Treasury Secretary Scott Bessent made his Wall Street reputation as a currency trader. And he still seems to be at it, relying on short-term efforts to manipulate debt markets in an effort to keep interest rates low.
The limits of such an intervention already are apparent. While his Tuesday announcement that Treasury would buy back billions of dollars in bonds drove down rates for a day, by Wednesday, bond prices again sank and rates spiked. In response, Bessant seemed to raise the ante and said each buyback could exceed the $4 billion he announced on Tuesday.
Analysts at the investment firm ING called Bessent’s efforts “rearranging deckchairs on the Titanic.” They probably are right. No amount of financial legerdemain can paper over the fundamental problem. The US Treasury, along with big tech, is borrowing far more than markets want to lend without demanding higher interest rates.
Fighting The Fundamentals
The buyback announcement wasn’t Bessent’s first attempt to fight the markets. In late July and early August, the US Treasury and Japan worked together to prop up the yen, a step that not only was aimed at assisting Japan but also intended to keep US interest rates low. But it appeared to have stabilized the yen only briefly before the currency resumed its decline.
Bessent says he knows more than the markets and later blamed thin August trading volume for the steep rise in rates. He even dropped vague hints that the Trump Administration would soon announce moves aimed at fiscal restraint. But none of that is likely to be enough to change investor concerns over rising federal borrowing.
The US government’s public debt has topped $32 trillion, roughly equal to the entire output of the US economy. That’s as much as it has been at any time in US history, except for the last year of World War II.
The Congressional Budget Office estimates that, in 10 years, the debt will top $56 trillion, or 120% of the Gross Domestic Product.
By the way, you probably have heard the federal debt is $40 trillion. That includes transfers among government accounts, mostly money the general fund has borrowed from the Social Security trust fund.
That’s an important number, but when it comes to how much the government must borrow in the bond market, the number that matters is $32 trillion. Which should be big enough to scare anyone.
The Fiscal Consequences
The consequences are substantial. Treasury will be spending more than $1 trillion dollars, or 3.3 percent of the nation’s economic output, on interest on its debt this year. Except for Social Security and Medicare, interest will be the largest federal expenditure. It will exceed all non-defense discretionary spending. More than 37% of what we pay in individual income taxes goes to interest payments on the debt.
Since his 2016 campaign, Trump has repeatedly vowed to eliminate the deficit and even the entire national debt. As recently as this week, he said he’d pay off the debt “very easily, very quickly.”
Bessent promised to cut the annual deficit in half. Instead, it is going in the other direction and is expected to rise from about $1.8 trillion at the beginning of Trump’s second term to more than $2.1 trillion this year.
Some reasons are baked into the budget. The aging population is driving up Medicare and Social Security spending. But other causes, including Trump‘s 2025 tax cuts and his immigration curbs, were own unforced fiscal errors.
The policies that Trump promised would lower deficits, such as his on-again-off-again tariffs and a manufacturing boom, have yet to materialize. His early 2025 DOGE initiative, led by Elon Musk, probably fell 95% short of its promised $2 trillion in savings.
Analytically Simple, Politically Impossible
By keeping the bond market on its back foot, Bessent may be able to slow the rise in interest rates for now. But as The Wall Street Journal’s Greg Ip has noted, growing US debt and seemingly erratic economic policies have bond traders rethinking Treasuries as the world’s safest investment. If true, that will further drive up rates.
The solution to all this is analytically simple and probably politically impossible: Reduce federal spending, raise federal taxes, or both.
Economically, the timing would be pretty good. The economy is growing, employment is relatively stable, and inflation is uncomfortably high though not out of control. This would not be a bad time for Trump and Congress to signal the bond markets that government is serious about addressing its budget deficit.
Unfortunately, the politics could not be worse. With an election coming up, it is hard to find politicians of either party willing to tell voters they will cut their government programs or raise their taxes.
Trump insists that interest rates should be falling because, well, because he thinks they should. Republicans not only won’t reverse their massive tax cuts of 2017 and 2025, they seem more likely to promise more during the campaign.
And, while the amounts of spending may be relatively small by government standards, Trump is adding the flow of red ink through vanity projects such as redoing the reflecting pool, building a massive White House ballroom, and redesigning aircraft carriers.
Democrats, especially the party’s left wing, are promising free health care, free day care, and more subsidies for housing and education. It all, they say, could be paid for by raising taxes on billionaires.
The bond market is sending a strong signal that the pace of federal borrowing needs to slow. Politicians are not listening. And everyone who wants to get a mortgage or a car loan is paying the price.
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