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Dear Secretary Bessent,
Your well-deserved claim to financial fame was leading two wildly successful runs — one against the British government’s defense of the pound and one against the Japanese government’s defense of the yen. But what goes around comes around. The market is now running, not on the dollar, but on U.S. Treasuries. And you’re the government official playing defense against the financial world’s offense, which knows, as you know, that you are armed with spitballs, aka meh.
There are $31 trillion worth of U.S. short-, medium-, and long-term Treasuries in the market. Of this, $27 trillion in Treasuries is potentially available for purchase. The remaining $4 trillion is held by the Fed. You have, without violating the Treasury’s free float rule, at most $130 billion to spend annually to buy back Treasuries — to raise their prices and lower their yields (interest rates).
That’s less than one-half of one percent of the $27 trillion in Treasuries that global private actors could and would, in a panic, dump (sell). Of the $27 trillion, $9 trillion is held by foreigners. Of the $9 trillion, $633 billion is held by China. So, China alone has five times your firepower when it comes to their ability to kill versus your ability to rescue the Treasury market. Were the Chinese government to noticeably accelerate its ongoing, substantial divestment of Treasuries, others would likely pile on, potentially sending bond prices crashing, interest rates soaring, and the U.S. stock, housing, and other financial markets plunging.
That’s surely your worst nightmare.
Canada, btw, has $456 billion in Treasuries. Most of these bonds are privately held, i.e., owned by individual Canadians. These folk were our brothers and sisters in war and peace. We fought with them, we visited with them, we traded with them, we partied with them. Hell, we even married them. They loved us and we loved them. No more. Now they view us as a threat — to their economy and, indeed, their sovereignty.
What if Canadians wake up tomorrow — Monday — morning and decide that Saturday’s imposition of 50% tariffs on a massive number of Canadian goods, from alcohol to cars to steel, to aluminum, to cement, to their … by HE-WHO-MUST-BE-FEARED, President Trump, wasn’t cricket. What if an influencer, named Brittlestar, with millions of followers, tells them “Buy Canadian means swapping your U.S. Treasuries TODAY for Canadian Treasuries?” That could lead many pissed-off Canadians to dump billions of Treasuries — TOMORROW!
It could also lead many a young Scott Bessent, around the world, to run on, including short, not just U.S. 30-year Treasuries, but the entire U.S. financial system. That includes the dollar, which took another hit at the end of the week. But the first target would likely be our insurance industry. As you know, the industry has, under your watch, loaded up on increasingly troubled private credits, which are as transparent as the CDO²s issued before the Great Recession.
That’s surely part of your 2008 All Over Again nightmare.
You Aren’t the Fed
Beyond your $130 billion peashooter, you can sell bonds to raise money to buy bonds. In this case, you’ll want to position your buy-side and sell-side traders at opposite ends of your trading floor and have them whistle Dixie to each other as they spend their day swapping positions, i.e., doing something individually and nothing collectively.
As Peter Coy just explained in his terrific Substack post, Economics for Everyone, your $4 billion pre-announced purchase of 30-year Treasuries temporarily lowered that rate from 5.34% to 5.18%. But the next day, market bond sales raised it back to 5.27%. So, you spent $4 billion of U.S. taxpayer money to achieve a 5 basis-point reduction in the 30-year yield. Congrats.
And the 5 basis-point reduction surely won’t last. There are too many sellers out there for your blip in purchases to matter. Of course, the biggest seller is you. Treasury daily bond sales, to finance the federal deficit, average $5.5 billion. Yes, you can, as you did, focus on the long end of the maturity structure. But, as you saw, the ten-year Treasury’s price fell as the 30-year Treasury’s price rose for a day or two. Your finger in one part of the maturity-structure dike lowered rates there, but raised rates elsewhere. Moreover, the 30-year mortgage rate finished the week at 6.65%. You managed to lower it from 6.67%. Again, congrats.
You Aren’t the Fed
The Fed doesn’t need to sell Treasuries to get money to buy Treasuries. It can simply print money to buy Treasuries. But the new Fed Chair, Kevin Warsh, wants to shrink the Fed’s balance sheet. This means, of course, that he wants to sell, not buy Treasuries. Doing so will raise the interest rates you’re trying to lower.This is the opposite of what he pledged he’d do in auditioning for the job with the President. According to the President, “He certainly wants to cut rates” and “Warsh would not have gotten the job” if he didn’t want to cut rates.”
Warsh is squaring this circle by claiming he wants to lower short rates while raising long rates, i.e., sell long-duration Treasuries, buy short-duration Treasuries and, on balance, sell more than he buys. In short, Warsh wants to steepen the Treasury yield curve whereas you want to flatten it. Can’t you guys get your act together? And, btw, don’t you realize that the market ultimately sets the slope of the yield curve. So if you buy (sell) long and sell (buy) short, the market will do the opposite.
Let’s Talk Fundamentals
Mr. Secretary, I get that you’re trying to convince the market that you can produce lower rates so the market will set lower rates on its own and you won’t have to show your non-existent cards. I also get that you are nervous. You certainly sounded nervous in this CNBC interview. Of course, you, of all people, can smell panic and there are many reasons panic could take hold. Indeed, in some form of mental slip, you directly or indirectly mentioned most of the reasons:
The current size and accelerating growth of federal debt
The growing cost of the Iranian war
The need to roll over federal debt at higher interest rates
The potential for inflation to take off, especially with the new round of tariffs
The loss, short and long term, of tax revenue due to OBBBA
The Admin’s failure, to date, to consider, let alone stay “laser focused” on the deficit
The CBO’s tariff revenue projection that’s roughly half of the Admin’s
The CBO’s 2050 projection of federal debt equaling 150% of GDP
The fact that inflation, despite your most fervent wishes, won’t drop. It’s running at 3.4% per year, not the 1.9% rate of Trump’s first term
The potential for the price of oil to double as the Iran war continues when the price of a gallon of regular is already one third higher than on inauguration day
The realization that conditions are now set for the perfect economic storm.
Your Asymmetric Knowledge
Mr. Secretary, in your CNBC interview, you suggested that we ask ourselves this question, which I paraphrase:
What does the Treasury Secretary know that you don’t?
Surely a lot. But Treasury Secretary Paulson had lots of specialized, insider information in 2008. So did Fed Chair Ben Bernanke. Yet, they couldn’t prevent the Great Financial Crisis/Great Recession. Yes, they managed to limit the damage after 17 major U.S. financial institutions had hit the dust. But it was too late to keep companies from shedding their largest liability — their payroll — and keep the unemployment rate from hitting 10 percent.
What I heard in your interview was someone reaching for straws — someone publicly admitting that he and his boss have ignored our massive deficit for 18 months, but will now be “laser focused” on the problem.
What I heard was someone who thinks we can grow our way out of our debt crisis via an AI or other miracle of technology. Yes, that’s a real possibility, but it’s a long shot on which no steward of our nation’s finances should count.
What I heard was someone suggesting he has the power to control interest rates when the market just showed he doesn’t.
But my hearing may be off. In any case, here’s what I hope your “asymmetric” knowledge includes.
I hope you know that the U.S. is in far worse fiscal shape than Italy.
I hope you know that our off-the-books liabilities are far greater than our on-the-books liabilities.
I hope you know that the 2026 Social Security Trustees Report has a Table VI.F1 (which you, the principal trustee, buried in its appendix) that reports the System’s off-the-books debt is $71 trillion — more than twice U.S. GDP and twice federal debt in the hands of the public.
I hope you know that paying Social Security benefits through time requires an immediate and permanent increase in the System’s FICA payroll tax rate from its current 12.4% value to 18.1%.
I hope you know you can ask an AI to translate Table VI.F1 and learn that another Social Security solution is to keep its payroll tax fixed and immediately and permanently cut all benefits to all current and future beneficiaries by 31%. That’s miles worse than the 22% benefit cut scheduled for 2032. The reason is that Social Security’s cash flows worsen over time. Without a 31% forever benefit cut starting now, the benefit cuts down the road will be far larger than 31%, which, of course, is far larger than 22%. Maybe it’s time to laser focus on Social Security as well? You are its chief trustee.
I hope you know that our nation’s fertility rate is now running below 1.6 and that absent immigration, we will, absent a best-case AI scenario, fall far behind China in terms of economic power despite China's even lower fertility rate.
I hope you know that our nation is insolvent when you do proper long-term fiscal gap and generational accounting and that future Americans face confiscatory taxes — 104% of their future labor earnings, to be precise — if current generations dump all our unpaid bills in their laps.
I hope you know that your job is to come up with fundamental reforms of Social Security, healthcare, taxes, and welfare that can save the nation before it’s too late. Need some ideas? Look here.
I hope you know that the world is starting to expect the U.S. will inflate away its official debt as part of digging out of its fiscal hole. This is why the implied inflation rate rose last week when U.S. debt hit $40 trillion.
I hope you realize that we actually have very little scope to make money by making (printing) money. Most federal spending (e.g., military pay) is real, not nominal, i.e., it’s implicitly indexed to prices. And the average maturity of our debt is only six years.
I hope you realize that selling short-term debt and buying long-term debt will further lead the market to believe we’re going to inflate away our debt. This will likely raise long rates faster than you can lower them.
I hope you realize that your claim to “asymmetric” knowledge — a suggestion that you know more, that you know better, and that you know how to protect us — constitutes what economists call cheap talk. It isn’t a substitute for your doing your job — finding real solutions to our colossal fiscal problems, not fiddling with asset markets.
Of Possible Interest
US debt, US national debt, US bond market sell-off, bond market sounding alarm, and 30-year treasury yield
May I add just one thing for Mr. Secretary?
'It is NOT different this time."
You’ve outdone yourself, Larry!!! Kudos! Happy Sunday