Britain’s Debt Problem Is Getting Worse - What Happens Next?

0:00Anthony Cheung: This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. UK government borrowing surges to new record highs. Dismal picture for public finances ahead of the autumn budget. Yields hit their highest level in the G7.

0:41Anthony Cheung: And billionaires warn Britain is on the slide. I purposely grabbed those four headlines just for you. This is going to be a great episode.

0:52Piers Curran: Can't wait.

0:54Anthony Cheung: So yeah, I mean, if you picked up a newspaper or opened up perhaps your news app this week, you would have seen these sorts of headlines. A dismal picture for Britain, debt costs skyrocketing like a staircase to nowhere, was what the IMF director said. And on top of that, yeah, your wealth creators threatening a mass exit. So sounds sensational, but behind the dramatic media noise, there is a real, very high-stakes story unfolding in global financial markets, close to home here where we're situated in the UK, and one that could hit every single household in the country. So why is your mortgage rate getting stuck above 5 %?

1:33Anthony Cheung: Why are your taxes almost certainly about to go up in October? And how on earth is a conflict thousands of miles away in the Middle East suddenly dictating the size of the UK government's bank account? So today's episode, we're going to try to cut through some of the panic if we can, tame that fire, look at the actual numbers. So pull back the curtain on the£18 billion public borrowing hole. Bond vigilantes, talked about before, I'm sure we'll get a mention again, holding the Chancellor hostage and why global debt markets, not politicians, ultimately are the ones really ruling this country. So as ever, joined by Piers Curran, co-founder of Amplify Me.

2:13Anthony Cheung: how are you Pierce? Well more depressed than I was uh two minutes ago. I know you sounded quite pumped when we were before I hit the record button and I've just hit you at that like sucker punch. Killed the vibe I mean I'm not sure I can do this now. Yeah maybe you want to come out of this room go across the corridor and open the room that says USA on the front you'll probably have a better time in that one to be honest even though the situation's worse at least they've got a better better way of masking it i guess from a media perspective um yeah you know times are it depends

2:54Piers Curran: yeah you're you're an optimist a pessimist who who are you like what angle are you coming at this from in terms of how you're analyzing the uk you know all the all these different these different directions you know can have different opinions different views but you know i would say broadly the the majority stance is building and that's the stance and not just necessarily about the uk but that you know government debt levels are perhaps getting a little unsustainable. And it's fine when debt's cheap. That's really the key thing, right? We've had a debt problem really since the great financial crisis in 2008.

3:42Piers Curran: It's just that interest rates were at zero after that crisis and kind of stayed at zero an incredibly extended, unusual period of time at the bottom of the interest rate cycle. The bottom was zero, so the lowest it's ever been in any interest rate cycle ever, but it stayed at the bottom for a decade plus. This is what we call the zero interest rate environment. And so if interest rates are low, debt's cheap. So if you've got a shitload of debt, but interest rates are low, you can afford it. The problem comes when you've got a shitload of debt that's getting bigger and bigger, and then just start going up.

4:25Piers Curran: And then, of course, it's not sustainable.

4:27Anthony Cheung: Yeah, I guess think of this on a consumer level. You know, if you've got a credit card or have ever used your credit card and let's say it's close to being maxed out and you're used to paying a set percentage point, then all of a sudden it gets jacked up to double digit plus numbers. You know, that's pretty much what's happening across the whole countries right now, right from a theoretical perspective. Yeah.

4:52Piers Curran: And like the other classic is the mortgage. You know, if you have a mortgage on your property, then, you know, in the UK, we've got quite a short term sort of mortgage periods. We were as a nation, we typically the banking system sells mortgages that have short term periods to you. You know, you'll have a you'll have an interest rate that's fixed for two years or three years or five years. Right. and then when it comes out of that period you either roll it and buy a new mortgage for another two-year fixed period or you you don't and you just come off the fixed and go variable so the problem is that since the bank of england started raising rates middle of 2022 then if you've had to remortgage you know at any point in the last three years now if you've had to remortgage you're remortgaging at a way higher rate than you had, you know, pre-2022.

5:53Piers Curran: So, and when you've got a massive amount of debt on your property, the cost of that mortgage, you know, your outgoings on a month-by-month basis suddenly jump, and of course, and jump by hundreds, it obviously depends on the size of your mortgage, right? But hundreds of pounds a month, if not thousands of pounds a month, right and that's just money that vanishes and doesn't get spent on the high street and therefore obviously then starts to have a net negative feedback loop through consumption drops GDP growth drops and so on add to that the inflation problem so not only are our interest rate sorry our interest costs going up but then the cost of stuff we're buying is going up as well so that you get that kind of double whammy effect on your purse strings, as we say, and the ability for the consumer to actually get out and spend, which is what the economy, you know, developed economies rely on.

6:52Piers Curran: It's always, you know, super roughly 70 % of GDP is consumption. So if you've got a problem with consumption, you've just got a problem.

7:04Anthony Cheung: So you can vote for Trump and get$5 ,000 now. Is that the case? Let's go.

7:10Piers Curran: Let's do it. But I say, look, it depends on where you come from, your direction of attack, or not attack, your direction of analysis. So, for example, the IMF, okay? They're obviously a third party independent body, you know, not a sovereign, they're not linked to any country. And so they're supposed to be this, you know, third party unbiased bystander. So the IMF chief's analysis. Well, basically just saying broadly about the global debt is climbing, like a staircase, as you were saying, but around the UK specifically, or no, sorry, not about the UK specifically. Again, more broadly, a general comment.

7:52Piers Curran: There are two things I'm quoting here. There are these two things that must be done, she said. This is the IMF chief. She said, bring debt levels down and put fiscal consolidation as a priority and make sure that the central banks deliver on their mandate of price stability. So it's very, very, very easy for her to say that sentence. Backseat driver. Yeah, right. You got about 25 words that came out of her mouth, okay? And there is no one on the planet that can argue with that. She's right. Yes, of course, we need to get debt down. Fiscal consolidation, therefore, needs to be a priority. I agree.

8:37Piers Curran: and obviously the bank's job is price stability. Yes, we need to do all of those things. But here comes the problem, you know, from a political point of view. And she did allude to this. She said, it is impossible to stress strongly enough how critical it is to get the courage, the courage to take the steps that are necessary. These are politically tough steps to take, she said, but necessary. So that's it, right? They are politically tough. And herein lies the

9:04Anthony Cheung: problem of democracy yeah what what is your incentive when you know you take a let's say a range of four to five year term as government whoa i mean these debt terms are more often or not well beyond that and isn't that just someone else's problem so well that's right the next you

9:27Piers Curran: know the next government can sort that out like how do you win how do you win an election giveaways we're going to spend more on services or you know xyz population we're going to spend more and your services are going to be better your life will be better we're going to tax you less so you're going to have more money in your pocket you know these are obviously great sound bites and they win elections. The problem is you need to borrow money to fulfill those promises. And so that's why our debt levels go up and up and up. And yeah, fine when interest rates are zero, when they're not, it's not fine.

10:05Piers Curran: It's just that, you know, if you, to deal with the problem, you've got to start spending less as a government and or tax people more, both of which will lose you votes. so there's actually a i don't know there's a mechanism here an unbreakable mechanism you might say unless and the only way to break the mechanism it's not quite unbreakable it's only breakable in the moment of absolute crisis so when the debt situation gets to the point where you default then you are forced into a bit like argentina is a good example actually go and look at what the argentinian government have been doing over the last few years with regards to fiscal adjustment you know that came out of chronic absolute crisis we now have no choice so we're nowhere near that point as you know a nation like the uk or the us or what france have got that but you know we're nowhere near that point but the problem is no one quite knows for sure how far away that point is.

11:14Piers Curran: That's up for debate.

11:16Anthony Cheung: On that point, perhaps one of the reasons why we're talking about it now is that in August alone, the UK government borrowed£18.3 billion. That's£3.5 billion more than experts has expected in a single month. And I saw another stat line that in August, interest payments hit£8.8 billion, pounds a record high for august since tracking began in 1997 yeah 8.8 billion pounds just in

11:50Piers Curran: interest costs in one month there's only i mean that's obviously a ridiculous amount of money i do always another problem with this whole situation is there's always someone else in a worse position and they're okay they haven't gone bankrupt so maybe we're fine like the u.s are going to pay$1 trillion just in interest costs over the next 12 months. $1 trillion. Obviously, they're a much bigger economy, so you can't compare the numbers light for light. But yeah, look, this is because the government has had to borrow more money than was expected, right? So our debt's gone up, but also then interest rates have gone up.

12:32Piers Curran: So this is the bit about, well, what's driving interest rates up? And there are a few things that are influencing this, of course. We've spoken at length about inflation. And so obviously inflation is a problem. Although I would say with the UK, we had the Fed and the ECB hiking rates, but actually the UK did not. So the Bank of England did not hike. And actually I was reading, there's a report there's a piece in the ft today the headline is bank of england does not need to raise interest rates says the oecd hang about is there two in the back of the car now so you

13:15Anthony Cheung: got mr imf mrs oecd keep yapping at the back telling me where to go and how to drive

13:21Piers Curran: yeah they're saying the bank of england doesn't need to cut oh sorry hike they're saying that the Bank of England is coming from a, we're already at a relatively higher rate of interest from a central bank perspective than let's say the ECB. I mean, just to put numbers on that, the UK's interest rate is 3.75%, whereas the ECB, even though they just hiked, is still only at 2.65. Okay. I mean, the Fed have hiked, so they're kind of 3.75 to 4. So you would say they're now marginally higher. So the OECD is saying, look, the interest rates are already quite high. You don't necessarily need to hike them more to contain this inflation.

14:00Piers Curran: The other side thing is the UK is more vulnerable in some ways, certainly from an inflation perspective, to the Straits of Hormuz situation. That's just because gas price spikes. Remember in the Straits of Hormuz, you've got the likes of Qatar, the world's largest natural gas producer. So gas prices set electricity prices in the UK, right? So gas plants are the kind of marginal generator in Britain for, you know, much more so than in France, for example, who rely on nuclear a lot more for their energy. Spain and Germany much further down the path with regards to renewables and other sources, right?

14:42Piers Curran: So we're just more dependent on gas than like mainland Europe. But also another thing, the UK has very, very little, or some might say no storage capacity. We operate from a gas point of view, we operate only a few days worth of demand. That's all we have in the tank, right? Whereas the EU, they hold months worth of gas supply in storage. So of course, they're buffered against short-term price spikes because they've got a load in the tank already that they can kind of fall back on right so that lack of storage here in the uk is a big problem then finally the heavy household exposure so about 85 percent of uk homes heat with gas boilers um and on the continent you know it's much much less than that so these are a few reasons why our inflation is more sensitive to gas price spikes um so that inflation being higher obviously feeds through into the cost of living problem but also means that the central bank needs to sit up and go right you know is this something we need to act on and is this something where we're going to need to hike rates and although the bank of england did not hike last time out, the governor, Bailey, was kind of, you might say, just pointing us towards the fact that hikes may well be needed further down the line.

16:11Anthony Cheung: I was just having a look then, putting this together, what you've described so far, in regards to borrowing is already more than the government is anticipating. then we've had some data points come out the day we were recording this we've just had reported from the PMI number the purchase at managers index for September growth in British business activity cooled in the month inflation pressures building and that number came in at 51.7 down to 52.5 that's a three month low in the the flash sody advanced reading coupled that then with some of the other things that are happening which is some of the momentum that we had with the incredible weather over the early part of summer world cup some of the ai hype which maybe has just dissipated a little bit is fading as evident in those pmi numbers fuel costs as you said going up.

17:11Anthony Cheung: So the other thing I saw as well was that pay, because looking at the labour market, you were talking about consumption, service-driven Western economies, like Britain's very much being the case. And there's a softer labour market, meaning then the power that the labour force has to demand higher wages is decreasing, if anything. So it sounds like a recipe for disaster for the new prime minister at this point where he's in a lose-lose situation because everything I've described, so what his coin toss risk is you've either got to just go for it and then we can talk in a moment about AI productivity comes good and I'm just going to go further down.

17:57Anthony Cheung: I'm going to double in to sizing my bet on that side. Let's just keep borrowing in that way or before you do take some measurements to try and control it. But I guess the point being is that, as we said at the top of the show, yields are already at these historic high levels. How far can you push the market before, as you said, these vigilantes punish you?

18:23Piers Curran: Yeah, it's important to talk about yields now rather than central bank interest rates, right? Because, and actually, just to make a point though, it is difficult for a government when you're setting out your budget spend for the year, here we are in August, right? And oh, we're going to have to borrow 8.8 billion more than we thought. Oops. Well, how do you make that kind of sized error? Well, of course, the amount you need to borrow in the future is dependent on how much you're going to spend. You can control that. But when you're going through an election cycle, sometimes you've got to give more giveaways, right?

18:59Piers Curran: And so the spend goes up. But the stuff you're at that's not in your control is GDP growth, because obviously that dictates the amount of money as a government you've got coming in through tax revenues. So if the economy is not as strong as you had predicted when you were doing your budgeting, like you've just said, GDP numbers are looking weak, well then your tax receipts are lower, but you're committed to spend a fixed amount, so you've got to borrow more money, right? And then secondly, what's the cost of borrowing and what's our interest costs per month? And are they higher or lower than when we set this budget at the start of the year?

19:37Piers Curran: And here you would definitely say, remember at the start of the year, the Iran-US war wasn't happening. So people were thinking we're going to cut rates this year, right? So that's the big thing. Interest rates and yields are much higher. So the interest costs are much higher. So we're having to borrow more money to carry on fulfilling the promise of the fixed spend that we put in the budget, right?

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20:34Piers Curran: So, like from a yields point of view, so I will go back to the central bank again, but not to talk about interest rates. There's something else going on that's having an impact, and there was news on this last week from the Bank of England, which actually led to bond yields dropping on the long end of the curve. So the cost of borrowing for the government, well, let's say they're borrowing for a 10-year period. They issue and sell some 10-year government bonds. What's the coupon going to be? So for the borrower, the coupon rate, and there's different types of bonds, and we'll come onto that, but your vanilla stuff, there's a fixed coupon rate.

21:12Piers Curran: That's why it's called fixed income as an asset class. So that's the interest, the amount of money the government will pay in interest each year for the 10-year loan. And that's fixed and set right at the start of the loan. That's the amount of money. Well, what is the coupon rate? Well, that is really on the day that you issue and sell these bonds, it's really a function of, well, what's the 10-year government yield on that day? What's happening with bond yields? That's bonds that got issued in the past and are now out in the system trading up and down. What's the yields on those things is the reference point for your coupon rate when you borrow more money.

21:53Piers Curran: Now, the problem is yields have gone up and up and up and up. And so when the government is borrowing more money today, the coupon rate they're having to pay is much, much higher than it was when they were borrowing money in the past when yields were lower, right? Now, the news the central bank gave earlier, this is a bit technical, but it's around this thing called quantitative tightening. So you kind of got to go back briefly, right? So So during the big crises, great financial crisis, COVID, you know, the weapons that a central bank has in their arsenal to try and help. Well, yes, it's interest rates.

22:32Piers Curran: So you cut interest rates during a crisis, you make borrowing cheaper. This helps out companies and individuals in their moment of crisis. And so they've got more disposable income to survive and, you know, carry on getting out there and consume and it tries to help keep the economy afloat, right? So you can cut interest rates, but often that's not enough. So they'll do this thing called quantitative easing. And this is where they are basically printing new money. So they're kind of spinning money up out of thin air. And then they are kind of trying to shove that money into the system. And they do that.

23:10Piers Curran: The amounts we're talking about, hundreds of billions or trillions in the case of the likes of the Fed, for example, then it's such a huge amount of money that you need a vehicle, an asset in the system that's big enough to accommodate that volume of money. And that typically falls to government bonds. So that's the most liquid, the biggest kind of asset class out there, right? So the central bank buys government bonds during a crisis, prints money, increases the money supply, buys government bonds. This has the effect of driving demand up for these bonds, which drives up price, which drives down yield.

23:53Piers Curran: So that net effect actually makes borrowing cheaper on the longer end of the curve. So it's another form of stimulus. And they've done that like in spades through the financial crisis, 08, 09, and beyond, and then COVID, right? So now you go, well, what's happened since COVID? And actually, if you look at the Bank of England, they've been more active in unwinding their quantitative easing programs from the past than the likes of the ECB and the Fed. This is called quantitative tightening, this reversing QE, okay? Now, there's three steps you can take, and each one being progressively more aggressive, right?

24:38Piers Curran: Step number one is to stop QE. So there you stop by issuing new money and buying new bonds. Okay, I'm going to stop doing that and I'm going to maintain the level of my balance sheet is what the central bank will say. Okay, now in that moment, these bonds you own, well, they have durations and they have, you know, expiry dates and you're going to get the borrower, in this case, the UK government, paying you back. So if the 10-year government bond you own as a central bank on your balance sheet hits redemption, the UK government will pay you the money back. Now, keeping your balance sheet on hold means that money that comes in from redemptions, you then turn around and send back out by buying more bonds.

25:24Piers Curran: You're not printing your money there. You're just rotating it and making sure that the money you did print is stable and it's out in the system. That's step one. step two is to stop reinvesting the redemption payments coming in so there you are reducing the money supply but super but slowly okay all you're saying is every time a bond redeems great we'll have the money back off the borrower please great and then we'll we'll keep that or actually in this case central bank we kind of burn it and it reduces the money supply okay that's step two So step three is not only not reinvesting those bonds that redeem, you are also actively selling the bonds on your balance sheet that have not yet reached redemption.

26:14Piers Curran: And that's the more aggressive, it means you're reducing your balance sheet at a faster rate. That's what the Bank of England have been doing since 2022. The Fed have not been doing that. The ECB have not been doing that. So they're the only ones. Now, what effect does that have? Well, if you're actively selling bonds, it's the opposite of QE. You're flooding the market with an excess supply of bonds. That drives the bond price down and drives bond yields up. So part of, and I'm definitely not saying it's all of the problem at all, part of the problem why UK bond yields are higher than Europe, than the US, making our government borrowing higher.

26:55Piers Curran: Part of that is because the central banks had a more aggressive QT program. Now, last week, Bailey said, we're going to stop QT. We're no longer going to be actively selling our bonds and selling down our balance sheet. And as a result, this is good news. And as a result, you look at UK bond yields and like the 30-year yield that got worryingly close to 6%, you know, at the first half of September, you know, multi-decades high, has now dropped back to below 5.8. Okay, so hopefully this can be the start of a trend back lower. It's way too early to say that, but that's what people are now hoping.

27:39Piers Curran: But it was an important moment. So now the Bank of England are getting involved to try and make borrowing costs cheaper by ending their QT program.

27:50Anthony Cheung: So tactically, as the Bank of England or the governor will want to be doing is utilizing this stepstone approach to try and address some of these market concerns without then shooting all the bullets at once. So there is a way of doing it bit by bit the the test comes is is you just alluded to how long does that direction of yours decreasing last four and if we come back up to the top and tap tap tap on the ceiling a six again you're going to have only so many bullets in the chamber yeah unless you start qe so not

28:33Piers Curran: only stop qt but actually start qe again and where does that fit from a timing perspective if that was an option would you already be cutting rates at that point

28:47Anthony Cheung: or would rate can rates be on hold and you go back to qe

28:53Piers Curran: there are other problems because qe is inflationary so whilst on the one hand you say oh well it's obvious we should do qe so we can get bond yields down and then this whole borrowing cost crisis will go away the problem is you're just feeding fuel into the inflation crisis which ultimately means the bank of england will have to raise interest rates so you end up back to high borrowing costs anyway we're kind of stuck

29:22Anthony Cheung: so is that true though that qe leads to inflation wasn't that back wasn't that the number one fear in 2009 2010 and inflation may have gone up or might have moved but nowhere near

29:41Piers Curran: to the degree that most had thought yeah if you go and listen to like larry summers back in the day he was saying, oh my God, this QE is going to kill us. There's two things to comment on on that from my mind. One is maybe we're now getting the inflation. Maybe it was just very delayed. And all that QE that we stuffed into the pipe years back is now coming home to roost. That's one argument people make. The other argument is that it actually doesn't cause inflation at all. And that's because all the money that the central banks print and try and get into the system, it actually doesn't go into the system properly.

30:21Piers Curran: It just ends up sat in the banking system. And this is where asset prices get inflated. And so your rich get richer because they're the wealthy ones who own equities, for example. And so one argument is it's kind of exacerbated the rich-poor divide. QE has because it's created asset price inflation that's benefiting the wealthy. And so the actual money didn't get out properly into the system. So you didn't see the inflationary effect that the textbook says should happen.

30:59Anthony Cheung: Can't go an episode, of course, without talking about AI. I'd love to get your take on there's this graphic which had when it was talking about UK government borrowing being ahead of its official forecasts it's kind of like a snaking line going upward of which the actual against the forecast is increasingly widening as time goes forward um so yeah within this one of the big kind of promises that ai offers is in productivity when it comes to it as a net benefit to economic performance. So, you know, there's been lots of reports over the last year or two, a little bit self-serving, one might say, from the likes of McKinsey and these consultants firms, you know, you should be doing AI transformation in your business and paying us$10 million a year, because AI is going to be massive sort of thing.

32:02Anthony Cheung: So you've got to take it, obviously, with a pinch of salt. But one of those is that it suggests that generative AI, if it delivers its promised one and a half percentage point annual boost to develop market labor productivity, could that in itself single-handedly bridge that OBR gap? if it pushes real growth comfortably above 2 % expanding the total economy faster than the debt accumulates does that answer the problem so that's number one the idea of AI as a cornerstone of future potential growth and then secondly timing as you said it might well be and there's often talked about this j-curve productivity lag meaning that I guess it's very slow to start and then goes exponential over time.

32:57Anthony Cheung: And so when exactly does this AI-driven productivity kick in? Because A, the UK economy is somewhat suffering in the short term, and then B, by the time it kicks in, the Labour Party is probably out by then anyway.

33:14Piers Curran: Yeah, I mean, the solution to all our debt problems... isn't stop spending because we can't, as we've discussed. So the only solution is a growth acceleration and we grow our way out. That just means that with epic GDP growth comes more tax receipts for the government such that they end up having a surplus every year and they can start paying down their debt. It's the only way out. So is it going to happen? When is it going to happen? So I would say like with the UK, the issue we have, it's going to be there's more of a lag, the positive impact of AI. There's more of a lag to that than let's say the US.

34:06Piers Curran: And that's because the UK, we don't have any hyperscalers. We don't have any frontier models. We don't have a massive infrastructure data center build out going on, which the US does, which is driving right now today GDP growth acceleration. We don't really have that, right? So what we've got to rely on is the straight up pure productivity gain that these tools can have on your average business. So that's going to take longer. I mean, I personally believe it will happen, but it's messy because, and who knows, right? This whole job displacement argument, is AI going to displace jobs? Well, fine.

34:54Piers Curran: It might be that if that's true, and I'm not necessarily a buyer of that argument, but it might be in the short term, but then AI creates new jobs, right? So I think long term we're fine there. But in short term it's messy where you might get, yes, increased productivity. So one worker can output more. But then if you, let's say each worker outputs 10 % more because of AI. Well, as a business, one option for you is to sack one of the 10 and you're left with nine workers with the same output as 10. So your costs as a business goes down. So your profits go up, right? Awesome. That person who gets fired, well, they don't have an income anymore.

35:35Piers Curran: So from a GDP, a consumption point of view, that can get hit if you're getting people displaced out of their jobs. So the whole GDP thing is a bit messy. If it's the case that the company doesn't fire the 10th person and actually they carry on with 10 and we grow quicker, we might not hire more in the future, but at least we're not firing. Well, then fine, that could have a net positive impact on actual growth. and then fine there'll be loads of new jobs that come out of AI that we don't know about yet and so in time five years ten years happy days we won't be worried about job displacement necessarily or there's arguments about universal basic income or there's other stuff going on right but yeah I think productivity growth is inevitable I'm worried it'll be too slow in the UK so we're still left with this problem where we've got too much debt so it just comes back to inflation and can it come back down if so borrowing costs drop again and we could just about muddle through with still too much debt but the interest on that debt being just about manageable we're only one crisis away an inflation spike away from the kind of wheels coming off

36:59Anthony Cheung: that's the problem could you not call the bluff of the bond vigilantes and be like psychologically uh we've had good reason for why balance sheets have swelled over the last two decades let's say So historically, I was reading a stat. I had to double check, is this actually the case? But Britain only paid off its debt from the South Sea bubble of 1720 and the Napoleonic Wars. They paid that off in 2015. So basically for nearly 300 years, taxpayers were paying interest on wars fought against Napoleon. so isn't there like as long as the investment community at large is satisfied that this isn't a cliff edge scenario where the whole thing implodes are we not now just living in is it not is it not it's inappropriate i feel to look back and draw a lot of these historical comparables because the global financial crisis happened and COVID happened and these things have happened that have required a response.

38:17Anthony Cheung: And so I guess can human ingenuity prevail? We create these new tools, we manage the system and we just keep borrowing.

38:29Piers Curran: You can. I think the debt to GDP ratio thing is fine. It's just trending higher, right? I mean, the UK's debt-to-GDP ratio right now is, let me just get that number, is 94 % debt-to-GDP. The US is 123%.

38:59Piers Curran: Japan, 249%. I mean, pick a number. Does it really matter? As long as the music doesn't stop, that doesn't matter. What matters is the year-to-year budget, and can you afford the interest payments on that debt? And this is the problem right now. Your massive debt levels are fine when borrowing is cheap. It's just that when borrowing is not cheap, how much is it costing relative to everything else you want to spend money on? and for the US, you know, I said earlier, they're going to spend a trillion dollars in debt interest payments. That's more than they spend on defense. So that's not sustainable, right?

39:47Piers Curran: They can survive that for a year or two or three or four, I don't know, right? But you can't have that debt interest cost continue to climb. They can't afford two trillion of debt interest costs. Then the wheels come off. so do we go if we stood if we stood here 10 years ago not is the question if we stood here 10 years

40:06Anthony Cheung: ago and said and i said it's going to be a trillion you would have said to me yeah but the world would blow up if that was the case and now you're saying to me right what about two yeah true it's true

40:17Piers Curran: it's when when does the music stop when does the merry-go-round kind of just run out of fuel i don't know that's the impossible question to answer i guess well i mean i guess talking

40:31Anthony Cheung: long term then is this the Ray Dalio transition of global world powers where people like the Far East, namely China, are not driven by the same timeline or incentives. And so whilst the Western world in the end might pay this catastrophic price for things in the bygone era, GFC, COVID, whatever yeah china just it's a waiting long-term game and if ai robotics all the rest of it can counter out the demographic challenge and then they just yeah it's a transition

41:11Piers Curran: well dalia talks about isn't he talking about like the 500 year cycle the super you know the kind of superpower cycle like 500 years and we're in the we're in the sunset period of the u.s superpower era. Now, how long does it take for the sun to set during the sunset is an unknown. Could be five years, 10 years, 30 years, right? So when you're here now today, should you be worrying about it if it's going to be in 30 years time? Well, no. But should you be worrying about it if in fact it turns out it's going to be more like in two years' time, well then yeah, we're going to start to freak out.

41:59Anthony Cheung: But the point is, the general consensus is that is multiple, if not several decades down the line.

42:06Piers Curran: But how many decades?

42:09Anthony Cheung: Don't know. Well, we were going to upset a lot of our listeners by making these sort of statements. So yeah, we'd love to get people's opinion on what they feel about this. I feel like it's probably a 90-10 split where I feel like it's one of those conversations where people in the UK, they'll go, I should never buy a house. Housing bubble. And you go, okay, yeah. And I go, sorry, can you tell me that again? Just to clarify, are you a homeowner? Yes, I'm a homeowner. Never buy a house. And you go, sorry, when did you buy your house? When was it? 1990. Okay, yeah. And we're in 2026 and your house is now worth 2.5 million and you paid like 200 grand for it um i do feel like

42:52Piers Curran: it's a little bit like that i guess look the final part i want to make is we're just more obviously as the years go on we're getting closer to that sun setting moment and the closer you get the more vulnerable you are to a black swan event so we're always on the lookout what could happen that accelerates it. And like we talked a few episodes ago about the yen carry trade. It could be that the yen carry trade blows up. That could be the catalyst. That could lead to people dumping US treasuries, as in selling them aggressively, to convert their dollars back to yen to get out of their yen loan. That could mean US bond yields drop sharply, meaning the yield goes up sharply.

43:39Piers Curran: So then that debt interest cost for the US government suddenly spikes to the point where, oh my God, actually, this is... That event, that's a potential banana skin, right? It could be an inflation crisis. Well, we just had one and survived. So all right, fair enough. Maybe another inflation crisis. I don't know how many inflation crises you can have until it becomes a proper wheels come off moment i don't know but anyway so that's what we're always on the lookout for whilst it might be decades away let's not worry there could be something that happens along the way that brings that timeline sharply into into vision i was gonna ask well if most of

44:24Anthony Cheung: the world's wealth is contained in the u.s so the invisible hand is controlled in that way well then what incentives is there in the market to get overly spooked to trigger one of these things when it's it's the bigger volume of capital flow that really dictates whether enough is enough or not when no one's incentive is to stop the music yeah anyhow some conspiracy theories in there if you want them all right well look good chat as always any questions at all and yeah i'd love to get your opinions you know i don't think there's any right or wrong answers to a lot of this stuff i mean theoretically explaining on why we've arrived where we are i think is pretty logical but in terms of where we go next definitely up for the so we'd love to hear people's opinions so thanks as ever for listening thanks pierce Fall has never looked or tasted this good.

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