ALEX BRUMMER: Biden’s borrowing binge sinks bonds as US debt spirals out of control

When Rachel Reeves embarked on a reputation-building trip to Washington in May she made no secret of her admiration for Bidenomics.

The Shadow Chancellor argued that Labour’s ‘green prosperity plan’ would be her party’s equivalent of President Biden’s misnamed Inflation Reduction Act, with its goal of attracting climate change projects to the US.

Six months on, Biden’s fiscal largesse is catching up with him.

American bond markets are in turmoil as traders refocus attention on the scale of US borrowing and debt amid a 156 per cent jump in the federal deficit over the last year.

It has been assumed that the extreme privilege that the US enjoys of operating the world’s reserve currency made it immune to events such as the Truss tantrum when the yield on British gilt-edged stock soared. 

Big spender: US President Joe Biden’s misnamed ‘Inflation Reduction Act’ has led to a 156% jump in the federal deficit over the last year

The former Prime Minister’s efforts to drive through unfunded tax cuts and lavish spending on energy subsidies saw her ousted from office.

In recent days, America’s ‘bond vigilantes’, dormant since the 1990s, have been out in force. 

They have been driven to the barricades by a realisation that the 20 interest rate rises engineered by the Federal Reserve since late 2021 mean that American borrowing costs are likely to remain at elevated levels for years to come.

This might be sustainable if US public finances were in better shape.

Extravagant spending commitments made by the White House mean the deficit and debt are spinning out of control.

Some American banks and analysts were quick to condemn Britain’s political instability as prime ministers were changed on an Italian scale in 2022.

Now it is a US political eruption that is in sharp focus. The ejection of the House Speaker Kevin McCarthy, after he agreed to a temporary expansion of US debt limits last weekend, has left a stalemate on Capitol Hill with some Republicans wanting to end big-spending ways.

All of this as candidates for the 2024 presidential elections hit the stump with both Biden and Donald Trump, at opposite ends of the political spectrum, regarded as deficit deniers.

The US was thought to be protected from bond market anxiety because China and Japan had little choice but to hold the majority of US Treasuries in their reserves.

That no longer is the case. Japan is largely able to self-fund because of the willingness of citizens and banks to hold vast quantities of local government bonds.

The cooling of diplomatic and economic relations between the US and China means Beijing is not willing to add to the several trillions of US bonds which have crashed in value. Bond prices are like a see-saw: as prices plummet the yield or return rises.

Biden is responsible for a series of big-spending initiatives layered on top of the helicopter money – cheques for every household – provided by Trump.

The big Biden outlays started with a $1.9trillion (£1.6trillion) package soon after he took office.

The fiscal faucet has never stopped running. The Chips and Science Act authorised $280billion (£230billion) of government incentives (or three HS2s) for re-shoring semi-conductor investment in America.

This was followed by the Inflation Reduction Act, which is nothing of the kind, where the estimated bill has soared to $1trillion (£820billion).

Biden was knocked back by the Supreme Court when he proposed to write off $400billion (£330billion) of student debt. 

This has not halted the gravy train. This week he went ahead with a stealth debt write-off of $9billion (£7.4billion) and more is promised.

At 7 per cent of US national output this year, the deficit is at its highest level since 1930 outside of wartime. 

Against such a background it is not surprising that Wall Street bond markets are spooked and the shock waves have reached the Eurozone and Britain.

As we learned with the embrace by UK pension funds of liability driven assets (derivatives built on gilts), when there are sharp movements in bond markets no one really knows where the chasm will open up in the financial system.

America’s Silicon Valley Bank, First Republic and some of regional banks already have been bailed out as a result of rate interest changes.

The yield on the ten-year bond has jumped 1.5 percentage points since the spring. Time to check the lifeboats are in good order.

This post first appeared on Dailymail.co.uk