{"text":[[{"start":5.9,"text":"The writer is the Rene M Kern professor of practice at Wharton School, chief economic adviser at Allianz and chair of Gramercy Funds Management"}],[{"start":14.76,"text":"In 1971, John Connally, then secretary of the Treasury, responded to European complaints about US currency policy with a simple, memorable phrase: “Our currency, your problem.” Fifty-five years later, considering how significant changes in America’s financial conditions spill over to the rest of the world, it’s become: “Our yields, your problem!”"}],[{"start":35.85,"text":"US government yields have surged in recent months, with the global benchmark 10-year Treasury rising from lows of about 3.96 per cent in February to 5.36 per cent early this month — the highest in two decades. It is now trading at about 5.10 per cent. The 30-year yield recently peaked at a level not seen since 2002."}],[{"start":56.68,"text":"The primary causes of this have been the “twin engines” of the current US dynamic. The first is the tech-driven private sector growth boom and the accompanying surge in bond issuance. The second is persistently wide fiscal deficits that have coincided with the need to refinance maturing debt at a time of diminishing availability of funds from traditionally reliable long-term holders of US fixed income securities."}],[{"start":79.88,"text":"Inflation concerns have amplified this, especially as persistently costly diesel and other energy products seep into a broader range of prices."}],[{"start":88.16,"text":"Given its size in the global competition for bond financing, what happens in the US bond market does not stay there. Instead, it reaches other countries and, in the process, exposes their structural fragilities."}],[{"start":99.8,"text":"As in 1971, the US benefits from the “exorbitant privilege” of being the world’s reserve currency. It also benefits from having the deepest financial system to which other countries outsource the management of their wealth and savings."}],[{"start":112.92,"text":"In the process, parts of Europe are penalised because of structural weaknesses, adding insult to injury. The US has not only imported capital from Europe with its more dynamic and entrepreneurial private sector but it’s now exporting financial pressures through borrowing costs that affect governments, corporations, mortgages and households."}],[{"start":132.52,"text":"France is the case in point right now. It has been made particularly vulnerable by low growth and a highly polarised domestic political climate ahead of next year’s presidential elections. A political situation that frustrates fiscal adjustment has produced the historical peculiarity of bonds for a “core” Eurozone country trading at “peripheral” state levels."}],[{"start":155,"text":"Yields in many other European countries also have been rising, risking exposure of structural vulnerabilities as elevated energy prices add to inflation pressures. Then there is the potential for a spillover of this back to US markets. While this may seem limited, it still risks disruptive financial feedback loops between the US and Europe."}],[{"start":175.52,"text":"Many European governments are hoping for a significant drop in US yields. Yet achieving this benign outcome through significant fiscal adjustment in America, while desirable, is highly unlikely. Indeed, if yields were to fall, it would be most likely the result of a US economic hard landing that would directly undermine global demand and trade, thereby increasing the likelihood of a new wave of tariffs and restrictions. This would inflict far more pain on Europe than the current elevated yields."}],[{"start":206,"text":"So Europe, like the rest of the world, cannot and should not wait for US weakness to save it. Nor should governments rely on their central banks as suggested by France’s far-right leader Marine Le Pen in a recent interview with the Financial Times."}],[{"start":219.46,"text":"The only way to minimise the real and present danger of escalating economic damage is to focus on generating higher growth and productivity, including by reducing regulatory red tape, completing the EU capital markets union plans to build an integrated market across the bloc, stepping up infrastructure modernisation and innovation, and scaling up promising start-ups — all of which would also reduce European domestic savings flowing to the Atlantic to fund US tech. Countries also need to undertake their own fiscal adjustment, including pro-growth budget reforms."}],[{"start":252.4,"text":"What’s happening in global bond markets is yet another reminder that the era of relying on American financial largesse and/or an artificially suppressed global rate environment is over. Policymakers in Europe, as well as elsewhere, need to act on the recognition that while the current yield shock originated in the US, they must design and implement the solutions at home. Until they do, the US bond market will remain their problem, and it will become an increasingly costly one."}],[{"start":280.24,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1792667493_6863.mp3"}