government has tried the former with its profligate spending and low interest rates; now it runs the risk of suffering the latter. Perhaps the government should spend less time listening to the Old Lady of Threadneedle Street and instead take a lesson from the Iron Lady of Grantham.