Britain is in the eye of the financial storm Investors are losing confidence

John Rapley

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Amid weak growth and a worsening budget outlook, British gilt yields are now higher than they have been in nearly 30 years, rising steadily for months and nearly 1% since last year. With national debt of nearly £3 trillion, every percentage point increase in interest drains billions from the government’s budget. Nor is there much hope this will change anytime soon.

Britain’s inflation is proving even harder to dislodge than that of other developed economies, adding a premium to its bonds. To a greater extent than other countries, too, it depends on external creditors for its lending — with 30% of gilts held abroad compared to an average of 18% for other Western countries. Surprisingly, though, investors seem to trust the Chancellor, Rachel Reeves, to keep the books in balance. When there was a hint she might be fired in the spring, the brief bond rebellion showed that investors don’t want her replaced. But they seem to have less faith that she will succeed in getting the economy going again, as evidenced by the fact yields keep rising nonetheless. This means that, as Britain continues to face upward pressure on interest costs, investors are looking to park their money elsewhere.

That certainly seems to be the signal we’re getting from the gold market, where the surging price shows the money is rushing into the one port that, throughout history, has been the safest in a storm. Priced in dollars, gold is up nearly 40% since the start of the year, its surge driven in large measure by central banks shifting out of dollar-based assets as they anticipate a debasement of the US currency.

The chickens of two decades of cheap money are coming home to roost. The World Bank estimates that, over the past 15 years, the global economy has expanded about 67%. At the same time, the world money supply has risen by more than double that, some 145% and rising, at last count. Most of that rise, in turn, was driven by a handful of big central banks — the US Federal Reserve, the European Central Bank, the People’s Bank of China and the Bank of Japan — and the ultra-loose monetary policies which were rolled out following the 2008 financial crisis.