Largely unnoticed outside the financial pages, says Iain Martin in The Times, there has been a “giant sell-off” in government bonds, sending yields – the interest rates states must pay lenders – to levels not seen since the financial crisis. What worries investors is not so much the growing risk of war in the Middle East, but “excessively high government spending”. America’s total debt stands at an eye-watering $33.6trn, more than triple the $9trn it owed in 2007. In Britain, the costs of an ageing population and the pandemic have sent debt from £700bn in 2007 to £2.5trn today. The moves in the bond market show that investors have decided the “pandemic party of ever-increasing spending” is now over.
But if investors aren’t concerned about the risk of war, they should be – especially because the US and much of the West is “maxed out on spending and debt”. At the end of World War Two the US debt-to-GDP ratio (what the government owes compared to what its economy produces) stood at 114%. Today it is approaching 130%, and the fight has barely begun. Yet our leaders appear blind to the “scale of the sacrifice and economic reorganisation” that will be needed in Western democracies if what’s happening in Israel and Gaza turns into a regional war, or “something even worse”. Much more of Western nations’ spending will have to go on national security, and the latest economic data “tells a troubling story” about our ability to afford this. “We appear to be living in the last days of a collective delusion.”