Scott Bessent should have kept his mouth shut. He also should have kept his money in his pocket.
The billionaire had a good thing going. He was leading a charmed life managing his hedge fund Key Square Group and preserving historic pink mansions in Charleston with his husband and their kids. But that was before he threw his money and support behind Donald Trump’s election campaign.
In return, President-elect Trump nominated Bessent to be Secretary of the Treasury. Maybe that was Bessent’s plan all along. If so, there’s a good chance he’ll come to regret it.
This week Bessent faced his confirmation hearing with the Senate Finance Committee. He said he wants to be the steward of Trump’s economic agenda that will “unleash a new economic golden age.”
In the runup to the confirmation hearing Bessent found himself in Senator Elizabeth Warren’s cross hairs. Warren, if you didn’t know, has a plan for everything. In fact, at last count, she has 81 plans for big government solutions posted to her website.
These plans are long and extensive and range from “Affordable Higher Education for All” to “We Need a Blue New Deal for our Oceans” and everything in between.
On Sunday, January 12, Warren wrote Bessent a 31-page letter with 185 footnotes. Inside the letter, she asked 180 questions and demanded that Bessent provide written responses to them prior to confirmation.
Warren, a member of the Senate Finance Committee, is obligated to grill Bessent as part of his confirmation. That’s an important part of her job. Her questions, however, were designed to score political points…
And somehow, with all these questions, Warren forgot to ask the most important question of all:
How in the world will Bessent finance all the debt that’s coming due?
Yellen’s Mega Mess
What you may not know is that outgoing Treasury Secretary Janet Yellen made a grave error in judgement over the last four years. Her decision to finance the debt with short-term Treasuries has set American taxpayers up with debt financing costs that could rise to over $1 trillion per year above what they otherwise would have been.
If you recall, in 2020, interest rates hit a 5,000-year low. In July 2020, the 10-Year Treasury Note yielded just 0.62 percent. Millions of homeowners refinanced their mortgages, locking in a 2.5 percent interest rate for 30 years. It was a no brainer.
When there’s an opportunity to lock in ultra-low interest rates over the long term, you do it. This goes for homeowners. And it goes for Treasury Secretaries too.
When Yellen became Treasury Secretary in January 2021 interest rates were still at historic lows. They didn’t really start spiking up until early 2022. Instead of locking in these ultra-low interest rates for 10 to 30 years, Yellen issued debt in short term maturities – generally two years or less.
When interest rates rose along with inflation in 2022, the U.S. government had to refinance at much higher rates. Specifically, the interest on the debt for fiscal year 2021 was $352 billion. In FY2024 it was $882 billion. Moreover, in FY2025 interest on the debt will top $1 trillion. By the end of the decade interest on the debt could rise to $1.5 trillion per year.
As interest rate payments rise year after year, Washington must use a larger and larger portion of its budget to cover these costs. This reduces the budget that can be spent on other priorities.
It didn’t have to be this way. Had Yellen only been of sound mind and good intentions, she would have locked in low interest rates for the next decade or more.
The mess she made will now fall on Bessent to clean up. He’ll have his hands full.
Debt Spiral
As interest rates rose in 2023 and 2024 Yellen continued to finance the debt with short term maturities. This, again, was another grave error in judgement. Interest rates have continued to rise. Because Yellen continued to use short term Treasuries, the debt will once again have to be refinanced at higher rates.
Bessent, not Yellen, will be forced to make the tough decisions. Will he issue short term T-bills and 2-year notes and roll the dice that interest rates will fall? Or will he issue long dated debt and lock in interest rates should they continue to go higher?
Locking in rates at 5 percent for 10 years certainly beats having to refinance again in two years at 7 or 8 percent. Jared Dillian, writing for Reason, explains the challenge Bessent faces:
“This will be painful. The United States finances itself through debt auctions. As Bessent sells more bonds at 10-, 20-, and 30-year maturities, the increased supply of bonds will cause long-term interest rates to rise, which will mean that we will all be paying higher interest rates on mortgages and other long-term borrowings. But the failure to do this could be catastrophic.
“The debt is a national security issue—at 123 percent of gross domestic product, we are at risk of a financing squeeze, where short-term rates rise rapidly and lead to a debt spiral from which there is no escape. This is what happened to Southern Europe in 2012—short-term rates rose, leaving Portugal, Italy, Greece, and Spain no choice but to conduct a program of austerity to get interest down—but what really got interest rates down was then–European Central Bank Chairman Mario Draghi’s pledge to do ‘whatever it takes,’ up to and including monetizing the debt in order to reduce interest rates.”
In America, ‘whatever it takes,’ means massive amounts of quantitative easing (QE) where the Fed creates credit out of thin air and buys Treasuries. In other words, dollar debasement would be employed as a means for financing Washington’s out of control spending.
Bessent Enters the Meat Grinder
The Fed’s balance sheet now stands at $6.8 trillion. This is down about $2 trillion from the peak of $8.9 trillion that was reached in April 2022. But it is well above the $3.7 trillion where it was just prior to the coronavirus fiasco.
The Fed has been diligently reducing its balance sheet over the last 32 months in anticipation of the day when it will again be called upon to buy Treasuries. Buying Treasuries with credit created out of this air is dishonest. What’s more, buying Treasuries with credit created out of thin air when Washington’s running a $2 trillion deficit is highly inflationary.
Yet these are the unpleasant circumstances we’re facing. The Congressional Budget Office recently reported that the federal budget deficit totaled $710 billion in the first quarter of FY2025. That puts spending on track to record a $2.8 trillion deficit for FY2025. It is likely that some of this spending will moderate throughout the year. But it is very well possible that the deficit for FY2025 will be over $2 trillion.
You may have seen that the statutory debt limit was reinstated on January 2, 2025, at $36.1 trillion. One of Bessent’s first acts as Treasury Secretary, assuming he gets confirmed, will be to suspend debt issuances and to take extraordinary measures to shuffle money between accounts without breaching the debt limit.
Once Bessent gets past the politics of the debt limit he will face a relentless wave of nearly $3 trillion in debt that’s expected to mature in 2025. This is on top of the likely $2 trillion deficit. All this debt will need to be financed at interest rates that are much higher than just several years ago.
This will further blow out Washington’s budget and will likely trigger a credit crisis and panic liquidation. That’s when the Fed will crank up the printing press.
Before it’s over the Fed’s balance sheet will push upwards of $15 trillion. The dollar, in return, will be the sacrificial lamb…
…as will Bessent, as he’s run through the meat grinder.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If discovering how this little-known aspect of American history can make you rich is of interest to you, then I encourage you to pick up a copy. It will cost you less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
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