Each week, I think about which macro figure or market theme to explore in this column. US job growth? Or the tariff war, which is heating up again because Trump and his foreign friends are failing to strike a deal. Then, out of nowhere, another article pops up about that enormous elephant in the room: our debt-fueled economic system is creaking so loudly that it can’t be ignored.
This time, the warning came from the United Kingdom. Like France and the United States, the UK regularly makes headlines for having a fiscal situation that’s an absolute mess. Last week, it was the turn of the “Big Beautiful Lie” in the United States.
The Office for Budget Responsibility (OBR)—a name that’s clearly chosen with care—published a scathing report on the UK’s national debt and fiscal policy. Brace yourself.
Britain’s underlying public debt is at its highest level since the early 1960s, while the tax burden is the highest since 1950. In other words: the government shouldn’t assume it can close the budget gap by hiking taxes even further. Wealthy Brits are already fleeing the country in large numbers. The budget deficit would need to shrink by 3 percent of GDP just to keep the debt from rising any further.
Meanwhile, voters are expecting more, not less: more protection against new crises, more income support during hard times, and—above all—much more spending on healthcare and pensions. Politicians, whose main objective is to get reelected, are promising the world without offering even the slightest clue how these completely empty promises will be fulfilled.
Immediate risk
The OBR estimates that the UK’s debt-to-GDP ratio will reach a staggering 270 percent by 2070. That alone gives me vertigo. But it gets worse. The OBR also points to an immediate risk: the British bond market. For decades, UK pension funds were the primary financiers of persistent budget deficits. But the share of Gilts in pension portfolios is plummeting, as more and more plans switch from defined benefit to defined contribution.
Once individuals become responsible for their own pensions, it becomes crystal clear: almost no one wants British government bonds in their portfolio. Only 7 percent of UK DC plans invest in Gilts. According to the OBR, this means the UK will need to spend an extra 22 billion pounds per year in interest to attract investors with higher yields. That won’t happen, though—the Bank of England will make sure of that.
Chasing risk
There’s another major threat to Gilts: risk. Ask any traditional asset manager or retail investor why they buy bonds, and the answer will likely be, “Because they’re safe.” But that’s just wrong. UK government bonds are now nearly as volatile as UK equities. Over the past three years, bond volatility was 12 percent versus 15 percent for stocks. I could list the actual returns for both asset classes just for fun, but if you follow markets even casually, you already know the difference is massive. So why don’t I see anyone acknowledging that bonds are structurally riskier, and why do asset managers stubbornly keep advertising bonds as a risk-averse investment? It’s complete nonsense.
My goal for next week is to write about a macro figure, market sentiment, or some other “current” topic. But I wouldn’t be surprised if the deep consequences of our debt-based system end up stealing the spotlight again—especially because policymakers, economists, politicians, and traditional asset managers keep pretending nothing’s wrong.
Jeroen Blokland analyzes striking, current charts on the financial markets and macroeconomy. He also manages the Blokland Smart Multi-Asset Fund, which invests in equities, gold, and bitcoin.