There is an apocryphal story about the captain of the Titanic. When asked at the inquest of into the sinking of the Titanic why he did not steer the ship away from the iceberg, he replied: “What iceberg?”
We have to wonder whether something similar might be said of a number of today’s major country governments, should we have a future world government bond market crisis. Despite long-term bond yields soaring to multiyear highs and the clearest signs of public debt unsustainability, the governments of these economies seem to be doing nothing about the parlous state of their public finances.
Start with the warning signs flashing from the government bond markets. In the United States, for the first time since 2007, the government has had to pay 5.2 percent on its 30-year Treasury bonds. It has had to do so, despite Secretary of the Treasury Scott Bessent continuing his predecessor’s policy of suppressing long-term bond yields by increasingly relying on short-dated Treasury Bill financing. In Japan, 30-year government bond yields have surged to a 1997 high of 3.5 percent on inflation worries, and in the United Kingdom, 30-year gilt yields have surged to a three-decade high of 5.8 percent in reaction to Keir Starmer’s political travails.
High government bond yields would not be a matter of great concern if government debt levels were at relatively low levels. Unfortunately, this is far from today’s case. By next year, the United States government’s debt in relation to the size of its economy is now on track to exceed its corresponding end of the Second World War level. Meanwhile, Japan’s public debt to GDP ratio stands at a jaw-dropping 230 percent, while those in France, Italy, and the United Kingdom all stand at over 100 percent. High interest rates and high debt levels will now mean that interest payments will constitute an ever-growing proportion of overall government spending.
The main reason to fear a future world bond market crisis is that public debt to GDP ratios will all too likely continue increasing for the foreseeable future. They will do so because of continued high budget deficits, increased defense spending, the risk of recession, and little political will to bring gaping budget deficits under better control.
The United States is perhaps the country whose public finances give grounds for the most concern. According to the Congressional Budget Office, Trump’s One Big Beautiful Bill Act of unfunded tax cuts will keep the budget deficit above 6 percent of GDP as far as the eye can see. The budget deficit could gape even wider should Trump’s proposal be accepted to increase defense spending by a staggering $500 billion over the next two years.
Further reasons for concern about the US public finances are the country’s high dependence on foreigners to finance its budget deficit and Trump’s relentless attacks on the Federal Reserve. Once foreigners, who own around one-third of all outstanding Treasury bonds, come to fear that the US will try to inflate its way out of its debt problem, it will be increasingly difficult for the US government to finance its deficit at reasonable interest rates.
Japan’s extraordinarily high public debt level makes its government bond market also a matter of particular concern. This is especially the case when Sanae Takaichi, Japan’s new prime minister, shows little inclination to address her country’s poor public finances. Indeed, at a time when Japan is already running a primary budget deficit, Takichi is proposing a supplemental budget to increase energy subsidies to soften the blow of the Iranian oil price shock.
The United Kingdom’s Labour government, which is in the midst of a power struggle, shows no sign of addressing its budget woes. However, it would seem that France’s current political dysfunctionality is a greater problem for its bond market than the UK’s current political crisis is for its gilt market. If, to date, France has shown no political will to rein in its unsustainable budget deficit, it almost certainly will have no political will to do so in the run-up to its presidential election around this time next year. Stuck within a Euro straitjacket, France also lacks an independent monetary and exchange rate policy to soften the economic blow of budget belt-tightening.
An important lesson of the 2010 Eurozone sovereign debt crisis was that problems in one country’s government bond market can quickly spill over to that of another highly indebted country. With so many major countries seeming to have serious public debt problems at the same time, there has seldom been a greater need than today for each country to take action to get its public finances in order.