The Week Investors Forced Uncle Sam To Confront Government’s Debt Addiction
We've all heard stories about interventions for addicts: family and friends draw an addicted loved one into a room and begin a confrontation about his or her addiction issues, threatening a cut off unless that person addresses his or her problem.
We’ve all heard stories about interventions for addicts: family and friends draw an addicted loved one into a room and begin a confrontation about his or her addiction issues, threatening a cut off unless that person addresses his or her problem.
A similar scenario played out Wednesday in the U.S. Treasury market, only this time it was bond investors signaling to the Treasury Department that, until Washington gets its spending addiction under control, they would continue to demand higher interest payments in return for purchasing Treasury securities that funded the federal government’s debt deluge. Treasury Secretary Scott Bessent announced his department was buying back $4 billion worth of long-dated Treasuries after yields rose to over 5.3% on 30-year Treasury bonds. Meanwhile, the national debt topped $40 trillion and the federal budget deficit was set to pass $2 trillion, the highest yields since the run-up to the 2007-2009 financial crisis.
Bessent claimed Thursday on CNBC he was buying back long-dated Treasurys to inject more liquidity into the long-end of the yield curve. At the same time, he said there was “nothing magic” about the grim $40 trillion debt milestone and that the Trump administration planned to address the debt crisis through fraud crackdowns and reductions to state grants. He further claimed that the government could “grow our way out of” the massive debt.
Lawmakers marked the $40 trillion milestone by pointing fingers at each other while failing to look in the mirror and acknowledge their own culpability in exacerbating the fiscal crisis the Congressional Budget Office projected would put
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The Week Investors Forced Uncle Sam To Confront Government’s Debt Addiction - IJR
Investors such as Bridgewater Capital founder Ray Dalio warned in a Friday post on LinkedIn that eventually there wouldn’t be enough investors demanding to purchase the government’s bonds, forcing the government to dramatically increase interest payments to entice leary investors to shoulder the risk of potential government insolvency. Dalio also warned that this would, in turn, force the government to print more money to buy its own debt while weakening the dollar, which would cause inflation to skyrocket.
Manulife Investment Management’s chief investment officer for equity and multi-asset solutions, Nathan Thooft, cast doubt on the Treasury Department’s ability to address the fiscal mess. “The Treasury can influence liquidity and sentiment, but it can’t sustainably override growth, inflation, deficits, and supply,” Thooft said, according to Bloomberg.
Dalio’s warning was grounded in the historical record. Since the times when Roman emperors diluted the value of metals used in their currencies, governments have attempted to print money which devalued their currency and caused citizens to bear the brunt of sky-high inflation. And, given the Federal Reserve’s quantitative easing actions following the Great Recession, it’s not a big leap of faith to assume that will also be Uncle Sam’s play.
Foundation for Economic Education President Emeritus Lawrence Reed described what happened to the ancient Roman economy after the emperors attempted to debase their currency to pay off government debts. “Every debasement pushed prices higher and gradually chipped away at the public faith in the Roman monetary system. The degradation of the money and increased minting of coins provided short-term relief for the state until merchants, legionnaires, and market forces realized what had happened,” Reed wrote.
American consumers were already suffering under the weight of post-pandemic and Iran war-fueled inflation that could continue if 10-year Treasury bonds remain elevated, increasing costs on everything from mortgages to credit cards. Investors also fled from the dollar following Treasury’s Wednesday move, bidding up prices of non-monetary assets such as gold and Bitcoin.
All of those actions cast doubt on the dollar’s ability to remain the world’s reserve currency.
Profligate government spending prompted former Treasury Secretary Henry Paulson, an appointee of former President George W. Bush during the 2007-2009 financial crisis, to warn on April 16 that the federal government needed to craft an emergency plan to address a potential crisis in the market for U.S. Treasury bonds. Those bonds are bought by investors and are used to fund the government’s spending deluge.
Paulson warned that, as the federal government continued to rack up more debt, investors would demand higher interest rate yields to compensate them for taking on the risk of purchasing Treasurys as the likelihood that the government could make all its payments on time declined. This, in turn, would cause the interest the federal government pays to finance its debt to rise, thus making insolvency more likely, a term economists have termed a “doom loop.”
“We need an emergency break-the-glass plan which is targeted and short term on the shelf, so it’s ready to go when we hit the wall,” Paulson told Bloomberg during its “Wall Street Week” event. “When you hit the wall and you’re trying to issue Treasurys, and the Fed is the only buyer and the prices of the Treasurys are down and interest rates are up, that’s a dangerous thing.”
At the end of any intervention the addict has two options: acknowledge they need help and attempt to change, or just continue to feed their urges. What will Uncle Sam decide?
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