Montreal, Canada

Judging by the break-even rates on inflation-protected bonds, the United Kingdom is home to the highest future inflation. And that means shorting or betting against British gilts (government bonds) will probably rank as one of the smartest speculations over the next five years.

30 Year Gilt Price Chart (Financial Times)

Long-term break-even rates for U.K. TIPS in 2035 show a 3.4% inflation rate – the highest in the G-10. This compares to 2.2% for U.S. break-even rates maturing in 2039.

Earlier this week I reported on Julian Robertson, Jr. and what the hedge fund legend believes is the greatest short – long-term U.S. Treasury bonds ahead of a credit debacle triggered by possible Chinese asset disposals. Robertson warns if the Chinese dump T-bonds we'll suffer a global financial Armageddon.

The Chinese have been especially vocal about surging U.S. deficits since last year and have repeatedly warned they are unsustainable; as America's largest financing nation they have also asked Treasury for some sort of guarantee on Treasury bonds. China owns approximately 40% of all outstanding U.S. Treasury supply – or more than $1 trillion dollars.

If U.S. Treasury bonds are an ideal short than Britain's bond market is probably an even better speculation on the short side. England is amassing piles of debt.

The U.K.'s financial system is essentially bankrupt. In 2008, the aggregate cost of bailing-out its banks exceeded the entire value of England's gross domestic product. The government already owns most of the country's largest banks – including Royal Bank of Scotland and Lloyd's.

Quantitative Easing (QE), the central bank codeword for massive credit expansion, is no greater anywhere than in the United Kingdom whereby the Bank of England's planned $287 billion dollar bond purchases has triggered rising inflation fears; the central bank has been an aggressive buyer of British gilts since last fall – especially longer dated gilts.

The big question for gilts is what happens once the Bank of England terminates or slows its QE program? Who will absorb this supply?

The odds are pretty high that Britain will have a hard time finding buyers to finance its ballooning budget deficits. That scenario, which is highly likely down the road once deflation is defeated, implies a major funding crisis coupled by sharply higher interest rates. The pound is also vulnerable and needs to remain at a low level in order to defeat deflation.

The above scenario, by the way, is also likely to play out in the United States eventually. Both Anglo-Saxon economies represent the worst long-term inflation scenarios and shorting their respective government bonds ranks as one of the greatest speculations over the next decade.