And just like that, the era of easy money for governments is over.
At the start of the year, the British government could borrow for 30 years and pay only 0.76% per year [pity the buyer of that bond]. Now Her Majesty’s Treasury must pay 5%.
In a country with double deficits and uncapped energy liabilities, the bill will climb rapidly.
But it’s not about the UK, it’s about the world. What happened in Britain is a message to governments around the world that the era of free money is over. Set aside recovery plans, support or new programs; prepare to repay deficits much faster than expected or risk a UK-like disaster.
It may take more than one country’s example for governments to get the message, but eventually they will.
This means even slower global growth. Central bank rates are one form of stimulus for the economy, but the most powerful is the government stock market. It wasn’t zero rates that saved economies during covid; they were gifts from the government.
Until last week, governments thought they could continue with generous targeted programs in social programs or soften the blow of inflation. It’s time to rethink that.
The blow to the global economy will be measurable and will increase with each day of the bond rout.
We all hoped the era of austerity was over, but it’s back and will be even worse this time.