Macroscope | Hard choices on global growth, fiscal austerity needed now to avoid a new debt crisis

Name: Outgoing UK prime minister Liz Truss joins ranks of shortest-serving world leaders
Uploaded: 2022-10-24T05:30:10.000Z
Duration: 1 min 46 s
Description: Outgoing UK prime minister Liz Truss joins ranks of shortest-serving world leaders

The market’s severe reaction to Britain’s mini-budget shows investors have had enough of never-ending streams of government borrowing and private-sector debt

Delaying fiscal correction exposes the world to a potential doom loop of rising bond yields, spiralling into recession, and risks of a major debt default

Reading Time:3 minutes

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A delivery courier walks past an empty retail unit in Huddersfield, England, on October 21. The Office for National Statistics reported that retail sales fell in Britain in September, with food sales suffering the largest drop. Photo: EPA-EFE

David Brown

Published: 1:30pm, 24 Oct 2022

The world is heading into a new financial crisis unless global policymakers take evasive action soon. Since the 2008 financial crash and the 2020 Covid-19 pandemic, there has been a huge explosion of debt to pay for the crises and help soften the blow to the global economy. The world has ended up bulging at the seams with record levels of debt and left investors stuffed to the gills with bonds when global sentiment is diving.

The 40-year bull market for global debt has collapsed, and it couldn’t have come at a worse time for the UK government trying to stage a go-for-growth fiscal stimulus policy based on too much borrowing. It was a car crash waiting to happen.

The UK government was forced into an embarrassing U-turn, sterling markets crashed and the country’s financial credibility was seriously undermined. It will take years to repair the damage through painful tax increases and spending cuts, which will drag on future growth, but the UK is not alone as a new age of global austerity beckons.

Bond market vigilantes have had enough of never-ending streams of government borrowing and private-sector debt. The scale of the proposed UK fiscal stimulus might have seemed small compared to the huge size of global debt markets, but the speed at which contagion spread into other major bond markets was a disturbing feature and underlined that investor appetite for fixed income has reached a turning point.

Outgoing British Prime Minister Liz Truss’ dash for growth at all costs came apart at the seams as it failed the basic test of market credibility. Unfunded tax cuts and uncontrolled deficit spending, even by governments like the previously fiscally correct UK, will have major consequences for financial markets and global stability. The party is over for excessive, bond-funded spending sprees.

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Outgoing UK prime minister Liz Truss joins ranks of shortest-serving world leaders

The fact that 10-year US Treasury yields surged in reaction to a 14-year high of 4.24 per cent, above pre-2008 crash levels, underlined the event’s severity. Global policymakers and central banks want a gradual return to more normal rates of borrowing, but not in one shock move.

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