This week’s G20 finance ministers’ meeting in Asheville ended amid unusually bitter divisions. Behind the arguments over China, tariffs, Iran and Russia lurked another problem which affects every country represented around the table: the world’s bond markets are in turmoil.

The practicality of funding the business of governments is an excellent demonstration of the interconnectability of the world. The fact is that no matter how high a tariff wall is built, the bond holders will find a way to scale it and their demands are based on global conditions.

At the moment, the global bond market is in tumult. This is simply because governments have borrowed too much money.  Inflation has proved harder to kill than expected, and investors are now demanding a much higher price for lending.

A bond is basically an IOU. A government borrows, say, $100 for ten years and promises to pay interest. If investors suddenly decide that inflation will remain high, that government debt is getting too large, or that the government may pursue reckless policies, they become less willing to hold that IOU. They sell the bond. When bond prices fall, bond yields rise. The yield is effectively the interest rate governments have to offer to persuade investors to lend to them.

That is what is happening now. US 10-year Treasury yields have climbed towards 4.8 per cent; UK gilt yields have moved above 5 per cent; Japan’s 10-year government bond yield has reached around 3 per cent, its highest level in roughly 30 years.

What is causing it? Global inflation is at the top of the list. Bondholders hate inflation because they are promised fixed sums of money in the future. If prices rise faster than expected than those future payments buy less.

The Iran War is probably the biggest concern as far as inflation is concerned. It has reduced the flow of oil from the Gulf which has in turn pushed energy prices to staggering levels. Energy is the basic building block of modern life.

Next, is that governments have borrowed too much. In the immediate aftermath of the 2008 banking  crisis interest rates dropped precipitously. Borrowed money was cheap so governments borrowed heavily. At one stage, interest rates in Japan dropped below zero percent. That meant that investors were effectively paying the Japanese government for the privilege of lending it money.

What governments failed to consider was that in the bond market, what goes down eventually goes back up. Increased interest rates means it costs more to service a government’s debt. Governments are forced to either raise taxes, and or cut spending to pay the extra interest.  Pile on top of that the cost of covid, maintenance of the welfare state, more defence spending and bondholders begin to question the ability of governments to honour their bond commitments and start asking for more money. This in turn only increases the dangerous debt levels.

Then there is Artificial Intelligence. The AI boom is sucking extraordinary amounts of investment into the United States. Technology companies are borrowing heavily to finance data centres, chips and electricity generation. That matters to governments because there is only so much money in the global savings pot. Every billion lent to an AI project is a billion which cannot simultaneously be lent to a government. Governments therefore must compete harder for investors’ money — and one way of doing that is to offer higher interest rates.

The AI boom is one of the main reasons the American economy is doing so well at the expense of the rest of the world. It is also why US Treasury Secretary was attacked in Asheville, North Carolina this week. It is also a reason for concern in the bond markets. The continued success of the US economy depends on growth to pay its $40.1 trillion debt. At the moment that growth is fuelled not by profits, but by international investors pouring trillions of dollars into Silicon Valley on the promise of future huge profits. If AI does not soon fulfil that promise and produce profits, the financial bubble it has created will burst. If that happens the US economy will suffer.

The other G20 countries are already suffering because there is only so much cash in the global savings pot. A big chunk going to AI means that there is less for governments to borrow. Supply and demand push up the cost of borrowing that money.  Politicians suddenly lose room for manoeuvre. A finance minister can announce ambitious spending programmes, but if the bond market responds by demanding another half-point of interest, those plans can become prohibitively expensive.

For world leaders—especially the leaders of “Middle-ranking” countries such as Britain, Canada and France—the results are frustrating because the bond markets are tied into a global network over which they have little control.

Globalisation is normally discussed in terms of trade, migration and supply chains. But the bond markets are the circulatory system of the world economy. Money flows across frontiers almost instantaneously, carrying the financial consequences of war, inflation and political decisions with it. Governments may control their borders. They do not control the price at which the rest of the world is prepared to lend them money. And without money, governments cannot do very much at all.

* Tom Arms is foreign editor of Liberal Democrat Voice. He also contributes to “The New World” magazine and lectures on world affairs. He is the author of “America Made in Britain,” two editions of “The Encyclopaedia of the Cold War” and “The Falklands Crisis.”