The ignominiously fast downfall of U.K. Prime Minister Liz Truss is a warning sign for the U.S. and policymakers around the world: Deficits matter again.
Why it matters: Investors who are selling bonds in order to register their disapproval of policy choices are calling the shots on Wall Street and in the global halls of government. And as inflation and debt both soar, the market is much less forgiving of grandiose taxation and spending plans.
- As Axios’ Neil Irwin put it earlier this week, the events in Britain are a sign that the era of the free lunch is over. In the last 15 years, rich countries could enact fiscal stimulus, cut taxes, and massively replace lost income without worrying too much about inflation, or spiking interest rates.
- But with the world drowning in debt, the U.K’s woes strongly suggest investors won’t continue to cut a check for government profligacy.
Driving the news: The Truss government’s aggressive tax-cutting plans roiled bond markets, and the resulting surge in yields wreaked havoc on U.K. pensions. Although that drama was relatively contained to Britain, warning signs for the U.S. are beginning to assert themselves.
- “Liquidity is a privilege, not a right," Bank of America analysts wrote this week in a note warning bond markets are becoming less liquid because of “acute” uncertainty.
- And funding problems in housing finance are amplifying the surge in mortgage rates, Axios' Kate Marino reported.
What they’re saying: “The nearly 14 years of financial repression that allowed politicians to escape the economic consequences of their actions without fear of retribution from the frontier justice of free markets appears to be ending,” Jason De Sena Trennert, Chairman and CEO of Strategas, a research firm, wrote recently.
- “Unfortunately for all concerned, the ‘unconventional monetary policy’ that came to be called quantitative easing is no longer tenable in the face of persistently-high rates of inflation. The bill has come due,” he added.
The bottom line: It’s not just Truss. Governments everywhere — including the U.S. — need to beware.
