The Podcast of the Lotus Eaters - PREVIEW： Brokenomics ｜ UK Bond Crisis

00:00:00.320 Hello and welcome to Brokenomics. Now in this episode I thought I'd talk about something

00:00:04.640 which is quite topical. Things have been blowing up this week in the UK. It would be nice wouldn't

00:00:10.640 it if we could have some decent competent governments in the UK and we certainly haven't

00:00:15.840 had that for very many years and we definitely, most definitely don't have it now. Now I was,

00:00:22.640 as we all were at the Lotus Eaters, rather keen to get rid of the Tories at the last election

00:00:26.160 because they had betrayed us on so many fronts. The massive levels of taxation, the astonishingly

00:00:32.880 huge amount of mass immigration which they, and I'm not talking about the people on the boats,

00:00:38.800 that small fry, I'm talking about the legal migration they just shipped people in with no 0.58

00:00:43.360 particular skills to put them on welfare. An astonishing betrayal and the taxes and the

00:00:49.600 Covid, they did have to go. But we were certainly under no illusions that Labour would be any better

00:00:58.800 and they are demonstrating that quite ably at the moment by taking the low standards that the

00:01:06.000 Tories left for them and managing to be significantly worse than them. Now spending has been far too high

00:01:13.360 for far too long. I told this story on the podcast last week but prior to Covid I was looking at the

00:01:23.280 financial situation and I wasn't a podcaster or anything at that time, I was just a general chap

00:01:28.000 on the street who knew a little bit about this stuff and I was thinking they've got to get a handle on

00:01:35.200 this soon. Because basically things weren't necessarily that great before 2008 but after 2008,

00:01:42.960 great financial crisis everything began to spiral and get significantly worse. We had David Cameron

00:01:49.200 come in not too long after that and he was talking about doing austerity, cutting public sector spending

00:01:56.640 and contrary to the hype, they never did it. And I remember having this argument with a new government

00:02:07.040 minister that I knew and I was saying, you appreciate but they're not actually cutting any government

00:02:11.840 spending. And he was like, I don't know what you're talking about. I'm having to make cuts all the time

00:02:16.160 in my department. I said, no, no, what's happening is the actual amount of spending is going up.

00:02:22.160 It's simply going up slightly less than the rate of inflation which means that you're having to

00:02:27.520 re-prioritise within your department. And he didn't believe me and we went over to the House

00:02:32.560 of Commons library and dug out a copy of the budget and he was shocked to discover that yes, in fact,

00:02:38.320 government spending never ceased going up. It was just going up by a little bit less

00:02:43.840 when they planned it to, which is described as a cut in our system. So, you know, David Cameron's

00:02:50.960 government, they never cut. Theresa May, you know, got bogged down in trying to get out of Europe, 1.00

00:02:58.240 which she clearly didn't want to and ended up committing us to vast sums going to them when we 0.98

00:03:03.200 could have re-chartered a new course. Boris Johnson was a epic disaster. I mean, certainly our last,

00:03:11.840 our worst prime minister in the last 50 years with the mass immigration and the COVID and, 1.00

00:03:16.480 you know, he's up against some tough competition for that. He had no clue when it came to spending

00:03:22.640 or anything like that. Liz Trust was probably the best of the bunch and we get into some comparisons

00:03:29.840 of her against, because a lot of people are comparing this current UK situation to what she did.

00:03:35.680 There are some comparisons that are worth making on that front, and we will cover that. And then

00:03:42.000 Rishi Sunak, who was just, maybe he was okay on the finances, difficult to tell. He wasn't in for that

00:03:46.880 long, but he was certainly politically in net and, you know, he had to go. But since we've had Labour,

00:03:54.480 they've behaved in a way that is so completely disconnected from reality. At least with the Tories,

00:04:01.680 they did the wrong thing reasonably competently. Whereas Labour are doing the wrong thing

00:04:10.240 incompetently. And I mean, I'll give you an example. I mean, essentially what it is,

00:04:14.880 now I'll explain exactly what it is. Exactly what it is, is Labour have been looking at the way the US

00:04:22.080 operates. They looked at the way the Biden government was, with its big deficits, so spending more than it

00:04:29.760 earns and its big social programmes. And Labour thought, well, if Joe Biden can do it, we can do it too.

00:04:38.480 And what they are discovering is that the UK cannot do what the US does. And the simple reason for that

00:04:45.040 is that the US has the dollar. And the dollar is the global reserve currency, meaning that people

00:04:52.160 always need dollars, they always want dollars to settle international trade, make international

00:04:59.520 investments, buy oil, that kind of stuff. So when Janet Yellen, their version of our Chancellor, more or 0.84

00:05:08.720 less, when she gets a bit ambitious and spends too much, she can just get in touch with Jerome Powell

00:05:18.640 at the Fed and say, look, I've got a problem on my screen, can you fix it on one of your screens?

00:05:24.480 And he could just magic up some extra dollars. And people will want those dollars because people

00:05:31.520 want dollars for the reasons that, you know, we've already got into that international demand,

00:05:36.720 global currency reserve. The UK cannot, cannot do that. I mean, yes, foreign nations and corporations

00:05:44.640 will hold a certain amount of pounds, but there's nowhere near the demand that there is for dollars.

00:05:48.800 And if you run Biden level insanity without the dollar backing you up, you're going to get called

00:05:56.560 out significantly sooner. And that's essentially what's happened. So over the past week, at the

00:06:01.280 point of recording, UK bonds of bond rates have risen to their highest level in 26 years. And you have

00:06:08.880 to go back to the Asian financial crisis to find a time when bond rates were higher than they are now.

00:06:14.080 Quick point on this. It gets a little bit confusing with bond rates. When I say bond rates have gone up,

00:06:19.040 what we mean by that is that the price of the bonds themselves has fallen. So basic economics,

00:06:25.680 things that people want to go up in price and things that people don't want tend to fall in price

00:06:31.520 because there's no demand for them. With bonds, they also pay out an annual coupon. So the price of the

00:06:36.880 actual thing is falling, then the yield on it is going up. If I'm a UK government and I'm issuing a

00:06:45.520 hundred pound bond and it pays a five pound coupon a year, the price of the bond goes up to 110 pounds

00:06:56.560 because everybody wants to buy my bonds, not the situation we're in. But if price goes up to 110,

00:07:02.480 then my yield that I'm having to pay out, I'm getting 110 pounds in and only having to pay out

00:07:10.080 five pounds. So my yield has gone down to about four and a half percent. But if it goes the other way,

00:07:15.600 if nobody wants my bonds and I can only sell them for 90 pounds per five pounds a coupon,

00:07:23.680 well now my rate, my yield on this has gone up to 5.5 percent. So yields going up is bad

00:07:30.960 and we tend to talk about bonds in those terms, which can be a little bit confusing because you

00:07:34.400 might think, okay, bonds going up, that's a good thing. No, it's not. It's the rates that we're

00:07:38.400 talking about that are going up. So to map this out, what happened is last Tuesday,

00:07:43.280 so that should be two weeks before you watch this because I tend to record these a week in advance.

00:07:48.640 And you can tell me in the comments if things got significantly worse in the week between

00:07:56.000 recording and this going out. I don't think it will. Actually, I think what's going to happen

00:07:59.840 is this situation is bad, but it's not acutely bad enough to blow up immediately. It's bad enough

00:08:05.920 to make us poorer and it's bad enough for the train to stay on the track. What you kind of want is

00:08:12.320 is something else. You either want the situation to improve or to get bad so quickly that the

00:08:16.480 government is forced to capitulate or be thrown out. And if it does capitulate but it manages to

00:08:22.640 stay in, then it slashes spending across the board, all that kind of stuff. And that's probably not

00:08:27.280 going to be the situation. So I don't feel too bad about recording this a little bit in advance.

00:08:31.200 But two weeks ago, from your point of view, what happened is the government issued

00:08:34.560 30-year debt, 30-year bonds. And it did that at a rate of about 5.2%, which is already very high

00:08:49.120 because there had been that slow loss in confidence of the Labour government throughout their term.

00:08:55.440 And in the days following, you saw it go up the first 20, then 30 basis points, which is 0.3%.

00:09:06.320 And you might think, okay, well, that's not necessarily a huge amount. Actually,

00:09:09.040 yeah, for bonds it is. That is a large amount. For every percentage point that UK bonds go up,

00:09:17.360 it costs the UK government about 30 billion over the course of the whole duration of the debt.

00:09:24.640 So borrowing costs have soared. Comparisons to the Liz Trust Mini budget, which I will come back to,

00:09:32.080 have abounded. But this is a serious loss of confidence in the UK. And that's why it's worth

00:09:37.440 covering. Because it's not just that people are saying, no, I don't want to buy those government

00:09:42.560 bonds and therefore the rates have risen. It is more than that. It is a wholesale rejection

00:09:48.320 of investing in Britain. And you can see that because the pound has also fallen. And normally

00:09:53.440 it doesn't work like that. Normally, if the UK government guilts are bonds, we call them guilts

00:09:59.040 for whatever reason, government, UK government bonds get called guilts. Normally, if a government's

00:10:04.400 bonds, the rate of them going up, well, that makes those bonds more attractive to investors,

00:10:09.840 because, of course, you can get a higher rate of them. And so what should happen in that situation

00:10:14.720 is that money flows into the UK, the pound goes up, and that compensates for it. And then some of

00:10:22.000 those bonds get bought at the higher rate. But what's actually happening is that people are just

00:10:25.840 saying, no, I want no part of the UK. I don't want the bonds, but also I don't want any of the other

00:10:30.400 assets, mainly stocks, but whatever commodities we still produce, whatever assets that we might have,

00:10:40.320 the world is basically saying, oh, I'm done with the UK. I want to get out of there. And that makes

00:10:45.360 it alarming. It means that the UK is running out of road. And the government, even though they've only

00:10:54.640 been in office for a few months, they've completely fouled up on the response to the Southport murders.

00:11:03.040 They made a complete mess of the grooming gangs scandal. They've also, they're running us into

00:11:09.200 the financial ground. I'll get into more detail on all of those. But yeah, it's not good. A lot of criticism

00:11:15.920 has come down on Rachel Reeves. A lot of us derisively call her Rachel from the Counts,

00:11:23.760 because that's basically the calibre of the woman. She should be a low-level functionary. 1.00

00:11:30.080 She should not be Chancellor of the UK. Her budget, which is where this all really kicked off in October,

00:11:40.320 she went after employment taxes. So she'd said before the election that she wasn't going to raise

00:11:46.800 taxes on employment. She immediately did. Only thing is that the way she did it was by raising 0.99

00:11:54.880 employers tax on employing people, which doesn't directly hit the employees on day one.

00:12:04.880 So they thought they were being very clever because nobody would see the tax line in their payslip

00:12:11.760 go up. But because it's more costly to employ people, basically she just robbed them of their 1.00

00:12:17.680 next pay rise. Or she made it more likely that they're going to be replaced by AI or automation 0.99

00:12:23.360 or something like that. I'll come back to the response that this is having in the industry,

00:12:28.640 but basically people are not hiring anymore. She left the last budget with a financial headroom,

00:12:35.040 as they call it, of about £10 billion. Which is not much for a country the size of the UK to have

00:12:40.080 a £10 billion headroom in your budget. But all of that has almost certainly gone at this point.

00:12:47.600 She probably has no headroom. What she does is going to be £1 billion. Now that's an issue because

00:12:52.240 you do actually have your day-to-day expenses. You've got a large workforce working for the government

00:12:59.120 that needs to be paid and other contracts that need to be serviced, other cash flows that need

00:13:04.320 to go out. So either you're going to have to pay these much higher bond rates and they're still

00:13:09.120 climbing day by day, or you need to bring in some emergency cuts, or you find another route

00:13:15.600 and you just sort of magic the money out of the air. I'm not going to spoil it, but you can probably

00:13:20.320 guess that's more or less what she's going to do. Rachel herself is, as we talked about,

00:13:27.120 incompetence. It doesn't necessarily mean that she's not the best qualified of the people that

00:13:33.840 could have been picked, because of course she can only pick from Labour MPs. But she is incompetent. 0.98

00:13:39.520 She lied on her CV about her background. She put herself forward as a trained economist who served 0.98

00:13:49.920 that function in the Bank of England and private industry, and that simply isn't true. She was a low

00:13:56.160 level functionary at the Bank of England. She managed complaints for a bank and they eventually sacked 1.00

00:14:03.440 her because she was basically skiving off work all the time to do Labour Party activism. So they got rid 0.97

00:14:10.800 of her. She plagiarised for a book. She's had her credit cards suspended. So it's disappointing really,

00:14:20.080 because you like to go through life thinking that the people in government are at least as competent

00:14:27.200 as you are, preferably significantly more competent. If they've risen to such a great office and we've got

00:14:35.760 somebody here, and I'm not bragging, I could easily do a better job than Rachel Reeves. Not even close.

00:14:43.120 I could easily do a better job than her. So she got into this pickle. Her response was, instead of,

00:14:49.920 okay, spending is out of control, we're going to rein it in. We're not going to have all of these

00:14:56.320 immigrants, because 60% of London social housing is occupied by people who weren't born here. We just ship 1.00

00:15:03.280 people in, put them in housing and give them benefits. It's enormously expensive. We can't afford it.

00:15:11.200 Some of the other welfare changes that she made, I mean, on day one, they came in and gave huge pay rises 1.00

00:15:17.680 to the workers in the NHS. You know, we can't afford the existing NHS bill, let alone, you know, these

00:15:24.400 additional wages. But they felt they had to do it because the NHS is an unworkable model and too many people

00:15:31.120 were leaving to, you know, doctors would commonly go and work in Australia instead where they can earn

00:15:35.280 more. That's because the underlying model is wrong. But anyway, so they didn't want to cut taxes.

00:15:42.640 Sorry, they didn't want to cut spending. And so her solution over the weekend was, okay, well,

00:15:50.160 people, we've taxed them to limit. What are we going to do? And her solution was,

00:15:56.960 well, we're going to put a tax on hotels. And the logic here is because nobody can afford to go abroad

00:16:02.560 anymore for their holiday and people having holidays in the UK, well, we just tax hotels in the UK and

00:16:11.120 that will give us some extra tax. So you can't even afford to do that anymore. And the market response

00:16:16.160 on Monday morning open was, again, yields up, sterling down. So she basically has no good choices from her

00:16:25.920 point of view. I mean, from my point of view, it'd be very easy because I think that cutting

00:16:31.040 from UK government spending is a very target rich environment. It'd be very easy to do.

00:16:35.920 But these people are ideologically possessed that state spending is good and all of it is

00:16:41.120 necessary. And so she feels trapped. She feels that there's nothing that we can do. And again,

00:16:45.440 I'm going to spoil it, my conclusion, but they're just going to have to print money,

00:16:49.440 which is dangerous considering the inflationary environment that we're in.

00:16:54.000 So you'll probably be hearing in the news, especially if you're in the UK,

00:16:57.360 that bond vigilantes are back. They're trying to make it sound like it's just this speculative attack

00:17:04.640 on poor old Rachel from the Counts. First female chancellor, therefore she must be good. 0.90

00:17:15.280 Awful bond vigilantes. The problem is it's not just a global phenomena. It's not just something

00:17:22.080 that's happening. Yes, yields are rising around the world because basically the Western world all has

00:17:28.000 this problem where they spend more than they earn and they don't want to get a grip to it. They don't

00:17:32.160 want to change the social model. They don't want to change the model of government. So they've all

00:17:38.160 had this. But if it was purely a global situation and not a particular UK situation, you wouldn't be

00:17:45.120 seeing the UK getting to its highest relative rates against any sort of chosen comparable. Now,

00:17:53.440 you wouldn't be seeing UK rates at their highest since 1998, the Asian financial crisis,

00:18:00.000 if it was purely global. This is a particular sickness within the UK. It is a particular

00:18:06.240 effect of labour policy. And you've got to remember that these rising yields, they don't

00:18:13.120 just affect government borrowing costs. I've already talked about the extra billions that the UK

00:18:20.000 government is spending, but it trickles into corporate costs, again affecting growth and employment,

00:18:27.120 and it trickles into UK mortgages. So if you've got a UK mortgage, certainly for a while,

00:18:35.440 unless they come back with some big monetary response, your mortgage costs are going to go up.

00:18:40.960 You're going to be a lot of people in the UK whose mortgages will go up by £500 a month. In an

00:18:46.000 environment where business isn't growing because business growth has been choked off, where they're not

00:18:51.680 getting their pay rises, where inflation is pushing up their bill. And on top of that, their mortgage

00:18:56.880 could be going up £500 a month or more. So what a complete mess. So they're trading at their highest

00:19:07.280 level for 26 years. It's seriously bad news for the UK because their entire plan is that we are going

00:19:16.240 to borrow more money from the bond market to pay for all this state spending that we feel that we need.

00:19:22.160 And actually taxes has topped out as well. You look at UK tax take as a percentage of

00:19:28.400 national income. It never gets above about the mid-30s. Whole combinations of different governments

00:19:34.720 and tax rates have been tried in the post-war period. None of them ever get above the mid-30s

00:19:42.560 as a total proportion of tax taken. And we are at the upper limit now. If you try and tax beyond this

00:19:50.960 point, what people do is they just think sod it. I'll work less hours or I'll leave the country.

00:19:58.000 Huge numbers of wealthy Brits have been leaving the country because they just don't see any point in

00:20:02.720 continuing anymore. So more of them will go. And again, you can keep turning up those taxes. You'll

00:20:08.880 just increase the rate at which people leave. Or you increase the rate at which people think,

00:20:13.920 you know, whatever, I'll just make do with less. I won't buy a new car. I won't do this. I won't go

00:20:19.600 on holiday because my hotel was being taxed now, even in the UK. So I'll just cut back on all those

00:20:26.160 things that I otherwise would have done. Growth is dropping. And I'll just work less. I won't take

00:20:31.920 that extra shift. You know, I won't take that promotion, which is a little bit more money,

00:20:37.120 but a lot more headache. You know, I'll just stop out of this process. And there's almost certainly

00:20:42.480 the level that we are now. Quick define on our terms. GILTS, basically just UK government bonds.

00:20:50.400 It's a government IOU to the government. They sell them to investors. Investors give them money.

00:20:59.440 They use that money to spend more than they earn. The yield or the coupon is the price that the

00:21:05.600 government pays out every year on that. And that's a fixed amount, which is why the price of it

00:21:11.360 moves around. And bond vigilante is somebody who is, it's one of those sort of made up terms that they

00:21:18.160 use in the media, somebody who will attack governments. It's not really true. What's really

00:21:22.960 happening there is that there are people who are looking for things that gives them a return.

00:21:30.240 And if the deal is unattractive, they simply walk away from that deal. Bond vigilante is not a term I

00:21:34.480 like at all, but you see it a lot in the media. What's the big picture? How do we get here?

00:21:41.280 So think back to the pre-2008 era, because 2008 was a pivotal moment in this. You go back to the mid 70s,

00:21:51.680 government debt was about 50 billion. By 2008, that had gone up tenfold. It was about 550 billion,

00:21:59.280 11 fold. Now that was high. That looked like we had a bit of a problem then, but it was nothing

00:22:05.360 compared to what comes next. After 2008, that 550 billion goes to 1.8 trillion, a massive increase.

00:22:16.800 2008 was a real milestone. I often say that the great reset has already happened. It happened in 2008.

00:22:29.200 So debt spiralled up to up to 1.8 trillion. And then in just a few years after that,

00:22:36.880 by 2020, beginning of the COVID era, you got that debt level of 1.8 trillion.

00:22:42.400 Astonishing amount of money. And beyond that, that spiralled up by another trillion on top.

00:22:47.680 So we're now sat just below 3 trillion. And we know where the labor budget is going to take us.

00:22:53.600 It's going to take us to north 3.5 trillion in debt. At just below 3 trillion, that's the level of,

00:23:02.080 that's basically 100% of GDP. So both debt and GDP are at the same level. It doesn't make the

00:23:08.080 maths easier because at that point, it's a simple question. What is growing more? Well, the debt is

00:23:15.520 very easy to work out how much that's growing. It's growing by the rate on the debt. The thing that

00:23:20.640 we've been talking about is growing by the coupon, which is on 30-year debt, now well north of 5.5%.

00:23:28.720 On 10-year debt, it's about 5%. So you know, over here, this thing measured at 100% is growing at 5%.

00:23:37.840 But the economy, what level is that growing up? Because if it's not 5%, then that means this thing

00:23:44.160 is just going to eat the other thing. This thing is going to get smaller while this thing gets smaller. 0.95

00:23:47.840 If the rate that this is going is not beaten by the level that this is growing. And it's not.

00:23:53.280 GDP growth is basically non-existent. It's negligible. If you would like to see the full

00:23:59.040 version of this premium video, please head over to lotuseaters.com and subscribe to gain full access

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The Podcast of the Lotus Eaters - January 21, 2025

PREVIEW： Brokenomics ｜ UK Bond Crisis

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