Bessent goes into the meat grinder.

Scott Bessent should have kept his mouth shut. He should also have kept the money in his pocket.

Good things have happened to billionaires. He was living a charmed life, managing the hedge fund Key Square Group and preserving his historic pink mansion in Charleston with his husband and children. But that was before he threw money and support into Donald Trump’s election campaign.

In return, President-elect Trump nominated Bessent to be Secretary of the Treasury. Maybe that was Besent’s plan. If so, that person is likely to regret it.

This week, Bessent faces a confirmation hearing before the Senate Finance Committee. he said he wanted to be steward Trump’s economic agenda “Opening a new economic golden age”

While preparing for her confirmation hearings, Bessent found herself in the crosshairs of Senator Elizabeth Warren. Warren has a plan for everything. In fact, at last count she 81 plans Information about large government solutions posted on her website.

These plans are long and extensive, and their scope includes: “Affordable Higher Education for All” to “Our oceans need a Blue New Deal” And everything in between.

On Sunday, January 12, Warren wrote to Bessent: 31 page letter There are 185 footnotes. In the letter, she asked 180 questions and demanded that Bessent provide written answers before confirmation.

As a member of the Senate Finance Committee, Warren is obligated to draw Bessent as part of her confirmation. It’s an important part of her job. But her questions were designed to score political points…

But amidst all these questions, Warren forgot to ask the most important question.

How will Bessent finance all of its maturing debt?

Yellen’s mega mess

What you may not know is that outgoing Treasury Secretary Janet Yellen has made major errors in judgment over the past four years. Her decision to finance the debt with short-term Treasury bonds cost American taxpayers a debt financing cost that could be more than $1 trillion per year higher than it would otherwise be.

If you recall, in 2020 interest rates hit their lowest point in 5,000 years. In July 2020, the yield on 10-year Treasury bonds was only 0.62%. Millions of homeowners refinanced their mortgages to maintain interest rates at 2.5% for 30 years. It was a no-brainer.

If there is an opportunity to keep interest rates ultra-low for the long term, we do so. This applies to homeowners. And the same goes for the Secretary of the Treasury.

When Yellen became Treasury Secretary in January 2021, interest rates were still at historic lows. It doesn’t really start to surge until early 2022. Instead of locking in these ultra-low interest rates for 10 to 30 years, Yellen issued debt with short maturities, typically two years or less.

As interest rates rise along with inflation in 2022, the U.S. government will have to refinance at much higher interest rates. Specifically, interest on debt In fiscal year 2021, it was $352 billion. In fiscal year 2024, it was $882 billion. Moreover, debt service will exceed $1 trillion in fiscal 2025. Over 10 years, interest on the debt could rise to $1.5 trillion per year.

As interest payments increase each year, Washington must use a larger portion of its budget to cover these costs. This leaves less budget available to spend on other priorities.

It didn’t have to be this way. If Yellen had been of sound mind and good intentions, she would have kept interest rates low for another decade or more.

The mess she made will now be left to Bessent to clean up. He will have his hands full.

debt spiral

As interest rates rose in 2023 and 2024, Yellen continued to finance debt with shorter maturities. This was another serious error in judgment. Interest rates continued to rise. Because Yellen continued to use short-term Treasury bonds, the debt will have to be refinanced once again at higher interest rates.

Bessent, not Yellen, will have to make the difficult decisions. Will he issue short-term Treasury bonds and two-year Treasury bonds and roll the dice that interest rates will fall? Or will you issue long-term debt and lock in interest rates if interest rates continue to rise?

Locking in a 5% interest rate for 10 years is certainly better than having to refinance again at 7 or 8% after two years. Jared Dillian writes. reasonBessent explains the challenges it faces:

“This is going to be painful. The United States raises funds through debt auctions. As Bessent sells more 10-, 20-, and 30-year bonds, the increased supply of bonds will cause long-term interest rates to rise, meaning we’ll all be paying higher interest rates on mortgages and other long-term loans. . -Term borrowings. However, failing to do this could be disastrous.

“Debt is a national security issue. At 123% of Gross Domestic Product (GDP), we are at risk of running out of funds, leading to sharp rises in short-term interest rates and a vicious cycle of debt from which we cannot escape. This is what happened in southern Europe in 2012. Rising short-term interest rates have forced Portugal, Italy, Greece and Spain to implement austerity programs to lower interest rates. But it was Europe at the time that actually lowered interest rates. Central bank chairman Mario Draghi has pledged to do ‘whatever it takes’ to lower interest rates, including monetizing debt.”

In the US, ‘whatever it takes’ means massive quantitative easing (QE), where the Federal Reserve creates credit out of thin air and buys government bonds. In other words, the dollar’s decline will be used as a means to finance Washington’s out-of-control spending.

Bessent goes into the meat grinder.

Fed’s balance sheet It currently stands at $6.8 trillion. This is a decrease of approximately $2 trillion from the peak of $8.9 trillion in April 2022. However, it is much higher than the $3.7 trillion just before the COVID-19 incident.

The Federal Reserve has been diligently reducing its balance sheet over the past 32 months in anticipation of the day when it will be asked to purchase Treasury bonds again. It is dishonest to purchase government bonds with credit created out of thin air. Moreover, with Washington running a $2 trillion deficit, purchasing Treasury bonds with credit created out of thin air is highly inflationary.

But this is precisely the unpleasant situation we face. Recently, the National Assembly Budget Office reported The federal budget deficit for the first quarter of fiscal 2025 was announced to have reached $710 billion. This is expected to result in a spending deficit of $2.8 trillion in fiscal 2025. Some of this spending will likely ease throughout the year. However, it is very likely that the fiscal year 2025 deficit will exceed $2 trillion.

You may have seen that the statutory debt limit was restored to $36.1 trillion on January 2, 2025. One of Bessent’s first actions as Treasury Secretary was to halt debt issuance and take special measures to shuffle funds between accounts without violating debt limits.

If Bessent deviates from the debt ceiling policy, he will face almost endless waves. 3 trillion dollars Debt expected to mature in 2025. This adds to the $2 trillion deficit. All of this debt must be financed at much higher interest rates than just a few years ago.

This will further blow Washington’s budget and is likely to trigger a credit crisis and panic liquidation. That’s when the Fed will fire up the printing presses.

Before it’s over, the Fed’s balance sheet will grow to more than $15 trillion. In return, the dollar will become the scapegoat…

…Bessent will also go through the meat grinder.

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thank you,

minnesota gordon
for economic prism

Bessent’s return goes into the economic prism of a meat grinder.