00:00We start with the drama that is politics in the United Kingdom, as the fifth prime minister in
00:04eight years is fighting to avoid yet another turnover at number 10. And the markets are
00:10keeping score. How much say does the guilt market have in who gets to run the country?
00:15John Authors is Bloomberg's senior editor for markets.
00:20So, John, there's a lot of political upheaval drama playing out in the United Kingdom right
00:24now. At the same time, bonds are selling off gilts. Yes. The yields have gone up. Is there a connection
00:31between the two and if so, what? Yes, there's certainly a connection, which is that Britain has even more
00:38than where we are here in the U.S. The rest of the Western world, it has a fiscal problem.
00:42We don't have
00:43much headroom left to spend money in the U.K. Any sign of concern about political instability will in its
00:53own
00:53right worry bond markets. And specifically at the moment, because Keir Starmer is in a lot of
00:59political trouble, any challenger, even those who you could argue are to his political right, will want
01:05to do something to show they've made a difference once they take over from him. And that's going to
01:11involve spending some more money on something that's going to involve being more lenient on fiscal policy
01:16than Labour has been so far. So plainly, the risks are towards more fiscal spending. That's plainly
01:25something the gilts market dislikes. There's a long history of friction between a Labour government
01:34that has its origins in socialism and the unions and bond markets, naturally.
01:42There is also a more recent history between the Conservative government and the bond market.
01:46Yes. Read Liz Truss. We remember that. But one of the things you pointed out in one of your columns
01:50is actually the yields on gilts right now are above where they got to under Liz Truss.
01:56Exactly. I mean, there are, to be fair to the current Labour government, there are reasons for that
02:00in that interest rates have risen across the world since then. And what really can endanger a financial
02:07accident is when yields rise very fast, which is absolutely what's happened under Liz Truss.
02:13She took the market by surprise and thereby slipped on a banana skin, whereas what we've got at the moment
02:20is more of a slow motion car wreck with Labour. But yes, the ultimate fact is true. The higher the
02:29yields go,
02:29and they are now even higher than when they toppled Liz Truss, the less room for manoeuvre any government has.
02:39And to some extent, this is a systemic problem for the UK because, as we've just said,
02:45that Liz Truss was and is Conservative. This is universal across the parties, a certain
02:52lack of trust. And the British two-party system is breaking down at present. And both Greens,
03:00who are basically a British woman of the AOC, Bernie Sanders left, and the reform party under Nigel
03:07Farage, who are obviously very similar to the Donald Trump margot right. Both of those are, on the face of
03:14it, more inclined to splash money around and do things that the bond market really dislikes than the
03:19incumbents. There's a very worrying dynamic about the entire British political situation. Or at least
03:26it's very worrying if you're a, if you're a guilt investor. We know from your column that you are
03:32a student of popular music. And I don't know if you remember the Aretha Franklin song, Who's Zoom and
03:37Whom? Yes, that's 1985. I remember that. That was actually my first time in America. But anyway, carry on.
03:44But if you take the bond market, the guilt market on the one hand, and the political system on the
03:48other, who's Zoom and who? I mean, you've explained how the, the political turmoil can affect the
03:52guilt market. Is the guilt market affecting what's going on in politics as well?
03:56At the moment, I mean, certainly in the Liz Truss incident, yes. That was very much the case that
04:02it was the bond market that basically said, no, you can't do this. And forced the, the expulsion of
04:07first the chancellor and then the prime minister herself. This time around, that's less clear. You could
04:15certainly say that at this point, the bond market has become a kind of a sheet anchor or a straight
04:22jacket for whoever is in charge. But it will be more uncomfortable for a, you know, a party of the
04:28left that actually has fewer hangups about spending taxpayers money. But, you know, the overall, the
04:35overall position is, is difficult either way. The other thing that's quite interesting compared to
04:41history is that it used to be, uh, the currency market. So Harold Wilson have been forced to devalue
04:50in the pound and then going on television to say that the, the pound in your pocket, of course,
04:56isn't worth any less, which absolutely wasn't true. And then Labour government of the seventies being
05:01forced by a run on the pounds to, to, to, to go to borrow from the IMF. And John Major's
05:08government
05:08basically never recovered from, uh, the Black Wednesday attack on sterling by George Soros and
05:13others. So it used to be the currency market that's really inflicted pain. Uh, and now that currencies do
05:22tend to float more gradually, more, more, more easily. And now that we've had many years of being used to
05:30extremely low bond yields, that, you know, cheap money is being treated as a fact of life or a
05:36birthright almost, it's the bond market that has now taken over as the anchor, the great limitation.
05:42The United Kingdom has a, uh, historically high ratio of debt to GDP. Yes. But they're not alone in
05:47that. No. They may be a little bit more than some of the rest of us, maybe a little less
05:50than some as
05:51well. Uh, is what we're seeing in the UK simply what's going to happen in other parts of the world,
05:56including the United States, just sooner? Yes. There's a reason that the UK has more of a problem,
06:02uh, or more of an instant problem, uh, which you can explain easily enough from geography and history.
06:07The UK is an island which got rich by trading with other people. The US is basically a continent
06:13that got rich by trading with itself. So exports have always been a much more important part of the, uh,
06:21the UK equation. When you have, uh, pressure on the currency, when you have inflation elsewhere,
06:27it will affect the UK much, much more swiftly, much more dramatically. It has, it is much more
06:33dependent on the generosity of others than, than the States. That said, um, America's share of GDP,
06:43the debt, public debt as a share of GDP was in round numbers 20 years ago before the global financial
06:49crisis, 60%, uh, uh, cause, you know, occasioning great alarm, the Simpson bowls. If you remember
06:57that attempts to cut the deficit, it's now 120. Um, and whatever you think of, um, the, the relative
07:06merits of Joe Biden and Donald Trump, both of them spent money, whether through tax cuts or, uh, fiscal
07:15largesse or both in a way that suggested that, that this just wasn't an issue. Uh, it will become an
07:22issue
07:22at a time. Uh, the US is a, is a bigger, more closed economy than the UK. It can, and
07:30it has the
07:31exorbitant privilege of, of the dollar. It doesn't, it's not as, it's not disciplined by, uh, by potential runs
07:38on the currency like the UK is, but ultimately if you're borrowing more than you have and
07:49can't generate the money to repay it, you're either going to get very bad inflation or you're
07:54going to go bust. You're not going to go bust. You're going to get very bad inflation. And that,
07:57that is ultimately the risk that afflicts this country too. Uh, you were a, a young lad, a young
08:04boy, uh, during the Wilson time. Yes. And the crisis when there was really high inflation in the UK.
08:11And the, as you say, the pound was devaluing. Uh, and I think some would say that was a, a
08:17predicate
08:18for what happened with Margaret Thatcher and a fundamental revision of the economy. Is there
08:22any prospect that could happen again in the UK? Could we have a new Thatcher? The, we certainly
08:29can't see her yet. Although that being said, uh, if you think back to 75, 76, uh, Margaret Thatcher
08:35get, wins the leadership of the Conservative Party in 75, uh, doesn't actually get the, the general
08:40election where she becomes prime minister until 79. Um, she certainly didn't seem to be quite the
08:47radical departure that she would turn out to be, uh, in 75. So maybe there is somebody out there
08:53who is hiding in plain sight already. I think the points I would make about
08:59the, uh, Thatcher regime. I, uh, I'm, I was 12 when she got in, 24 when she left. I'm,
09:04my generation of Brits still basically thinks she's running the world. And you could also argue
09:08there's an analogue to that in the States, which didn't get into anything like as much trouble
09:13in the seventies as Britain did, but did get into a lot of trouble. Paul Volcker is the key figure
09:18who
09:18changes America around. He is appointed by Jimmy Carter. As was Alfred Kahn. Yes.
09:24Deregulation. Yes. And, um, um, would American, the American economy have boomed the way it did
09:31in the eighties if you hadn't then had Ronald Reagan who really believed this stuff, who was a
09:35really enthusiastic advocate for it? Almost certainly not. But it was much easier for him
09:41to do what he did because he actually had the building blocks in place. Again, the, the, the
09:46ancien regime had accepted that the game was up and shifted before you then had the really exciting,
09:55um, you know, free market politician factor or Reagan, uh, to take things forward. So I think the key
10:03moment is when is the game up? When does the market, does the economy force a change? It's conceivable
10:13it could happen here that, that Donald Trump grasps that you just need to actually start cutting
10:21entitlements and, uh, cutting back on defense budgets or whatever. But I think it's more likely
10:28that circumstances force a change from the ancien regime and that's the critical change rather than
10:36that voters elect in the person who will make the change.
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