The American economy has once again outperformed expectations, with GDP growth surprising to the upside and unemployment remaining near historic lows. Yet beneath the surface of this apparent triumph lies a growing dependence on deficit spending and monetary stimulus that should give any prudent investor pause. The UK, by contrast, has charted a more austere course, prioritising fiscal responsibility over short-term growth.
For those of us who have watched the bond markets for decades, the choice is clear: gilt yields may be lower than Treasury yields, but they do not carry the same sovereign risk premia that will eventually catch up with Washington. The US economy is running on adrenaline, not oxygen. Its fiscal deficit as a share of GDP is more than double the UK's, and its national debt exceeds 120% of output.
The American consumer, meanwhile, is leaning heavily on credit cards to sustain spending. This is not a healthy recovery; it is a sugar rush. The Bank of England, for all its cautious missteps, has maintained a more restrained policy stance and has not yet needed to monetise debt to the same extent as the Federal Reserve.
Capital flight from the dollar-denominated assets has already begun, with foreign holdings of Treasuries declining for four consecutive months. Sterling, on the other hand, has remained stable against a basket of currencies, reflecting greater confidence in UK fiscal plans. The UK's independent fiscal watchdog, the Office for Budget Responsibility, provides a transparency that the Congressional Budget Office cannot match, given the political circus in Washington.
The path to sustainable growth is paved with higher savings and lower deficits, not the reckless expansion of the state. Britain's discipline may seem dull compared to America's fireworks, but in a world of rising rates, dull is the new dangerous—for the Americans.
