The first warning signs
In our recent reports – including this week’s GFM report – we highlighted that government debt is rising too rapidly in many Western countries. Interest payments are increasing so quickly that they are beginning to crowd out other essential expenditures such as infrastructure, education, and research & development, all of which are vital for long-term growth. However, no one knows at what debt level the markets will stop accepting this trend. Once that threshold is crossed, long-term interest rates may spike sharply, causing interest payments to rise even faster, creating a vicious cycle. History shows that when this happens, central banks often intervene by financing large portions of government debt through money creation.
This issue is now particularly relevant for two countries:
The United Kingdom and the United States
Both countries are facing large fiscal and current account deficits. The UK’s debt-to-GDP ratio is slightly lower than that of the US, but its structural economic growth is also weaker, giving the US more room to carry higher debt levels.
The so-called “twin deficits” in both nations imply that substantial foreign capital inflows are required to finance these gaps. If these inflows fall short, the currency tends to weaken and/or interest rates rise. This can trigger a self-reinforcing downward spiral, potentially leading to a crisis. For this reason, maintaining international investor confidence is critical. If that confidence fades, interest rates may surge. Even a falling currency alone can lead to the same outcome: it raises import prices, drives up inflation, and ultimately increases interest rates.
No one can predict exactly when the situation might spiral out of control, but there are early warning signs that suggest it could become more acute. We are now witnessing two such signs:
1. Silver Prices Break Out Upwards
This is exactly what one might expect when inflation remains low – as is currently the case in the US – while the central bank appears to be shifting towards a more inflationary stance. In the US, this situation reflects a combination of:
- A very large government deficit (with limited economic stimulus effect),
- A rapidly worsening debt-to-GDP ratio,
- Import tariffs that suppress growth and increase inflation,
- And attempts by former President Trump to pressure the Federal Reserve into rapid rate cuts.
Combined with Trump’s attacks on scientific institutions, critics, and legal norms, this has eroded confidence among foreign capital holders. Moreover, trade negotiations around tariffs are making little progress: even when agreements are reached, they are typically vague frameworks requiring years of follow-up negotiations. As a result, importers, exporters, and the broader business community face prolonged uncertainty, weighing down growth – including in the US.
Trump believes that tax cuts and deregulation will sustain growth. However, nearly all economists disagree. Most likely, US economic growth will remain weak for the time being, reducing tax revenues and increasing government spending.
The bottom line: US public finances are set to deteriorate further, and foreign willingness to help finance this is likely to decline. This increases the likelihood that the Federal Reserve will need to step in more aggressively.
Once markets sense this shift, gold and silver prices tend to rise sharply. Silver has already broken out upwards – a first early warning. The next red flag will be when gold surpasses $3,500. The real tipping point comes if the yield on 10-year US Treasury bonds – currently around 4.35% – exceeds
5%.
2. The UK’s Fiscal Challenges
The UK has been unable to bring its budget deficit under control. Politically, there is strong resistance to cutting government spending, which means that significant tax increases are on the horizon. This comes at a time when the UK economy is already stagnating. Higher taxes and a tariff war will only further suppress growth. Even with higher tax rates, government revenue is unlikely to increase substantially under these conditions.
Final Note:
We are already seeing a combination of a weak currency and upward pressure on long-term interest rates in the UK. In the US, the main development so far has been a weakening dollar. We believe it's only a matter of time before long-term interest rates in the US also begin to rise. This would turn the global financial landscape upside down. Rising US interest rates tend to drive rates higher around the world. Moreover, the combination of import tariffs and a weaker dollar has caused a sharp spike in US import prices, which will significantly impact global trade flows and corporate profitability.
