Jim Morrison, Liz Truss, and the Fall of the U.S. Economy
Beautiful friend,
This is the end.
My only friend, the end,
Of our elaborate plans. The end.
I give thanks to Jim Morrison, of The Doors fame, for penning those lyrics more than half a century ago. I’m using today to make a point about a big problem we’re facing…
Originally, those lyrics were about Morrison’s breakup with longtime girlfriend, Mary Werbelow. But apparently the message morphed, Morrison once told Rolling Stone, so that “it could be almost anything you want it to be.”
Today, I want it to be about what’s happening in Britain… because how higher interest rates are hitting the U.K. it hints at where Uncle Sam is headed.
It turns out the Brits are having some bond woes once more.
How Higher Interest Rates are Hurting the U.K.
You might recall last fall, when a head of lettuce was elected prime minister, that the British bond market plunged. The British pound plunged, nearly sinking bond-dependent pensions funds. The Bank of England (the U.K.’s Federal Reserve) rushed to save the day.
Liz Truss—the aforementioned head of lettuce—seriously displeased financial markets with her bonkers “mini-budget.” It leaned heavily on insane amounts of debt, so the bond market collectively said, “Ain’t no way!” and promptly collapsed.
Liz beat a hasty retreat. After serving the shortest term in prime ministerial history, she now runs a veggie bodega in Notting Hill (probably) as bond woes return to the island-nation she successfully mismanaged.
This time around, the root cause of U.K. bond problems is rampant inflation wrought largely by the own-goal known as Brexit. That move to leave the European Union had all-too-clear-to-predict impacts. Chief among them: U.K. inflation remains close to 9%, well above “rich nation” club members.
That, in turn, pushed up bond prices because bond investors—crazy as this sounds—want returns commensurate with the risks they take. And, yes, even supposedly safe government paper is a risk.
Yields on 10-year British debt are now above 4.4%… pushing up against the 4.498% they hit during the height of last fall’s “Lettuce Crisis.”
But here’s the bigger problem, and where our cautionary tale for America begins: Higher borrowing costs are making it increasingly difficult for the British government to service all the King’s debt.
How Higher Interest Rates Will Hurt the U.S.
The U.K.’s Debt Management Office, which manages public-sector funds, has been tasked with selling almost £240 billion ($300 billion) worth of debt this year. That’s the largest sum the U.K. has ever had to sell, excluding the pandemic. Apparently, traditional bond-buyers are increasingly balking.
In basic terms, the U.K. has to sell more debt to afford the impact of rising interest rates. Yet bond jockeys are wringing their hands and not buying bonds they’d otherwise buy. And those who are buying are demanding higher interest rates, an indication they see risks rising for U.K. debt.
Of course, the U.K. is a small economy relative to the U.S., so the pain is felt quicker.
But size is just a number.
Sooner or later what kills the mouse, kills the elephant—it just takes more poison.
That larger dose is already apparent in America.
Earlier this year, the U.S. Treasury Department reported paying out $213 billion in interest payments on Uncle Sam’s debt in the final quarter of 2022. That was a record.
A year earlier, in the fourth quarter of 2021, Treasury paid out just $63 billion.
The problem will worsen, of course, because:
- Interest rates are even higher today than they were last fall.
- America has even more debt than it did last fall.
- Older debt that’s coming due carries much lower interest rates and will be refinanced at today’s higher interest rates.
These vastly larger interest payments inflicted upon America are a direct result of Federal Reserve jealousy.
Why Gold Is Destined To Boom
Today’s Fed looks back at the 1970s and lusts for the success that then-Fed Chair Paul Volcker had in defeating rampant inflation of the day. Volcker crushed inflation by jacking interest rates to more than 20%, well above the rate of inflation.
But as I’ve noted many times, today’s heavily indebted America is not 1970s America, and today’s inflation is very much different from the 1970s. So, the ancient prescription of raising rates to the moon is not working as intended.
It is, however, costing America a boatload of added interest costs, which could very well lead us to our own British Moment—when bond buyers begin to worry that the U.S. is on an unsustainable path… that high interest rates are going to birth a monetary crisis centered on the dollar and America’s much-too-mountainous pile of debt.
In which case, my use of Jim Morrison’s lyrics brings us full circle.
This the end, my friend, of our elaborate plans… to jack up interest rates so high and so fast that we quash inflation over which we have limited control. Those plans are not working so well on inflation, but they are doing a number on America’s debt-repayment costs.
If we reach a tipping point when global bond buyers recoil, we’re going to have one helluva global crisis on our hands.
And if that happens, I’ll be stealing the final lyrics from the theme song to James Bond’s Goldfinger:
He loves only gold.
Only gold.
He loves gold.