Scott Bessent Is at War With Prices — and Prices Are Winning!

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0:35Vanta gets you compliant fast with SOC 2, ISO 27001 and more, and keeps you secure with continuous monitoring. Hyperbound, a YC-backed startup, used Vanta to unlock the Fortune 100 in under a year. Snowfire got audit ready in a month and closed a multi-million dollar deal. Trust matters. Get started at Vanta.com. This week, the President of the United States suggested that the ongoing problem of high interest rates might, if necessary, be solved by the military. Did you direct Secretary Vessen to intervene in the bond market? No, not at all. No, he's a very capable man. He wanted to do it. He's very good at it.

1:13He has a good touch, very good natural touch for the bonds and interest. And he did that, yeah. The yields have come back up since then. Have you talked to him about another type of intervention? Is that something he will be doing? We have many types of intervention. That's one. The ultimate intervention is our military. And if we have to use that we will. Yeah. He was being asked about the Treasury's recent attempts to force down the cost of government borrowing. And I'll admit that I've spent a chunk of this week trying to work out how exactly you deployed the armed forces against the bond yield.

1:48I haven't yet worked that out. But hold that thought, because by the end of this video, it's going to seem maybe a little bit less ridiculous than it possibly should. To understand how it all came to this, you have to start with the man running the treasury, Scott Besant. For most of his career, Scott Besant was a hedge fund manager. He spent a lot of it at Soros Fund Management, where he had a hand in some really big trades, the 1992 bet against the British pound being the most famous, and then a short against the Japanese yen in 2013 that reportedly made a billion dollars. This track record built his reputation, but it's worth noting that to some degree these were other people's trades.

2:37Nonetheless, the job of a macro trader is to look at a market price, decide that it's wrong and bet on it correcting. In 2015, Besend left to run his own fund and launched Key Square with startup capital of around$4.5 billion. This was one of the biggest fund launches in history. The returns were mixed, a few percent a year over the life of the fund, and investors gradually drifted away. Today Basend is the Treasury Secretary of the United States, and that is a big job. He's the President's principal economic advisor. He oversees everything from tax collection to financial sanctions. But the part of the job that matters the most for today's video is also the least glamorous part, debt management.

3:30The US government spends more it takes in taxes. So, the Treasury has to borrow enough money to make up the difference, and the Treasury Secretary has to decide how. How much to borrow short-term versus long-term, and how to run the auctions and even when to buy old bonds back. For most of the Treasury's history, the guiding principle has been to be as boring as possible, to issue debt in a way that's regular and predictable, with the goal of never surprising or upsetting the market. What Basent has done is treated instead like a trading position. He's looked at certain prices and decided that the market has it wrong.

4:13He then put on a trade, the kind of big directional macro bet that he built his name on, except this time the trade is against the entire US bond market, and the money is the nation's. The most famous trade Basent was part of was a bet against a government. Britain was trying to hold the pound at a level that the market didn't believe in. And Druckenmiller and Soros, with Basent on the desk, bet that the government's position was unsustainable and the market's price would win. It did. The press described it as breaking the Bank of England. In fact, I made a whole video about it. The other signature trade he was involved in was a short against the Japanese yen in 2013, and it was a bet that the currency was heading down, and it was.

5:04So the through line of Besant's career was betting on where prices were going, and at least once famously betting that a government trying to force a price against the market would lose. which is an awkward biography to bring to his current role, because in his current role he is the government trying to force a price against the market. The price, or at least one of the prices that Basent has decided the market has gotten wrong, is the 10-year treasury yield. The 10-year treasury yield is frequently described as the most important number in finance. And while that sounds like the sort of thing people say about everything, let me explain why both you and the government should really care about this yield.

5:51For you, it works like this. When you take out a 30-year fixed-rate mortgage, the bank doesn't just pick that rate out of thin air. It derives it from the 10-year treasury yield and adds a little bit on for the risk that you are less creditworthy than the US government. Car loans, credit card rates, the rate that companies pay to borrow money to build a factory, all of these are priced off of government bond yields. When the 10-year goes up, the cost of borrowing goes up for everyone else. The 10-year treasury is the wholesale price of money, and everything else is retail. For the government, it matters for a more direct reason.

6:33The 10-year is the rate at which the US government borrows money for 10 years, and the United States borrows quite a lot of money. So, when that yield goes up, the government's own interest rate bill rises with it, and the government is currently sitting on more than$40 trillion of debt, on which it paid nearly$1 trillion in interest last year. At the current scale of government debt, a small move in the yield turns into a very large amount of money in interest payments. So, the 10-year matters to everyone and the bond market has decided over the summer that the correct yield is quite a bit higher than Scott Besant thinks it should be.

7:1630-year yields also touched their highest level in 19 years this summer too, and Besant has decided that the market is just wrong. On the 19th of August, the Treasury made a surprise off-schedule announcement. It is said that it would double the size of its long-dated bond buybacks, from a maximum of$2 billion per operation to at least$4 billion. To understand why that was a surprise, you have to understand what bond buybacks normally are, because normally they are the most boring thing the Treasury does. And this is why you never hear anyone talking about them. The government is constantly issuing new bonds, and old ones are constantly aging.

8:03A bond issued three years ago trades way less often than one issued just last week. Traders call the freshly issued ones on the run and the older ones off the run, and the off the run bonds are less liquid, meaning they are harder to buy and sell without moving the price. So, every so often the Treasury buys the old illiquid bonds back and reissues fresh liquid bonds in their place. This is just housekeeping and importantly it is normally duration neutral, meaning that they buy back a long bond and issue another long bond to replace it, and the overall shape of the debt doesn't change. Nobody writes an article about it just because it isn't really interesting.

8:49What Besant announced was quite different, buying back long dated bonds to push their price up and their yield down. And this isn't really housekeeping, it's a trade designed to change an important market price. This might look like quantitative easing, but it's different in one key way. The Treasury can't print money the way the Federal Reserve can, so every bond it buys back has to be paid for, and it is paying for them by issuing short-term treasury bills. So, the operation swaps long-term debt for short-term debt, shortening the maturity of the national debt in order to reduce long-term yields.

9:32At its core, it is a bet that long-term rates are going to fall, funded by borrowing short. Now, if that bet is right, the treasury will get to refinance a big chunk of the rapidly growing national debt at a lower interest rate sometime in the future, which will look quite smart. But if it's wrong, if long-term rates stay high or rise, the government has loaded up on short-term debt that has to be constantly rolled over at whatever interest rate the market demands. An analyst at JP Morgan described the approach as being like paying your mortgage with your credit card, which is unkind, but it's also basically what it is.

10:15There is one other thing that you should know, and it's the part that Basent would probably prefer you didn't. Before he had this job, he was one of the loudest critics of the former Treasury Secretary Janet Yellen. He accused her at the time of running what he called an activist treasury by tilting issuance towards short-term bills to keep the long-term rates down ahead of the 2024 for election. Janet Yellen and Scott Basend, we have to remember, were handed very different market opportunities. When Yellen was in the job, long-term rates were about as low as they had ever been. Terming out or locking in 30-year money at those rates would have been a huge prize.

10:59The government version of the cheap fixed mortgage millions of Americans locked in back then and are still sitting on today. She argued at the time that she was protecting the trust that keeps borrowing cheap forever rather than raiding the markets for a one-off win. Besant does not have Yellen's opportunity. He can't issue bonds at once in a generation low rates. He is instead suppressing a yield he has decided is simply too high on a bet that rates will fall from where they are today and he is spending it on a much smaller, far less certain price. It is a very strange trade with modest upside and plenty of downside.

11:43Besant accused Yellen at the time of politicizing the Treasury by doing the Fed's job. Now, whatever you make of that charge, it is a remarkably precise description of what he appears to be doing right now himself. His buybacks are designed to push long-term yields down by manipulating supply and easing financial conditions through debt management. Activist debt management, it seems, is a grave distortion of free markets right up until the moment that you are handed the keys of the Treasury, at which point it becomes prudent liability management. The 10-year is only the first price that Basen has decided the market is getting wrong.

12:25It turns out that he does have a bit of a list. Now, if you are going to pick a fight with the bond market, it doesn't hurt to have the backing of people who really understand macro trading. And for Scott Besant, there is one person whose opinion carries more weight than anyone else's – Stanley Druckenmiller. Druckenmiller is one of the greatest macro investors who has ever lived. He ran money for George Soros, then ran his own fund, Dickensie, for 30 years without a single losing year, which is not supposed to be possible. He was also for years Scott Basent's boss and mentor, and Basent has never been quiet about this.

13:07Last year in an interview with the FT, Basent said that in macro there's Stan and there's everyone else. In another interview he described Druckenmiller as the greatest money-making machine in history, a man with Jim Rogers' analytical ability, George Soros' trading ability and the stomach of a riverboat gambler. So, it can't have been a pleasant morning at the Treasury when Scott noticed that his mentor had published a piece in the Wall Street Journal titled Let the Bond Market Speak, which walked through in detail why his former protege's intervention was a terrible mistake. The op-ed got attention for two reasons, and the first was the writing.

13:53Readers took one look at it and concluded that a chatbot had done most of the writing. Druckenmiller didn't even deny it when he was asked. He said of course he'd used AI and he wasn't at all embarrassed, which is fair enough. The ideas were his and the ideas were right. It's just maybe a little bit awkward that a plea to let authentic market signals come through unfiltered was itself filtered by AI. But anyhow, Druckenmiller's central point in his op-ed was that the buyback wasn't liquidity management at all. It was an attempt to change a number that the government doesn't like, dressed up as routine market plumbing.

14:36And the tell, he said, was in the Treasury's own justification. The Treasury defended the operation as support for a part of the market with strong healthy demand, which is a strange thing to step in to rescue, because obviously strong demand is what a working market looks like and you don't need to buy up something if there is already strong demand for it. Druckenmiller went through the evidence that nothing was actually broken. There were no failed auctions, no dealers seizing up, no forced selling, none of the genuine breakdown seen in treasuries in March 2020 or UK gills in 2022 that might justify the government stepping in.

15:21Trading was orderly, the market was working, it was just producing a price that the Treasury Secretary didn't like. Next, Druckenmiller laid out what that price is actually responding to. Inflation has been above the Fed's target for five years now. The economy is at full employment. The government is running a deficit near 6 % of GDP, which America has never done in peacetime. The national debt crossed$40 trillion the same week that BASENT intervened, and the annual interest bill was on track to pass$1.1 trillion, more than the entire defense budget. I guess the solution to that might be to boost the defence budget, but anyhow.

16:06Druckenmiller argued that the bond market wasn't being a vigilante, it was being a pushover that had finally started to grumble, and the Treasury moved to shush it. His sharpest point was about what a bond yield is actually for. A rising long-term yield, he argued, is the last thing left in Washington that forces politicians to deal with the deficit. because neither party will touch spending or taxes until the pain becomes visible, until mortgage rates bite and auctions go badly. Suppress the yield, he said, and you switch off the alarm, which lets everyone carry on pretending that the debt is someone else's problem.

16:49Every basis point you push down artificially, he said, is a subsidy to procrastination. Now, before you write this off as a partisan hit, Druckenmiller has aimed this same argument across the aisle for years. He tore into the last administration over the mirror image failure, and he is now turning the same principle on the man he mentored. If nothing else, he is consistent. The Treasury appeared to ignore the message. Instead of easing off, Basent went on television and said that the department had a big toolkit and asymmetric information at its disposal, and hinted that the buybacks could grow well beyond the$4 billion minimum.

17:34Asymmetric information is, it's worth noting, an interesting phrase for him to use. It's the sort of thing a trader says about a counterparty he's trading against. Coming from the government about the market it's supposed to borrow from as a neutral issuer, it's a somewhat startling term to reach for, but we'll let that one go for now. Shortly afterwards, CNBC reported that the Treasury was considering using the Treasury General account to fund even bigger purchases. Now, to see why that raised eyebrows, you need to know what the TGA is. It's basically the federal government's current account account held at the Federal Reserve.

18:17It's the account that taxes flow into and things like salaries and government spending flow out of. Besant has built it up to around$950 billion, which is a lot higher than prior governments kept it at. Using the government's day-to-day checking account to buy long-term bonds and prop up their price is a very unusual idea. The Treasury's own advisory committee has noted that the government pays out hundreds of billions every week just to function, and that only a couple of hundred billion of that balance is really a safety buffer. There's a word for spending your rent money to day trade your own IOUs because you didn't like the price the pawn shop quoted, and it isn't cash management.

19:05Now, Druckenmiller flagged this in his op-ed too. Once the market is sure a government is defending a particular price, he argued, every rise in yields becomes a test of official resolve, and the intervention has to keep growing just to survive to the next test, which is a grim spot for the Treasury to be in, because the traders on the other side can see it as clearly as he can. As he put it, governments defending prices against fundamentals always lose. The only question is how much money they burn through before conceding. This brings us back to the matter of enforcement. If swapping bills doesn't work and spending the checking account doesn't work, you're left wondering what other tools the administration might have in mind.

19:56Now, I'll be honest, I'm still not exactly clear on how the whole military intervenes against a bond market thing works. I don't know whether the army maintains a dedicated fixed income squadron or what the rules of engagement are for suppressing a yield. You can't really call in an airstrike as far as I know on the 30-year, though I suppose if anyone were going to try it, it would at least make the quarterly refunding announcements a bit more exciting to watch. Now the second price that Scott Bessent is fighting is the price of imported goods, though here he shares the desk with the rest of the administration, which has spent the past week in a rather lively trade dispute with Canada.

20:42On Friday night, trade talks between Washington and Ottawa collapsed, and the US imposed 50 % tariffs on around$20 billion of Canadian goods. Trump also announced that tariffs on Canadian cars and car parts would rise to 50%. Canada said that it would retaliate dollar for dollar. The diplomacy that followed was spirited to say the least. Trump signed an executive order changing the official name of Lake Ontario to Lake America, explaining that he was doing it because the United States didn't expect to be doing much business with Ontario any longer. This is, of course, the second body of water that he's renamed, having started with the Gulf of Mexico last year.

21:29He seems to be developing quite a taste for this, telling reporters that he now needs an ocean and that maybe he'll rename the Atlantic or the Pacific. I'm in truth mildly surprised that none of them have been named after him yet, but perhaps he's saving that for the Pacific. From there, the rhetoric warmed up nicely. the vice president giving a speech in Maine made a point of referring to Canada as a state and then pretended to catch himself and blamed a Freudian slip, before adding that Canada would quite literally be invaded were it not for the American protective umbrella. The Premier of Ontario, Doug Ford, told the president that he could kiss my ass and threatened to charge triple for the oil, potash and uranium that Canada sends south, and to slap a surcharge on the electricity that heats a good chunk of the northern United States.

22:25So, regional diplomacy is progressing smoothly. Into this stepped Scott Bessent, who went on television to attack Mark Carney directly, accusing him of running an anti-American, anti-Trump playbook. Now, this isn't the first time he has picked this fight, which seems somewhat outside of his remit as Treasury Secretary. Back in January after Carney gave a famous speech at Davos that went down rather well with the rest of the world and was widely read as a jab at Washington, Vicente went on Fox News and claimed that in a call with Trump, Carney had been very aggressively walking back those remarks.

23:07Carney's response the next day was to say more or less, while rolling his eyes, that he told the president he had meant every single word. This is a particularly odd fight to pick when the man on the other end is Mark Carney. Besant's assessment of him around the same time was that he had seen what happens when a technocrat tries to pivot and become a politician, and that it never really works out well. The technocrat in question of course ran the Bank of Canada through the financial crisis and the Bank of England through Brexit. So if Canada is heading into a rough patch, which it probably is, it is at least being run by someone who has seen a few crises already.

23:51Television etiquette isn't Basin's real problem though. His real problem is the arithmetic. Canada is America's second largest trading partner and in a lot of industries the two economies aren't separate markets at all, as they are so deeply integrated. In the car industry, a single component can cross the border several times before the vehicle is finished. Put a 50 % tax on a part that crosses the Detroit River three times during assembly, and you haven't punished a foreign rival, you've just made American-built cars dramatically more expensive to build and to buy. And this is the part that's often forgotten in these trade negotiations.

24:35A tariff is just a tax paid by Americans, not by Canadians. The importer who brings the part across the border pays it, and the cost lands in the sticker price of the finished car. Tariffs on essential imports from your closest trading partner do one thing reliably. They raise production costs and they push consumer prices up. They'll reduce demand for Canadian goods without a doubt, but if there is no American manufacturer making the same thing, the part just gets imported either from Canada at a higher price or from somewhere else also at a higher price. This brings us straight back to the bond market.

25:17Inflation is the natural enemy of a bond investor. If investors think tariffs and retaliation and energy fights are going to keep inflation running closer to 4 % than 2%, they will demand higher yields to lend the government money for 10 or 30 years. So, with one hand Basent is running surprise treasury buybacks and eyeing the government's checking account, all to force long-term yields down. down, with the other, the administration he serves, is running multiple policies that feed the very inflation that is pushing those same yields up. I described this in a prior video as being equivalent to flooring the accelerator in your car while hauling on the handbrake.

26:02It just doesn't work. The Economist put the strategy plainly this week, writing that Besant's actions may not amount to much in the long run, but might squeeze yields down a little, at least until the midterms. A brazen politicization of the treasury market, they say. And that may be the whole point. If the aim is just to hold yields down for the 10 weeks between now and the November elections, then aggressive buybacks and a bit of television bluster might be enough to keep 30-year mortgage rates under 7 % until people have voted. But kicking the can down the road doesn't change the road ahead.

26:44Once the midterms pass, the inflation and the$40 trillion debt pile are still standing there waiting. So the trade war pushes inflation up and inflation pushes the interest rate percentage fighting up with it, which means both of his wars are now fighting each other. If the military is the ultimate intervention, this is presumably where it deploys. Though I still can't picture the operation. You can blockade a port. I'm not sure how you can blockade a 10-year yield that's simply responding to arithmetic, but it doesn't matter. It's not my job. It's Scott's. And that brings us to the third front in Basen's campaign, and the one place where we don't have to imagine a military deployment, because there is a real one underway already.

27:34The United States has been at war with Iran since February, an undeclared war since Congress has never actually voted on it, but a war nonetheless. And that war has settled into a stalemate. There's a naval blockade on Iranian ports, oil exports have been squeezed hard, and energy prices have climbed, which feeds straight back into the inflation that's been tormenting the treasury market. So, having discovered that a shooting war hasn't brought petrol prices down, the administration decided to open a financial front. Now, Scott Bessent trailed it in a Financial Times op-ed promising what he called an Economic D-Day, the single greatest financial offensive ever marshalled against an adversary.

28:22He said that the objective was to sever every economic lifeline until Tehran stands alone. Trump, for his part, said Iran was completely collapsing. Expectations, I think it's fair to say, were quite high. On Monday, Besant held a press conference to unveil the offensive, which the administration gave the name Operation Economic Outcast. The single greatest financial offensive ever marshalled against an adversary turned out to involve sanctioning around 60 individuals, ships and companies and naming five sectors of the Iranian economy, digital assets, gold, aviation, technology and shipping for possible future pressure.

29:09When reporters asked about the one weapon that might actually force Iran's hand – secondary sanctions on the countries still buying Iranian oil – Bessent said the US would give those countries a defined timeline to stop, but declined to name a single deadline. Bessent himself called the announcement a warning shot. One outlet described the highly anticipated remarks as, in effect, a stern advisory. Iran's chief negotiator called the threats empty boasting and said that the US was not in an economic position to further restrict its relations with other countries. Now I am no historian, but I can't help but feel that this isn't exactly how D-Day was described in the history books – empty boasting.

29:59It did, however, seem like the moment that the reserves might finally be called up, and And I'm pleased to report that something that looked like military reinforcements arrived. So I wanted to go on record saying that I am ready to rise to the defence of the bond market. In fact, let me put on my helmet and just let me make a declaration. We shall fight on the Bloombergs. We shall fight on the financing rounds. We shall fight in the yields and on Wall Street. We shall fight in the T-bills. we shall never surrender. Reporting for duty. Now, that's the Nobel laureate Paul Krugman. He does seem to be wearing a saucepan on his head, but he equally is reporting for duty.

30:48So the general staff is, I guess, assembling. I still can't quite picture the campaign, but morale is at least holding up amongst the troop. Now, the reason that Basen flinched from using the one weapon that might matter isn't really all that hard to work out, and he more or less admitted it. When asked why he wasn't naming names or dates, he said, and this is a real quote, why would I want to blow up the global financial system? The issue is, of course, China. China buys around 90 percent of Iran's crude exports. If you want to actually stop Iran from selling oil, the country you have to sanction is China.

31:32You'd have to force Chinese banks to choose between doing business with Iran and having access to the US dollar. That would indeed be a dramatic escalation to an undeclared war, and it could quite possibly bring down the global financial system. It would also be politically impossible to do right now for a much simpler reason. Donald Trump is hosting Xi Jinping for a state visit on the 24th of September, at which point the two governments hope to advance a trade deal. You can't credibly threaten to expel China from the dollar system in the same month that you are trying to sign a deal with it.

32:12Iran's negotiator can see this as clearly as anyone else can, which is why he is cheerfully betting in public that America can't afford to pull the trigger. So, that's the first hole in the economic blockade. Iran's biggest customer is one you've decided not to touch. But there's a second hole, and it's one that the administration created itself. While one part of the government is trying to cut Iran out of the global financial system, another part has spent the last two years building and blessing the very financial rails Iran uses to get around it – cryptocurrency. Crypto has always had a somewhat awkward relationship with the law, in that it was specifically designed to work around the law.

32:59One of its central selling points has always been that crypto transactions don't rely on the banking system or any intermediary that a government can lean on. There is no institution in the middle to freeze an account or block a payment. The catch is that a borderless censorship-resistant payment system turns out to be extremely useful to the very people that the US government is trying to censor. Last May, the Wall Street Journal published an investigation into how this works in practice. It found that a key Iranian regime financier named Babak Sanjani, a man who cheerfully describes himself as an anti-sanction operator, ran a network that moved around$850 million through Binance over a two-year period, mostly through a single trading account to help finance Iran's revolutionary guard.

33:56Binance's own internal compliance team flagged the account repeatedly, but it stayed open anyway. Now, you might expect an administration preparing an economic D-Day against Iran to take a dim view of an exchange that Iran sanctions buster was using as a payment artery. Instead, the administration has been the crypto industry's most enthusiastic patron. Trump even pardoned Binance's founder, CZ, who had pleaded guilty to an anti-money laundering violation and served four months in prison. And Trump signed the Genius Act, the first big piece of US crypto legislation which builds a federal framework for stablecoins.

34:42The way this links back to Scott Bessent is that the Genius Act requires stablecoin issuers to back their coins one for one with liquid reserves, and the reserve asset of choice is short-dated US Treasury bills. Bessent has said out loud that he expects the stablecoin market to grow enormously to something like$2 trillion, and that this will create a large new source of demand for the short-term treasury bills that the treasury is now busy issuing to buy back longer dated bonds. What this means is that the same crypto system that helps Iran evade the sanctions is also being cultivated to help finance the treasury's bond strategy.

35:25Besant needs the thing that he is supposed to be shutting down. Critics have a name for the sector the Genius Act creates, a digital shadow banking system. So, we have a treasury secretary claiming to be running an economic blockade against Iran, while the US government deregulates and grows the shadow banking system Iran uses to work around it. It's a bit like building a very expensive border wall and then every 50 yards installing a revolving door and taking a cut of the turnstile. So anyhow, we have a blockade with two great big holes in it, both of them deliberate, and a treasury secretary who can't fully close either without hurting himself.

36:11If the military really is the ultimate intervention, I assume that the next move is sending in the navy seals to seize Iran's private keys. I'm not sure which branch is best trying to breach a cold storage wallet, but on current form I'd assume it's under review. This all brings us to the last and largest problem facing the Treasury Secretary, the other person in Washington who controls interest rates and who happens to command a far bigger balance sheet, the chair of the Federal Reserve, Kevin Warsh. While Bessent has spent the last few weeks trying to convince TV audiences that the market as the long-term yield wrong, Warsh was in Wyoming for the Fed's annual symposium at Jackson Hole this week.

36:58Investors had been waiting for his speech wondering whether the newly installed Fed chair might offer a few soothing words to help the Treasury pull borrowing costs down. Kevin Warsh unfortunately did nothing of the sort. He pointed out that inflation has now run above the Fed's 2 % target for 65 months in a row, with the Fed's preferred measure sitting at 3.7%. He said that the Fed's predominant focus right now should be on prices. He added that he'd be hard-pressed to describe financial conditions as restrictive, which in plain English means that he doesn't think rates are high enough to be doing their job.

37:41And he warned that unless inflation moved toward target clearly and quickly, the Fed would have work to do. In Fed speak, we have work to do doesn't mean cutting rates to help the Treasury fund the deficit. It means the exact opposite. And the market understood him instantly. The odds of a rate hike at the Fed's September meeting jumped to 60 % right after the speech, from 35 % the day before. Short-term yields rose. So, the one man who could have helped Basenda out instead pointed firmly at the exit. This is a very unusual spectacle. We have the Treasury Secretary running surprise buybacks and eyeing the government's checking account while the Fed is signalling that it may push rates higher to fight the very inflation the administration's tariffs, immigration policy and foreign policy are helping to stoke.

38:37It is a tug of war between two former Druckenmiller protégés, except one of them has the legal power to create money and the other has to borrow it. The two don't even agree on what a bond yield is for. Besant thinks a high yield is a problem to be managed down, while Warsh thinks that the market should set rates and the Fed should mostly get out of the way. He, like Druckenmiller, sees the yield as a signal and believes his job is to let it speak, rather than talking over it, which is quite a philosophical gap to bridge. Now, Besant has some defenders. Stephen Moran, the former chair of the White House Council of Economic Advisers, is one.

39:22He wrote an op-ed in the FT arguing that everyone panicking about the bond market has it backwards. Moran argues that if investors were actually frightened about the debt, that fear would show up in the term premium, and it doesn't. So the yields must be rising for a more positive reason. Investors betting on American growth because AI, deregulation and tax cuts are about to turbocharge the economy. Higher yields, based on this view, are a vote of confidence. Rates rise when an economy booms. This argument rests on a single bet though, that there's huge growth in the pipeline. If Moran is right, the rising yields are optimism and the deficit will shrink.

40:09If he's wrong, then he's describing the oldest move in fiscal politics – the promise that next year's growth will pay for this year's spending. Governments have been promising that the boom is just around the corner for about as long as there have been governments, and the boom has a poor record of arriving on time. Moran is betting that it does, Druckenmiller is betting that it doesn't. One of them has the future priced correctly, and we are all going to find out which soon. A deep flaw in Moran's argument, which his own logic highlights, is that if he is right that yields are climbing because of a coming boom, then Basent is making a massive mistake by fighting it.

40:51You don't fight an interest rate that reflects good news, and you certainly don't fund the fight by issuing huge quantities of short-term bills, as that would only pay off if rates fell. Moran has come to Besant's defense with an argument that if Wright says that Besant is doing precisely the wrong thing. Additionally, Moran's assumption that the new tariffs will stick may be flawed too. The last batch were struck down because the President had used emergency powers that the court said didn't stretch that far. Taxation is Congress's job, not the President's. The new tariffs rest on very similar legal footing.

41:32There is a very real chance that they will go the same way, in which case the revenue that Moran is banking on to shrink the deficit will never show up. But here's the part that makes it a gamble. Roughly a third of all marketable US debt comes due within the next 12 months. Funding the deficit with short-term bills is a bet that rates will be lower when those bills have to be rolled over, and if Warsh hikes, that maturity wall arrives and the interest bill goes up. When Basen took the job he sold a plan he called 333. Get the deficit down to 3 % of GDP, growth up to 3%, and energy output up 3 % as well.

42:18As things stand, growth is running somewhere around 1.5 % to 2%. The deficit is roughly double the target, and the plan is basically not going to plan. Which brings us back to the president's preferred policy option. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome.

42:55Check responses set up required, compatibility and availability varies 18+. Starting a business can seem like a daunting task, unless you have a partner like Shopify. They have the tools you need to start and grow your business. From designing a website to marketing to selling and beyond, Shopify can help with everything you need. There's a reason millions of companies like Mattel, Heinz, and Allbirds continue to trust and use them. With Shopify on your side, turn your big business idea into... Sign up for your$1 per month trial at shopify.com slash special offer. The ultimate intervention is our military.

43:31and if we have to use that we will, yeah." I've spent this whole video treating that as a joke, but look at what's actually left on the table. The buybacks were doubled and yields bounced right back in a day. Rating the checking account just burns the emergency cash. The tariffs push inflation up, not down, and Operation Economic Outcast collapsed into a stern advisory the moment it met with the reality of sanctioning China. Every economic tool has been tried and every single one has failed. So, by process of elimination, the military really is the only instrument left. And I have to admit, after a week of study, I still don't really understand that plan.

44:17I think it's 4D chess or something like that. I don't know whether the Joint Chiefs maintain a fixed income command or which service you'd task with holding a perimeter around the 10-year yield. Krugman has his helmet on, the seals are presumably being briefed on cold storage wallets. Mobilization is well underway. The problem that no amount of firepower will fix is that a yield is not a fortress or a port or a standing army, it's a number, it's the arithmetic of what the government owes set against what the market will lend. You can rename a lake, you can impose an embargo, you can even sanction an exchange.

44:59But you can't invade a number, as far as I know. The thing about running the treasury like a trading desk is that a market price is not an adversary you can bluff, because there's no one on the other side to blink. America's credit was slowly built over time on the simple idea that a government that borrows responsibly and pays on time can borrow almost without limit, cheaply for generations. Credibility is the most valuable asset the Treasury owns, and the Treasury Secretary who decides he's at war with market prices is spending that asset to fight an opponent with an infinite balance sheet and no deadlines to hit.

45:43The yields aren't refusing to fall because bond traders are being difficult, they are refusing to fall because the arithmetic just doesn't work. And the arithmetic isn't a crisis to be managed, it's a bill that has to be paid, as Druckenmiller told his old protege. If the 30-year has to trade at 5.5 % to clear, that isn't a crisis, it's an invoice, and governments that go to war with their own invoices always lose. The only real question is how much they spend before they admit it. Thanks for tuning into this week's podcast. The podcast is entirely funded by viewers like you on Patreon, where you can contribute as little as you'd like to.

46:26Thanks once again to my Patreon subscribers, and if you'd like to support the podcast there's a link in the show notes. Talk to you again soon. Bye.

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47:15They have the tools you need to start and grow your business. From designing a website, to marketing, to selling, and beyond, Shopify can help with everything you need. There's a reason millions of companies like Mattel, Heinz, and Allbirds continue to trust and use them. With Shopify on your side, turn your big business idea into... Sign up for your$1 per month trial at shopify.com slash special offer. Thank you.