ALEX BRUMMER: Biden’s credit spree sends bonds sinking as U.S. debt spirals out of control
When Rachel Reeves made a promotional trip to Washington in May, she made no secret of her admiration for Bidenomics.
The shadow chancellor argued that Labour’s “green prosperity plan” was her party’s equivalent of President Biden’s misnamed Inflation Reduction Act, aimed at luring climate change projects to the US.
Six months later, Biden’s financial largesse is catching up with him.
American bond markets are in turmoil as traders turn their attention back to the extent of U.S. borrowing and debt, while the federal deficit rose 156 percent last year.
It is believed that the extreme privilege that the US enjoys in running the world’s reserve currency made it immune to events such as the Truss tantrum, when the yield on British government bonds soared.
Spend a lot of money: U.S. President Joe Biden’s “Inflation Reduction Act,” erroneously dubbed the “Inflation Reduction Act,” led to a 156% increase in the federal deficit last year
The former prime minister’s efforts to push through unfunded tax cuts and generous spending on energy subsidies led to her ouster from office.
In recent days, American “bond watchdogs,” inactive since the 1990s, have been out in force.
They have been driven to the barricades by the realization that the 20 interest rate hikes orchestrated by the Federal Reserve since the end of 2021 will mean that American borrowing costs are likely to remain high in the coming years.
This could be sustainable if U.S. public finances were in better shape.
Extravagant spending commitments from the White House are causing the deficit and debt to spiral out of control.
Some American banks and analysts were quick to condemn Britain’s political instability as Italy-style prime ministers were replaced in 2022.
Now it is a political outbreak in the US that is in focus. The expulsion of House Speaker Kevin McCarthy after he agreed to a temporary expansion of U.S. debt limits last weekend has led to a stalemate on Capitol Hill as some Republicans want an end to their excessive spending policies.
All this while the 2024 presidential election candidates Biden and Donald Trump are failing at opposite ends of the political spectrum and are seen as deficit deniers.
The U.S. was thought to be protected from bond market fears because China and Japan had no choice but to hold the bulk of U.S. Treasury bonds in their reserves.
That is no longer the case. Japan is largely able to finance itself because its citizens and banks are willing to hold large amounts of local government bonds.
The cooling of diplomatic and economic relations between the US and China means Beijing is unwilling to replenish the several trillion US bonds that have fallen in value. Bond prices are like a seesaw: When prices fall, the yield, or yield, rises.
Biden is responsible for a series of major spending initiatives that complement the helicopter money — checks for every household — provided by Trump.
Biden’s big spending began shortly after he took office with a $1.9 trillion (£1.6 trillion) package.
The control valve never stopped running. The Chips and Science Act approved $280 billion (£230 billion) in government incentives (or three HS2s) to shift semiconductor investment in America.
This was followed by the Inflation Reduction Act, which is nothing of the sort and whose estimated bill has ballooned to $1 trillion (£820 billion).
Biden was rebuffed by the Supreme Court when he proposed writing off $400 billion (£330 billion) in student debt.
This didn’t stop the gravy train. This week he carried out a secret $9bn (£7.4bn) debt relief deal, with more promised.
At 7 percent of American economic output, the deficit this year is at its highest non-war level since 1930.
Against this background, it is not surprising that the bond markets on Wall Street are unsettled and the shock waves have reached the Eurozone and Great Britain.
As we have learned from the introduction of liability-driven assets (treasury bond-based derivatives) by UK pension funds, no one really knows where the rift in the financial system will open up when there are big moves in bond markets.
America’s Silicon Valley Bank, First Republic and some regional banks have already been bailed out due to interest rate changes.
The yield on the ten-year bond has risen by 1.5 percentage points since spring. Time to check that the lifeboats are in good condition.