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.”
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9 Comments
Off-topic (sorry).
I’m trying to find the docs and the policy proposals passed from the Young Liberals Summer Conference Manchester 14th – 16th August 2026 this year, and I cannot find it on their website or anywhere else.
Can anyone help?
I’m interested in the precise detail of the policy around AI glasses, which they say lead to the recent mini campaign from the leadership.
On Topic.
This is a good focus, but I think some numbers would be helpful.
In September alone, AIUI, £75 billion of FTSE 100 companies are being taken private by groups such as KKR. That is 3% of the total value of the FTSE 100. There is a structural undervaluation of UK vs US assets, as we have seen before.
Watch out Macclesfield – one of the companies is Bodycote International, who have their world HQ there. I would not be surprised to see it loaded with debt to pay for its own takeover then asset-stripped, over a few years.
Houston, we have a serious problem.
A small contribution we can make is to call for a Temporary Ban on new Data Centres, We can also tell the Truth about The Governments plan to make Britain an “AI Superpower” – its delusional.
AI has done a lot of useful stuff but most of those Data Centres will be devoted to the Profitable production of more Addictive Crap – Electronic Heroin.
Any Money made will be in America or China, if at all.
Still, just over 3 years to go before net zero.
Cheap home grown secure energy – the public wait with anticipation.
“Government bonds are a structural and regulatory NECESSITY for banks, insurance companies and large institutional financial actors” (AIOverview)
“Banks cannot survive without gavernment bonds because under global banking regulations, such as Basel III, banks are legally required to hold a specific ratio of High Quality Liquid Assets (H Q L A) in order to survive liquidity crises,” (From AI Overview)
A prime purpose of “Bond Vigilantes” is to drive bond prices down and yields up irrespective of the consequences for regular, non bond vigilante citizens and their children.
“Economist and historian Michael Hudson argues that Western financial systems use unpayable external debts and domestic debts as tools for political control and rent collection, and modern financial imperialism.” (Same source)
P S In this context “Rent Collection/Rent Seeking” is an economic concept whereby an individual or organisation manipulates the social, political and/or legal environments to increase their wealth rather than by creating new wealth or producing goods and/or services.
“Economic rent is an amount of money that exceeds that which is economically or socially necessary.” (From Investopedia)
Don’t worry Steve , Peter will be along in a bit to explain how it all works.
There is a global crisis of democracy, selfish denialism, runaway capitalism and borrowing.
The liberal – left believe in tackling real-world issues like climate change, peaceful rules-based international collaboration, and cohesive societies.
The Right say to hell with all that, it’s too hard to act responsibly. Deny real-world issues, plan to start and win wars, and act to divide society. Base your winning electoral formula on racial discrimination in favour of target voters, on selfishness, on live now pay later.
The denialists are winning.
When the Berlin Wall fell, everyone thought that capitalist democracy had rightly triumphed over a manifestly inferior central command ideology. A generation later, runaway capitalism has degenerated to the point where its supposed superiority is no longer evident.
Financial manipulation – cryptocurrency and the private equity “borrowing” scam – are key parts of the problem.
The original seed for runaway capitalism was the Government concession to permit limited liability companies. That kickstarted the industrial revolution – but now it underpins predatory private company supremacy and the emasculation of the liberal State. That’s the scale of the problem.
Might David Allen’s most interesting comment support the hypothesis of Robert Dahl that “Western” democracies are not true/pure democracies but are polyarchies/poliarchy democracies?
According to AI Mode and AI Overview, the U.K. is a flawed polyarchy becacause “the financial sector significantly distorts the polyarchy structure of U K governance.” (AI Overview)
P S Some U K political structures such as the House of Lords also distort it.
“If investors suddenly decide that inflation will remain high…… they become less willing to hold that IOU…… When bond prices fall, bond yields rise….. yields have climbed towards 4.8 per cent…….”
All very well, but if the government decides that bond prices are too low they can instruct the BoE to enter the secondary market as a buyer and push the prices up again. They’ve done that several times before before so there is no reason why they can’t do it again now, if they wanted to.
If fair enough to argue that they shouldn’t do that because it will cause the pound to fall. This would have the effect of helping balance trade and because the two deficits (trade and govt budget) are linked, the total debt will decrease too.
If the govt has decided they don’t want to see the pound fall, this is what they should be saying.