Britain’s Bizarre “Lettuce Crisis” Will Spread to America

Jim Morrison, Liz Truss, and the Fall of the U.S. Economy.

Beautiful friend,

This is the end.

My only friend, the end,

Of our elaborate plans. The end.

I give thanks to Jim Morrison, of The Doors fame, for penning those lyrics more than half a century ago, and which I’m using today to make a point about a big problem we’re facing…

Originally, those lyrics were about Morrison’s breakup with longtime girlfriend, Mary Werbelow. But apparently the message morphed over time so that Morrison once told Rolling Stone magazine, “it could be almost anything you want it to be.”

Today, I want it to be about what’s happening in Britain… because it hints at where Uncle Sam is headed.

It turns out the Brits are having some bond woes once more.

You might recall that last fall, when a head of lettuce was elected prime minister, the British bond market fell out of bed, crushing the British pound, nearly sinking bond-dependent pensions funds, and forcing the Bank of England (the U.K.’s version of the Federal Reserve) to step in and save the day.

The markets were seriously displeased that Liz Truss—the aforementioned head of lettuce—had proposed a bonkers “mini budget” that leaned heavily on piling insane amounts of debt onto the British economy. The bond market collectively said, “Ain’t no way!” and promptly collapsed.

Liz beat a hasty retreat, and after serving the shortest term in prime ministerial history, is now running a veggie bodega in Notting Hill (probably) as bond woes return to the island nation she successfully mismanaged.

This time around, the root cause of the bond problems is rampant inflation brought about in large part by the own-goal known as Brexit and its all-too-clear-to-predict impacts. Chief among those impacts: U.K. inflation remains close to 9%, well above the rest of the “rich nation” club members.

That, in turn, has pushed up bond prices because bond investors—crazy as this sounds—want returns on their money commensurate with the risks they’re taking on, even if those investments are in supposedly safe government paper.

Yields on 10-year British debt are now above 4.4%… pushing up against the 4.498% they hit during the height of last fall’s “Lettuce Crisis.”

But here’s where the bigger problem lies, and where our cautionary tale for America begins: Higher borrowing costs are making it increasingly difficult for the British government to service all the King’s debt.

The U.K.’s Debt Management Office, which manages public-sector funds, has been tasked with selling almost £240 billion ($300 billion) worth of debt this year—the largest sum of debt the U.K. has ever had to sell, excluding the pandemic. And apparently traditional bond-buyers are increasingly balking.

In basic terms, the U.K. has to sell more and more debt to afford the impact of rising interest rates, and the bond jockeys are wringing their hands and not buying bonds they’d otherwise buy in more normal circumstances. And the fact that those who are buying are demanding higher interest rates is, in part, an indication that they see risks rising for U.K. debt.

Of course, the U.K. is a small economy relative to the U.S., so the pain is felt quicker than in America.

But size is just a number.

Sooner or later what kills the mouse, kills the elephant—it just takes a larger dose of poison.

And that larger dose is already apparent in America.

Earlier this year, the U.S. Treasury Department reported that it had paid out $213 billion in interest payments on Uncle Sam’s debt in the final quarter of last year. That was a record.

A year earlier, in the fourth quarter of 2021, Treasury paid out just $63 billion.

The problem will worsen, of course, because:

1. Interest rates are even higher today they were last fall.
2. America has even more debt than it did last fall.
3. Older debt that’s coming due carried much lower interest rates and will, out of necessity, need to be refinanced at today’s higher interest rates.

These vastly larger interest payments inflicted upon America are a direct result of Federal Reserve jealousy.

Today’s Fed looks back at the late 1970s and lusts for the success that then-Fed Chair Paul Volcker had in defeating the rampant inflation of the day. Volcker managed to crush inflation by jacking interest rates to more than 20%, well above the rate of inflation.

But as I’ve noted many times, today’s heavily indebted America is not 1970s America, and today’s inflation is very much different from the 1970s. So, the ancient prescription of raising rates to the moon is not working as intended.

It is, however, costing America a boatload of added interest costs, which could very well lead us to our own British Moment—when bond buyers begin to worry that the U.S. is on an unsustainable path… that high interest rates are going to birth a monetary crisis centered on the dollar and America’s much-too-mountainous pile of debt.

In which case, my use of Jim Morrison’s lyrics brings us full circle.

The is the end, my friend, of our elaborate plans… to jack up interest rates so high and so fast that we quash inflation over which we have limited control. Those plans are not working so well on inflation, but they’re doing a number on America’s debt-repayment costs.

If we reach a tipping point when global bond buyers recoil, we’re going to have one helluva global crisis on our hands.

And if that happens, I’ll be stealing the final lyrics from the theme song to James Bond’s Goldfinger:

He loves only gold.

Only gold.

He loves gold.