Britain couldn’t sell all of the government debt it was offering at a government bond auction last Wednesday. Over £100 million worth of long-dated gilts—the British equivalent of U.S. treasury bonds—failed to sell as the government attempted to raise £1.75 billion. This is the first failed government bond auction since 2002, and comes at a time when British debt is set to rise to unprecedented levels.

Statistics published two days later paint a grim picture of Britain’s ability to raise money. The Times reported:

British institutions fled from the gilts market during 2008, selling a net £20.2 billion of government bonds, and dumping holdings worth £5.9 billion in the final quarter alone, official figures revealed. The flight by institutions from gilts followed modest net sales of £400 million in 2007, and was a big reversal after purchases worth a net £19.4 billion in 2006.

If domestic institutions no longer want to buy government bonds, then the British government must rely mainly on foreign buyers.

In 2007, the government issued £34.1 billion worth of gilts. In 2008, it issued a record £92.2 billion. It is predicted to issue £150 billion in the next fiscal year. The British government will have to find an awful lot of buyers.

Yet even foreigners may not be willing to buy the debt. “Overseas demand for gilts may now be weakening, and they were net sellers in January,” said Michael Saunders of Citigroup.

Should these trends continue, Saunders warned, the Treasury would be heavily dependent upon further gilt-buying by banks, and on purchases by the Bank of England under its “quantitative easing” program, which is just another way of saying the printing of money. The British government may have to rely on freshly minted money to stay afloat.

Many in Britain are worried. Jeremy Warner, business and city editor at the Independent, writes:

Last week, I expressed the view that the recession should prove just about affordable for the UK assuming nothing further by way of fiscal stimulus. Now I’m not so sure. With the failure of yesterday’s long-dated gilt auction—the first such failure in seven years—we may be seeing the beginnings of a buyers’ strike that will make the fiscal deficit increasingly difficult to fund.This was always the nightmare for government and at the Bank of England, and it may be coming true. To those of a cynical disposition, it was also the surrogate purpose behind the policy of “quantitative easing.” If you are struggling to persuade investors to fund the deficit, it kind of helps if you can fund it yourself by printing money and expanding the money supply.

The International Monetary Fund forecasts that Britain’s budget deficit will rise to 11 percent of gross domestic product next year—higher than anywhere else in the developed world and a lot of places in the developing world also. Total national debt could rise to 80 percent of gdp, writes Warner. If you include the liabilities of nationalized and semi-nationalized banks, this figure rises to 400 percent of gdp.

No wonder Bank of England governor Mervyn King warned last week that Britain couldn’t afford any more stimulus plans.

America is in a similar position. It too could soon be unable to fund its massive debt. For more information on this crisis, see our article “Can the Financial Flames Be Stopped?”