Nobody’s Stronger Than the Government…Except These Guys

Lettuce now praise today’s departure of U.K. Prime Minister Liz Truss. Her salad days are done. 

Sorry. Was an easy joke to make at the expense of the shortest-lived PM among the 56 who have served in that role going back to 1721. This was obviously going to be Truss’s end after she and her former chancellor proposed a series of economic measures that made about as much sense as putting bricks in a food processor. 

Her departure was so assured that The Economist magazine questioned whether her expiration date would outlast that of a head of iceberg lettuce. Taking inspiration from the article, The Daily Star newspaper even set up a YouTube livestream of a slowly decaying lettuce. 

The lettuce won. 

Jokes aside, the events that felled Liz Truss speak to an issue much bigger than Truss herself or the economy of the island nation she so disastrously oversaw.  

See, Liz was brought down by the financial markets, in particular the bond market.  

I always point out that bond jockeys are the smartest people in the room. They operate on a plane well above the stock market, and can sniff out pending disasters like a bloodhound stalking a fugitive. 

For the most part, the bond market goes along to get along when it comes to sovereign debt. It allows politicians and their financial/monetary mandarins a great deal of rope to manage an economy as they see fit. 

But then comes the day when the mandarins go too far and the bond market imposes its own version of vigilante justice. 

Which is exactly what happened to Truss. She went too far. She proposed a mini-budget based on the “trickle-down economics” philosophy of the Reagan/Thatcher 1980s…a philosophy that has never lived up to its billing. 

The bond jockeys revolted. They realized the mini-budget was going to saddle the U.K. with an ungodly amount of additional debt. So, they dumped bonds en masse and collapsed the British pound, forcing the Bank of England to step in and start propping things up to prevent a bond-market collapse that would have scorched the economy. (Remember this: Financial markets are always stronger than governments.) 

Here, however, is the bigger story: England is a cautionary tale for the U.S. and the European Union. 

The U.S., in particular, has an egregious amount of national debt. It’s also overseen by financial/monetary types who buy into the voodoo known as Modern Monetary Theory, a (totally mental) philosophy that believes governments which control a fiat currency can print as much money as they need and never worry about debt. 

As seen in England, the bond market is now standing up to say, “Hold my beer…” 

Debt most assuredly does matter. The MMT crowd has it entirely bass-ackward (and I could write for days on why MMT is fundamentally flawed). 

But let’s assume they don’t have it bass-ackward…that government can print money from now until the end of time and never face repercussions. 

Even at that, the U.K. bond market, one of the world’s most important, is telling Western governments that idea is stupid. Soaring debts will not be tolerated, the bond jockeys are saying, because they will, at some point, burn down an economy and its currency. 

If you print and print and print—and then print some more—every single new dollar, euro, pound, whatever, devalues every existing dollar, euro, pound in circulation. You make money increasingly worthless…which then drives up the cost of goods because people would rather own a tangible item than an increasingly worthless piece of paper. 

So, when you do that, you drive up inflation…which drives up interest rates…which then flows through all the debt you as a government are issuing to live above your means. Which just leads to a spiraling, hyperinflationary cycle. 

The bond market reflexively understands this, and it said so in slapping down Liz Truss. 

I am not sure American monetary mandarins are paying attention to what has happened at a deeper level beyond a prime minister losing her job after just six weeks. But there is a cautionary tale in all off this: debt matters and at some point, the bond market is going to impose on the U.S. a painful remedy. It’s not going to allow Uncle Sam to just keep on printing money to pay for this program and that. 

When that day comes…watch out below.  

The dollar will plunge. U.S. Treasury paper will plunge as yields shoot the moon. 

The Swiss franc will rally. Bitcoin will rally. And those who have built a solid position in both will be protected to a degree from the destruction all around. 

This is not imminent. The dollar will outlast a head of lettuce. But the salad days are coming to an end. Now is the time to prepare.