If there is one financial lesson that must be learned from the Truss Fiasco it is this: in a world of very high debt even relatively minor fiscal moves can have outsize negative effects in the bond and currency markets.
Case in point: The Truss unfunded tax cuts and energy support outlays amounted to approx. 85 billion pounds, or 3.8% of UK GDP. Though not entirely insignificant, this amount was meant to be spread out over several years, making the impact on the annual budget deficits rather manageable - if it wasn’t for the fact that the UK is already highly indebted at 96% of GDP. The Truss proposals were the proverbial straw that broke the camel’s back; the rest was up to the Bond Vigilantes who kicked Gilt prices off the cliff and drove Truss out of office in a shameful 44 days.
Is there a lesson here for the US? You better believe there is. In some ways the US is in worse shape than the UK, particularly in the deep socio-economic divide that is splitting the country apart in ways not seen since the Civil War. While the UK went through the Boris Brexit drama, the US experienced Trump’s MAGA and a thinly disguised attempt at a putsch, while in the background debt to GDP soared to 135% (now slightly better, at 121%).
As the US heads to crucial midterm elections in a few days, it is imperative for fiscal rectitude to be maintained. It takes a very long time to build credibility in the bond market, but under current conditions it can be destroyed in an instant, producing a doom loop identical to what happened in Gilts.
What can cause it? There are plenty of candidates: student loan forgiveness, increased defense spending due to Russia/Ukraine and China/Taiwan, partisan tax cuts and/or subsidies formulated in a new Congress.
The United States is no longer the world's sole superpower, Pax Americana is no more. American politicians, central bankers and financiers can no longer act as if the world is in thrall of the mighty dollar. Quite the reverse, in fact, despite its record price in FX markets. It feels to me that while many are looking towards Rome, or even Paris, for the next shoe to drop, it could very well be in Washington.