Blain’s Morning Porridge Nov 27^th 2025 – Bond Markets, Inflation and Economic Dementia

“I find it fascinating the chainsaw has become an emblem of a new golden era of humanity”

The UK survived yesterday’s Pretend and Extend budget. It was a lacklustre soap-opera moment. It won’t cure the UK’s long-term issues or fix Broken Britain. If politicians were serious about repairing the political economy of the UK – it’s time for root and branch surgery on the “frictions” that leave the nation suffering Economic Dementia!

LINK TO PODCAST

Today is Thanksgiving in the US, commemorating when the local indigenous residents shared their winter supplies with starving settlers. That ended well… I hear Donald Trump did not pardon the Turkey after it declined to give him 50% of itself in return… (Bad Joke and confirms I suffer Trump Derangement Syndrome… but I could not resist!)

Back to this small, damp Island at the unfashionable end of Yoorp….

Yesterday, all economic life of the UK did not suddenly end. The economy did not fizzle away in a puff of irrefutable budget logic. Millions of UK employees did not self-combust as a result of tax changes. The political economy of the nation did not breakdown as angry mobs stormed Whitehall.

Instead, Yesterday’s budget was dull, boring and predictable – a pretend and extend budget papering over the cracks on the wall, but fixing nothing for the long-term. It was like a really boring soap opera without the DuffDuffs at the end setting up tension for the next episode.

Bond markets love dull, boring and predictable…. So… nothing to worry about in Gilts. Yields fell. JOB DONE. In Bonds there is truth. Nothing else really matters.

Not a single holder of UK government bonds around the globe will have awoken this fine day worried Gilts are about to default, or that payments of principal or interest will be missed or delayed. Therefore, the Chancellor can call yesterday a success.

Highlight of the day was the premature release of the fiscal report from the Office of Budget Responsibility outlining the consequences of the Budget – even as Premier Sir Kier Starmer was introducing the Chancellor and her budget! You could see her surprise and fury as she read about it. I have a suspicion the OBR is not long for this world – when the guardrail of financial stability becomes the cause of instability, you have to wonder what its point is.

Even funnier was one of my Reform minded chums texting me to say it was a deliberate leak from No 11, designed to deflect from the mounting “tidal wave” of criticism of her “deeply flawed and dangerous budget.” Whateva…

The tidal wave never hit. No one really cared much. The busiest people yesterday were not Gilts market analysts, or investor desks pressing buy on their Gilts orders, but financial editors on right-wing media desperately trying to be negative. Even the Torygraph struggled to be effectively negative – the best their attack-dogs could come up with was a charge that Angela Rayner was the real author of the budget: nothing will infuriate the Tory Shires and resident Gammons more than the thought a “jumped-up working class single-mother from Up-North” is running the national finances.

(Funny how the Torygraph worked in Raynor’s £40k stamp-duty tax issue (despite the fact she resigned over the issue) into the story. They still don’t say much about Nathan Gill, a Reform MEP, going to Jail for 10.5 years for shilling for Russia. Neither does Nigel. Just saying….)

As for the budget: Yes – there is going to be pain as more taxpayers are dragged into the highest tax band, and more will pay the basic rates. Yes – spending on welfare was increased.  And yes, this budget fixed nothing, so there will be at least three more tweaky, nervous budgets from this Government which will twiddle spending and taxes to placate Labour backbenchers without upsetting markets too much.

That’s politics. It’s a compromise. And it’s pretty boring.

What’s are the real risks to the UK?

Last night I was in London to see my great chum Prof Mark Blyth lecture on his recent book: Inflation: a Guide for Users and Losers. The dint of his thinking (and his co-author, the very insightful Nicolo Fraccaroli) is that “inflation is NOT always and everywhere a monetary phenomenon” – which is economic heresy for conventional monetarists! Instead, the pair show that periods of high inflation typically follow supply shocks or other extraneous, often politically driven, events.

It’s a great book – Adam Tooze called it “an essential dose of clear thinking on one of the most contentious issues in economic policy.”

It set me thinking. The greatest risk to Government bond holders is not that America, Japan or the UK will default – there is no reason for them ever to do so. They have the keys to the printing presses to print as much money as required to repay any debt. If they were to do it would be a monetary phenomena creating inflation, which would be accelerated as the currency would collapse. That’s all very conventional. (When nations printed money during QE it did not cause general inflation, just financial asset inflation as stock markets absorbed all the liquidity!)

The biggest threat for bond holders is inflation, eroding the value of the bonds. The UK’s stubbornly highly relative inflation is why bond investors are buying shorter-maturity bonds (and the UK’s Debt Management Office has been reducing the maturity of the bonds it sells.)

Why is inflation so high? Surely consumers being taxed more means they have less to spend, thus inflation should fall. Er… No.

In the late-stage democracy Western Economies now find themselves in, the increasing “frictions” caused by bureaucracy will likely drive inflation higher as the nation becomes structurally inefficient. As economies age and mature, I am beginning to think they become vulnerable to Vascular Economic Dementia – where bureaucracy, rules, regulations, process and procedure block the economic arteries. Infrastructure, services and execution of policy become increasing sclerotic and deliver less and higher and higher costs – thus pushing up inflation, and creating inflationary demand/supply shocks across the economy.

You can see that today in the £1.7 bln weekly cost to the UK economy of Brexit – a number suggested by the Liberal Democrats. For Reform minded voters  – that is £2 bln per week less than Nigel Farage et al told us we would save and the NHS would get £350mm a week more if we left Europe! Doh.

You can also see that friction in the UK paying more than any other nation for energy, water and sewerage. At some point some political party will have to address the ravening maw of the NHS before it consumes us all.

How to do you cure it…. ?

If Labour, Reform or the now irrelevant Tories, were serious about fixing Broken Britain, it might time for some painful but effective open-heart surgery to unblock the state’s arterial system. Someone may have to address the costs of bureaucracy by borrowing Javier Milei’s chainsaw!

Labour backbenchers sawing up the NHS? That’ll be the day….

Out of time, and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital

Special Advisor – Spitfire Strategic Capital