One of my main themes is that the western political structure seems unable to wean itself off a policy of fiscal stimulus and largesse.There were the extraordinary spending efforts in the Covid pandemic which you might reasonably think would be followed by some retrenchment. But that has not happened and we have seen the fiscal taps regularly opened again. As I wrote about yesterday even Germany which used to be something of a paragon in fiscal terms is a fiscal stimulus player these days. Another perspective is that whilst many look at the differences in policy between former President Joe Biden and the present incumbent Donald Trump in this area they both have Andrea True Connection on repeat.
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
The UK
Yesterday the Office for Budget Responsibility in y home country joined the fray.
The UK’s public finances are currently in a challenging position relative to history and to other similar countries, with government debt having increased by one of the largest shares of GDP of any advanced economy over the past two decades.
That is a factor in the UK having such persistently elevated bond yields with longer-term ones being above 5%. That has been added to by the present government where Chancellor Rachel Reeves did this in her first Budget as I noted on October 31st 2024.
leaving a further £35bn to be funded through higher borrowing. ( in 2026-27)
Actually there was more than that.
Pledging that the UK would not return to austerity, she announced sharp increases in departmental spending in the near term, with much slower growth further out. ( FT)
The reality is that no one with any real sense believed the reductions later line and so it has turned out as an attempt to reduce the growth of the welfare bill saw a backbench rebellion. Returning to the OBR all it sees are rises in spending over time.
Based on these assumptions, primary (non-interest) spending is projected to rise from 40
per cent of GDP in 2030-31 to 49 per cent by 2075-76 in our baseline scenario
Then we have another factor which it tends to skirt which is that economic growth is not what it was.
Our baseline scenario assumes long-term average productivity growth of 1.4 per cent over the next 50 years which, combined with changes in the workforce,
means growth in both real GDP and real GDP per person are assumed to average around 1½ per cent a year across the long term.
Remember that we are consistently told that fiscal stimulus boosts economic growth.Except that the period of fiscal largesse in recent years has been accompanied by disappointing economic growth. There was a time when the estimate above would be around 1% higher which would make a big difference to forecasts that far ahead.
A factor in poor economic projections is this.
In some areas – such as legislated net zero commitments – there is a clear policy commitment over the long
term, but in many others there is not.
Officially this is a glorious rise in investment leading to lower energy bills. The real world is much less kind as high infrastructure costs for renewables ( another £89 billion only recently) mean that out internationally high electricity costs look set to go even higher and drive industry abroad.
Japan
Even the Japanese owned Financial Times is now facing up to the issues we have been looking at for years.
The surge in Japan’s borrowing costs, investors warn, is putting pressure on its significant sovereign debt, which is equivalent to more than 200 per cent of GDP.
The present government has like so many decided that what is needed is another fiscal boost which in Japanese terms is yet another fiscal boost.
Investors say the policies of Prime Minister Sanae Takaichi — centred on a $2.3tn spending plan spread over 14 years — are stoking the sell-off in long-term debt.
If we hold fire on the bond market issue we see that Abenomics 2.0 just like the original Abenomics requires more spending. If we now switch to economic growth there was a Bank of Japan research paper released at the end of June telling us this.
Looking at the revised potential growth rate , there is a temporary drop during the pandemic due to a
decline in the hours worked trend and potential TFP, but it has risen to around the 0.5 percent range, reflecting improvements in TFP and the accumulation of capital stock
associated with increased investment; on the whole, the development is roughly the same as before the revision. (TFP = Total Factor Productivity)
They have gone rather round the houses here but the theme is even worse than that of the UK because they are estimating economic growth at around 1% lower than even the weak forecast for the UK.
The next issue is that the more you borrow the higher your bond yields thus you end up borrowing even more in the future.
A bruising sell-off in Japanese government bonds this year pushed the country’s benchmark 10-year yield to 2.87 per cent on Wednesday, its highest since 1996…..The country’s 30-year yield has surged above 4 per cent this year, and is hovering close to the record 4.2 per cent intraday high in May.
This is the reason behind the talk and hints of borrowing more on a short-dated basis.
Market concern over long-term risks is reflected in the premium that investors are charging Japan to borrow for 10 years rather than two, which has risen from less than 1 percentage point in April to 1.4 percentage points today.
In terms of a stable debt market that is a simply awful idea as it means that should you enter a period of crisis the problems come around faster and potentially a lot faster.
The rise in bind yields today has been influenced by the restarting of hostilities with Iran. But the problem is that all the borrowing has made countries much vulnerable to this.
The United States
We can look at it via its bond yields.
30yr yield up another 2bps to 5.07%
10yr up 3bps to 4.58% ( Mike Zaccardi)
Where the US is a separate case is that its economic growth and prospects for it have been much better. Should it ever see a period at UK or Japanese levels the situation would immediately look quite a bit worse.
Comment
As you can see the theme continues. Western politicians spend more claiming it will increase economic growth. Then economic growth disappoints and the weaker position for debt metrics leads to higher bond yields and thus higher debt costs now and expected future debt cost. It is a downwards spiral and I have been pointing this out for some time.
“The scenario playing out reflects Japan having built the world’s largest [sovereign] debt pile on the assumption that money would stay free forever,” said Stephen Jones, chief investment officer at Aegon Asset Management.
Of course things look worse today because of the Middle East but the problem is that the trends I have described today make us weaker to economic shocks in an era where such shocks are more common.
Another issue is that western central banks are full of the bonds they bought assuming “money would stay free forever”.