The City of London watches California burn with a mixture of horror and detached curiosity, the sort reserved for a particularly volatile emerging market. Wildfires tearing through the state's highways are not just a tragedy; they are a financial statement. As UK emergency services study containment tactics, they would do well to consider the underlying economic kindling.
The cost of these fires will be staggering, and it will be paid for with borrowed money. California's pension liabilities already dwarf its GDP. Now add billions in disaster relief and reconstruction.
This is a sovereign debt crisis waiting to happen, masked by favourable weather and media attention. The gilt market is a cold, hard judge. If UK policymakers think they can simply spend their way out of climate-related disasters without a corresponding rise in taxation or a credible plan to restore fiscal balance, they are mistaken.
The bond market will eventually rebel. I see parallels to the Eurozone crisis: a currency union without a fiscal union, states left to burn while the central bank prints money to calm the flames. But you cannot print your way out of a supply shock.
These fires destroy productive capital, reduce the tax base, and increase demand for government services. That is a recipe for inflation, higher yields, and capital flight. History tells us that the most effective firebreak is a balanced budget.
But say that in Westminster today and they will call you a heartless technocrat. No, I am a realist. The market will have its say, and when it does, the smoke will clear to reveal a very different fiscal landscape.
