View to a killing: bond yields rise and rise

0:10Hello and welcome to The Intelligence from The Economist. I'm your host, Rosie Bloor. Every weekday, we provide a fresh perspective on the event shaping your world.

0:25Donald Trump raised hackles with his comment that America might try and take control of Greenland using economic or even military force. But our correspondent has a different idea. Could the US buy Greenland? And Singapore is famous for its hawker centres, state-run food courts where small stalls sell all manner of cuisines. We chew over why that delicious cheap fare is now under threat.

1:01But first...

1:11Governments in rich countries generally love to spend. And more often than not, they spend a lot more than they take in in taxes. Josh Roberts is our capital markets correspondent. So to make up the difference, they issue bonds. Bonds are IOUs that promise investors a steady stream of interest or a yield on the debt before the government eventually pays it all back. Once things get this extreme, how many more days are rates going to go? The momentum clearly is stronger dollar, higher rates right now. That's the highest yield at a 30-year bond auction since August of 2007. Today, government bond yields are rising fast across pretty much the entire rich world.

1:52The yields on 10-year American Treasury bonds are nearly 5%, and yields on government bonds in Germany, Japan, and especially Britain have been rising fast too. What this means is that governments need to pay more to service their debts. And it also means that pretty much every other borrower needs to pay more to service their debts too, since many other loans, for example mortgages, are priced at borrowing rates that depend on government rates. So Josh, just explain something to me. Central banks have been cutting their interest rates, and that would normally mean that government bond rates weren't going up.

2:30So what's going on? So there are a few things that go into the pricing of government bond rates. And a big one is not just what the central bank's interest rate is now, but what investors expect it to be in the future. And even though central banks have started to cut rates, and some of them have cut them by a percentage point or more, for example, in Europe and America, investors are starting to expect that in the future, the pace of those rate cuts is going to slow. and they're starting to fear that instead of rate cuts, they might even get rate hikes. So even though central banks are lowering their policy rates, because the expectations of future rates are going up, government bond yields are going up with them.

3:13And it's not just government bond yields going up. All sorts of other borrowing, for example, mortgages or corporate borrowing, depend on the rates that governments pay on their bonds. They're priced from those yields. So, for example, even though the Bank of England has been cutting interest rates, Brits are now paying an average of 6.75 % on new loans. And in America, to give you another example, the rate on new 30-year fixed-rate mortgages is close to 7%. So why are expectations so divergent from the economic data? Well, there are all sorts of reasons, but a big one is expectations of inflation.

3:50We had very high inflation across much of the rich world a couple of years ago. The rate of price rises has slowed, but in the last few months, it stopped slowing quite so much. So across the G7 group of big economies, inflation kind of bottomed out in September, and it's risen a little since then. Price rises are no longer slowing. What investors are looking at when they think about future expectation is also the government policy that we're about to get in big countries. And they're particularly thinking about the policies Donald Trump is going to bring with him into the White House. And there are a few of those that investors fear are going to cause prices to rise even faster in the future.

4:30So for example, if he follows through on promises to deport large numbers of illegal migrants, that will constrict the labour force in America. And if employers find it harder to hire workers, their prices are going to go up. If tariffs are slapped on all sorts of imported goods, that will raise their prices and that raises inflation. Donald Trump also wants countries around the world to spend more on their defence, which again will tend to push up prices. And if all of these different factors keep prices rising fast or keep those price rises even faster than they've been in the past, central bankers will be less able to cut rates in the future.

5:07So if much of the uncertainty is about what happens in the US and specifically Trump's second term, how much can government actions in other countries actually do to rein in anxiety? Yeah, it's really tricky. And particularly here in Britain, the government's come under heavy fire for government bond yields going up and it pushing up people's mortgages, even though a lot of the problem is imported from elsewhere. Kind of the only option for governments who are seeing their borrowing costs rise, while they are spending a lot more than they take in in taxes, is to cut back on that spending. It's less of a problem that your borrowing costs are rising if you're not borrowing quite so much every year.

5:46Unfortunately, what that means is cutting spending, and that tends to constrict your economy rather than stimulating it. That means growth slows and that means you might take in less in taxes in the future. Isn't that also a cause for anxiety? Very much so, yeah. Governments around the world are in a really tight bind here because they have been spending so much more than they've taken in in taxes in the past and it's really hard to get off that path and the ways that you get off that path can be quite damaging for your economy. So what happens next? What's happening to bond markets and what's happening to government action?

6:18Well, right now, lots of politicians are making noises about reining in spending. But what we've seen them actually do once they get into office has not been to rein in spending. It's been to increase borrowing. So again, to use Britain as an example, our Chancellor of the Exchequer, our Finance Minister, Rachel Reeves, campaigned to have really tough fiscal rules to sort out government finances. I want to lead the most pro-growth, the most pro-business Treasury that our country has ever seen. That will be underpinned by robust fiscal rules to get debt falling by the end of the Parliament. And then one of her first acts, once in office, was to raise government borrowing by 1 % of GDP every year.

7:03We will measure debt differently, but of course we'll put guardrails in place to ensure that every pound of taxpayers' money spent is spent wisely. So you hear some tough talk on dealing with this difficult fiscal situation, but you don't really see action from governments. Unfortunately, that is ultimately unsustainable. And what makes it clear that it is unsustainable is seeing your borrowing costs rise as a result and seeing your interest bill go up. So ultimately, this has to be dealt with by balancing budgets. We're just not seeing very much appetite to do it at the moment. So, Josh, that sounds like a pretty dismal picture when you think about it at an institutional level.

7:39But even more so, when you think about us as consumers, when you think about the kind of the reality on the ground, if you've got government spending being cut, high inflation, rise in the cost of borrowing, what's the impact of all this going to be? Well, unfortunately, the impact tends to be a fair amount of economic pain and fairly obvious pain on everyday people. for example, your mortgage costs will go up while you're also seeing the prices of food going up in supermarkets. The silver lining is that ultimately these situations self-correct. If an economy takes a lot of pain because prices are rising quickly, because interest costs are going up, because a government is cutting back at spending, ultimately growth slows and that's not good.

8:20But what it does tend to do is bring down inflation, which helps interest rates come down and allows central banks to cut them to help stimulate the economy. So after the economic pain, these situations can correct, but that isn't much of a comfort in the near term. Josh, thank you so much. Thanks for having me.

8:39And the latest edition of Money Talks, our weekly podcast on finance, economics and business, looks at Britain's economy and how its growth problems became a crisis. If you aren't already a subscriber, you can search Economist Podcast Plus for a free trial.

9:05Even before Donald Trump has started his second term as president, he's been dishing out threats. Some of these, like the prospect of imposing tariffs, were expected. But then came some more bizarre suggestions of taking control of the Panama Canal and Greenland, an autonomous territory of Denmark. Well, we need Greenland for national security purposes. I've been told that for a long time, long before I even ran. I mean, people have been talking about it. Unsurprisingly, Denmark and Panama have rejected the idea of giving up any territory.

9:39Greenland is for Greenlandic people, Danish Prime Minister Mehta Fredriksen said. Denmark already recognizes Greenland's right to self-determination. But now here's an idea. What if Trump was to abandon his threats and instead make an offer to buy Greenland? America has a history of expanding by acquiring territory, by buying it. Henry Kerr is our economics editor. In 1803, the Louisiana Purchase under Thomas Jefferson roughly doubled the size of the country. Alaska was bought that century for$168 million in today's money. But of course, all that happened in a different era. The notion of buying another country's territory today, as Donald Trump has been floating, sounds like something from a very distant colonialist past.

10:36It does indeed, Henry. This is an extraordinary idea. Tell me a bit more about what you're saying here. Well, the starting point here is that Greenland is a Danish territory. And so the original position of Trump wanting to buy it from Denmark, indeed, that's how it's typically reported in the press, is truly extraordinary. Because if you think about what that means, a country selling a place and its inhabitants to another country really is like something from the colonial era. And then when you consider the history of Denmark being the colonial power with all of the baggage and abuses of the past that are typical of those situations and do apply in Greenland as well, then you can understand why that's very offensive.

11:21The military threat is even more extraordinary because Denmark is a NATO ally. The US is supporting Ukraine on the principle that force should not be used to amend national borders. But the Greenland idea is neither completely stupid nor completely infeasible, given Greenland's current status, which is not actually straightforward in terms of it just being like any other part of Denmark. It's in fact got rights to itself. So that does actually open this small window for a legitimate way you can imagine Greenland exceeding the United States. A deal for Greenland that was pulled off with goodwill on all sides could in fact be a very good deal, not just for the US, but also for the people in Greenland, if they wanted that deal.

12:09Okay, it still sounds pretty outlandish to me. So explain to me how any kind of deal could be struck between the US and Greenland. Back in 2008, there was a referendum in Greenland that was held with the approval of the Danish parliament at the time. And as a result of that, in 2009, it adopted a law which increased the amount of power that was exercised by Greenland autonomously. And that law recognised the Greenlandic people as a people under international law. It made Greenlandic the official language. It gave Greenland the control of its own natural resources and stated that it would decide on its own independence.

12:50And lots of people in Greenland are very keen on that idea. It has a nationalist government. It has its own prime minister who wants independence. So there is an argument here that if America should be negotiating with anyone, it is the people of Greenland because they already have the right to their own resources. And if Denmark recognises that Greenland could be independent, why couldn't it then decide to join the United States? If you believe that Greenland belongs to the people in it, then those the people who could feasibly negotiate with America. Okay, so let's run with this for a moment.

13:25How much would Greenland actually be worth? Well, on its current annual GDP, not an awful lot. Its GDP is$3 billion, which is one seven thousandth of America's. But the reason America has been interested in it is not just Trump. America has at least entertained the prospect of buying Greenland before. It's its strategic value and its potential future economic value. So its strategic value stems from its location between Russia and America in the Arctic. Now, Greenland is part of what's called the Greenland-Iceland-UK gap in the North Atlantic. And that gap is the gap through which Russian submarines have to travel from Russia's north coast to America's east coast.

14:13It provides access to the North Atlantic for Russia, which is important not just for America's own defence, but also because the Atlantic is very important for America supplying Europe in a wartime scenario. The potential economic importance stems from its natural resources. Greenland has lots of the minerals that are deemed critical by America's government. Moreover, a lot of those minerals, their supply globally is limited and concentrated in China. With advances in technology, with the fact that these minerals are more in demand, because many of them are essential for green technology, and with climate change, you're probably going to have an enormous resource boom in Greenland.

14:58But the really important point here is that there are hardly any people in Greenland. There are only 57 ,000 people there. So given the extent of those natural resources and the small number of people who in effect have the rights to them, it would be entirely feasible, economically at least, for America to make every single person in Greenland a multi-millionaire and still have it be a good deal for America, simply because there are so few people you would have to compensate for those rights if that was the goal of your negotiation. So why wouldn't Greenlanders want to reap their own benefits from their strategic and natural resources?

15:38Why sell to America? Yes, and that's the case of the nationalists on the island, of course. You know, we have this enormous wealth. We can use that to our own ends. But that number of people is so small that I think it's reasonable to ask whether there will be a problem with the resource curse if they try to be an independent nation exploiting those resources. And it's a bit like if somewhere the size of an English town was given control of Saudi Arabia's oil fields. It's going to pose all kinds of governance administrative issues and also the risk of corruption, which has often plagued resource-endowed countries in the past.

16:20So if you run with my crazy hypothetical of America offering every Greenlander in excess of a million dollars and an American passport in exchange for becoming part of the United States. You can imagine an individual sitting there and thinking, well, this is more likely to give me my share of this windfall than if Greenland goes it alone, which poses all these governance risks. Henry, as you've said, this is something of a crazy hypothetical. Could it ever happen? Well, I think Trump has made it quite difficult to strike any deal in good faith because, of Of course, it's easy to sit in a relatively safe country and say, well, that's just a joke, Trump's military threat.

17:00I would have thought sitting in Greenland, when there's only 57 ,000 of you in the United States, not far away, it's a very unfunny joke. But if there were a way for those threats to be really credibly rescinded and to operate in good faith here among allies, then America would need to make an offer. And then it would ultimately be up to the islanders to decide whether to take it up or not. Henry, it's an extraordinary idea. Thank you so much for talking to us. Thanks very much, Rosie.

17:44Singapore is filled with hawker centres. There's 121 of them around the island. Edward McBride is the briefings editor at The Economist.

18:20whether you want your chicken roasted or boiled, laksa, Singapore laksa. My favourite is the turnip cake. I absolutely love turnip cake, but there's Chinese food, there's Malay food, there's Indian food, there's Western food, and it's all available round the clock, incredibly cheaply. Aside from the completely delicious food, which I remember well, why are Hawker centres seen as so iconic in Singapore? They're just a huge part of Singaporean life. Everyone's grown up with them. Everyone sees it as a quick, easy, cheap meal. In fact, it's seen as so essential to Singaporean life, the government actually builds it into Singaporean life.

18:57It's still building these hawker centres in every new neighbourhood to make sure every Singaporean has access to one. I'm surprised to hear that because these hawker centres feel like the ultimate in sort of small business, family, enterprise. So what is the government's involvement? Yeah, it is curious, isn't it? The government gives a lot of different answers as to why it's interested in hawker centres. Partly, it seems to think it's a good idea to make sure that there's cheap food available to ordinary Singaporeans. Partly, it seems to see Hawker centres as just part of the national culture and therefore something that is important to preserve as one of those few things that Singaporeans of every religion, every ethnicity have in common, that they all go to Hawker centres.

19:38So it's almost become a symbol of Singapore. In fact, they've got it put on the UN's World Heritage list as one of only three Singaporean things that count as World Heritage. Hawker food is one of them. Ed, we're talking about this now because despite the government's involvement, Hawker centres are under threat. Why is that? So it's very hard to run a very profitable Hawker centre business and it's backbreaking work. We work very long hours in very cramped conditions, often not air conditioned. And so as Singapore has grown rich, fewer and fewer people seem to want to take up the job of being a hawker.

20:18And you have to bear in mind that Singapore is as wealthy as any country in Europe, almost on a par with America in terms of median incomes. So telling someone that they should spend their life slaving over the hot fryer, that's a hard sell in Singapore these days. And how is it trying to persuade people to do that? Well, so the government has come up with a whole roster of different programs to try and encourage people to go into hawking. There's schemes that temporarily subsidize the rent on one of the stalls. There's mentoring schemes where somebody who wants to retire is connected to someone who might be interested in becoming a hawker and they pass on their wisdom and keep their stall going even after the original stallholder retires.

20:59The most ambitious scheme is called the Hawkers Development Programme, and that is a sort of combination of everything. There's mentoring, there's a special course. And I watched students on that crash course trying to learn what it was like to be a hawker. You'd think you'd worry mainly about cooking, but obviously you have to worry about inventory and staffing and budgets and marketing and so on. And so watching the poor students try to cram all this in was a good indication of actually how challenging the job really is. And you haven't really sold it as the kind of business and aspirational young Singaporean would want to join.

21:35Are any of these schemes working? So no, unfortunately, it's not working particularly well. This is how big an issue hawker centres are in Singapore. In Parliament, there was a question about this recently. A fairly damning stat came out. So at the time, earlier this year, 566 people had completed this course that I attended. And then of those, only 120 went on to do a full apprenticeship ship with another hawker to learn the ropes. And then of that 120, only 29 started their own stall. And then of those 29 stalls, only 16 were still operating. That's four years into the scheme. So they've gone from 566 people trained down to just 16 who were actually running a stall still.

22:23That's a tiny proportion, just 3%. And I think that just shows how hard it is to lure Singaporeans into this business. So either there has to be a rethink about how the whole system works, or your laxer, your pepper crab, your hockey and me, those are all endangered dishes. Ed, thank you very much. Thanks for having me.

23:09Thank you.

23:23Thank you.