I was in Las Vegas over the weekend for the Eagles concert and had to walk through casinos to get to restaurants. I was shocked to see signs saying the casino takes credit cards. Instead of stopping their gambling, people were moving on from cash to credit and continuing to spend with abandon. This is eerily similar to how the world’s largest countries are handling their budgets.
Last week, the British UK markets hit a significant milestone. The interest rate on 30-year government bonds, known as the yield, reached 5.75%, a level last seen in the 1990s. At the same time, US 30-year bond yields were at 4.88%. The UK has a national debt problem, like the US and many other countries.
It was the kind of milestone that made both politicians and investors consider the fiscal health of the world’s leading economies, and they probably didn’t like what they saw. The UK has a substantial debt, and due to high interest rates, its borrowing costs continue to rise. Investment 101 says that high yields are a flashing warning sign that this country is now a riskier investment.
What makes the UK debt situation more significant is that its government interest payments in 2026 are expected to hit about $150 billion, which is twice what the country spends on defense. (The US spends nearly the same amount on defense as it does interest payments, which is still too much, but not as dire as the UK situation.)
The UK isn’t the only country in this predicament. The yields on 30-year German, French, and Dutch bonds are climbing to their highest since 2011. A lot of countries took on significant debt during the pandemic by passing out stimulus checks in incredible amounts during a time of low interest rates. That season is over, and the servicing of that debt has now become a lot more expensive.
Now, the UK is in a particularly tight situation because it has struggled to cut its out-of-control welfare spending. The British government debt is projected to reach 270% of its Gross Domestic Product by the early 2070s, due to a slowing economy, aging population, and spending on healthcare and pensions, according to the Office for Budget Responsibility. Investors are skeptical that the UK can get things under control because the left-wing Labor government has been unwilling to cut spending, which is driving up yields.
Countries with enormous national debt have three ways to fix it. First, it needs to grow its economy so that it can collect more taxes to pay down the debt. Secondly, it can dramatically cut spending, which is very unpopular with voters who rely on financial assistance. Or lastly, a country can tax heavily to get more money to pay down the debt, which slows its economy and pushes businesses and the wealthy to leave the country for lower tax havens.
The UK, like many other industrial nations, is trying to tax its way out of its debt problem instead of making the difficult decisions to cut its excess welfare system. The problem with that is that it can severely impact economic growth. The UK is just the first Western nation to hit the brink of fiscal disaster. The other heavily indebted countries will be watching closely to see if the UK can find a way to fix its debt problems without crushing growth.
I don’t gamble because the odds are never in your favor. Credit card debt in the world is out of control, when the solution is to spend no more than you make. Likewise, governments need to live within their means and not make promises they can’t pay for if they want investors to take them seriously.
Have a blessed week!
Richard Baker
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that the strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.