Is Britain on the Verge of Collapse?

Now, let me tell you right here at the top that this is not, per se, a story about Britain. It is, instead, a story about the fragilities that are clearly apparent across Western economies today. Britain is just the useful idiot in our tale. 

We start, then, with this headline that ran earlier this week: 

Bank of England warns of ‘material risk’ to UK financial security 

Turns out that the U.K.’s new prime minister, Liz Truss, has risen to the level of her incompetence. Since taking over the role of PM on Sept. 8, she has managed to steer the U.K. economy toward an abyss by way of a “mini-budget” that recalls failed “trickle-down” economic policies.  

The bond market balked.  

Bond jockeys are the smartest people in the room, no matter what room it is. They have way more power than any government, make no mistake about that. They can collapse a currency and an economy regardless of central bank counter-measures. 

Under Truss’s tenure during her terrible, horrible, no good, very bad first month on the job, the British pound at one point plunged toward parity with the U.S. dollar, a level not seen since the mid-1980s. That forced the Bank of England to step in to save pension funds that were careening toward collapse.  

Now, as per that headline above, the British central bank is warning that the ongoing turbulence in the market for U.K. bonds poses “a material risk to U.K. financial stability”…which, in turn, is forcing the Bank of England to dive into the market and snap up government bonds to prevent a price collapse that would result in interest rates shooting moon…which would then see the economy implode on itself. 

Like I said, this is not a story about Britain, despite the content of those last few paragraphs. 

Here’s the story: The system is broken! Possibly irretrievably. 

I don’t mean the British system.  

I mean the Western financial system. 

This should not be happening in the U.K., even with a box of stale donuts serving as prime minister. 

No Western government’s financial system should be so fragile that a proposed budget sends the currency crashing and, in turn, nearly collapses pension plans and prompts the central bank to race into the bond market before the fires of Mordor burn it all to the ground and bathe the word in darkness. 

As I noted to a colleague, “Why does all of this feel like the beginnings of Chernobyl?” 

If England were to collapse, if the U.K. bond market goes haywire, these are not small problems on some little island.  

Those events produce global shockwaves that, tsunami-like, will absolutely roll across Europe, Asia, and the U.S. 

The biggest holders of U.K. debt are U.K. banks and institutional investors. But investors in those institutions are American, European, and Asian banks and institutional investors. Meanwhile, foreign investors (those same American, European, and Asian banks and institutions) own a quarter of U.K. debt outright. 

Think about the collapse of Lehman Brothers and U.S. house prices in 2008 and all the ripples felt across banking and mortgage companies globally…and the way a collapse in the value of government bonds in places like Greece and Italy and Ireland starting in 2009 slammed banks in Germany, England, Iceland, the U.S., and elsewhere. 

I’ve read the books that quote the banking, finance, and government officials sitting at the table when all of that was going down. They all noted how close to meltdown we really were…like, days away from an unimaginable global tragedy.  

Western economies are not individual cupcakes. Economies and businesses and investments are so intertwined nowadays that all these economies are baked into a single cake at this point. If one part of the cake is infested with maggots, well pretty much the whole cake is getting thrown out. 

Turns out, you see, that decades of decadent “deficits don’t matter” spending orgies have piled up and are knocking on the door. They wanna see the manager…  

The fiscal buffoons who preached that “trickle-down economics” would grow the pie…those who fell in lust with the beautiful, sexy lies of “modern monetary theory” that preaches debt has no meaning…they’ve led the Western world to a Thelma & Louise moment. 

A Chernobyl moment. 

I am not convinced we can turn back and avoid that cliff up ahead…that moment a technician turned a switch at Chernobyl and started a disastrous chain reaction. 

That’s Britain: A disastrous chain-reaction in waiting. If the Bank of England ultimately can’t fend off a bond collapse…if Liz Truss continues to make the kinds of missteps that infuriate the very smart folks in the bond market…then the switch flips. 

The meltdown begins. 

I’ll be exploring all of this further in the upcoming issue of our Global Intelligence Letter dropping later this week, including how Britain got itself into this position and what it means for America and the global economy.  

In the meantime, I’ll say, own some gold and bitcoin. If all this blows up, you’ll be very glad that you do.