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... perhaps this weekend is as good a time to panic as ever, maybe even better than ever, for I have news, good or bad depends on one's PoV and order of battle, and mental equilibrium disposition
Bessent Concerned About Treasury "Rollover Risk". Gold Is His Biggest Holding.
'they' are trying to play us, and perhaps someone better than us can better explain the below headline ...
Dollar and Gold Slump on Nomination of Bessent as Treasury Secretary
bloomberg.com Debt Risks That Lured Bessent to US Treasury Now Loom Large
Trump’s choice to run US government finance was part of the Soros team that crashed the pound. His new reality is more complex than any exchange-rate wager.
Photo Illustration by Mark Harris; Photos: Bloomberg (3)
Scott Bessent built a career on understanding when a government’s economic-policy narrative was fundamentally out of whack with reality.
If he’s confirmed as President-elect Donald Trump’s Treasury secretary next year, his new job will be to ensure the US government doesn’t face on his watch the kind of make-or-break moment that he saw other nations experience during his decades-long career in finance. The challenge is real: Bessent will be inheriting a trajectory for federal borrowing that’s far worse than any of his modern-day predecessors.
Donald Trump and Bessent during campaign event in Asheville, N.C., on Aug. 14.Photographer: Matt Kelley/AP
Ignoring warnings from budget experts, Washington has for years set fiscal discipline aside for another time, enacting spending and tax packages that added to government red ink. Emergency programs to combat the Covid pandemic, along with steady growth in healthcare and retirement-benefit spending and rising interest costs, piled onto the debt burden. The outgoing Biden administration forecast that 2025 will see a third straight year of deficits in excess of 6% of gross domestic product — unprecedented at a time of solid economic growth and high employment.
“Ultimately, the deficit has grown so big that it requires very drastic and unpopular reforms to bring it down — at a time when Congress seems even less willing to stop playing Santa Claus,” said Brian Riedl, a senior fellow at the Manhattan Institute and former Republican staff member at the Senate Finance Committee. It’s “simply too big to grow out of and it's too big to tweak your way out of by addressing small parts of the budget.”
Nevertheless, Bessent is targeting roughly halving the deficit, to 3% of GDP by 2028, with a recipe of further tax cuts alongside spending restraint, deregulation and cheap energy. His goals have won plaudits on Wall Street, and investors snapped up Treasuries on news of his nomination last month.
Once in office, he’ll be met with the messy reality of congressional deal-making that’s more complex than any exchange-rate wager, serving under a president with a tendency for sudden shifts in position. All the while, he’ll need to ensure investors keep willing to absorb unprecedentedly large debt auctions that threaten to become even larger.
Bessent, 62, knows something about the importance of maintaining credibility with financial markets. He played a key role working with hedge fund manager George Soros in 1992 on a bet that the UK government would prove unable to maintain an exchange-rate peg for the pound. That successful wager yielded Soros’s group more than $1 billion. Two decades later, Bessent foresaw the plunge in the yen that would result from incoming Prime Minister Shinzo Abe’s policies in Japan.
Scott Bessent in July.Photographer: M. Scott Brauer/Redux
More recent instances have illustrated the power of markets to punish. The UK — again — furnished a powerful example in 2022, when a government fell after its proposal for unfunded tax cuts prompted a destabilizing selloff in UK government bonds. Trump’s incoming vice president, JD Vance, referred to that incident as a “bond market death spiral,” and said before Bessent was picked that among the criteria for choosing the Treasury chief was finding someone able to manage that risk. Vance worried in September that some investors might “try to take down the Trump presidency by spiking bond rates.”
For now, investors appear largely to be giving the incoming Trump team the benefit of the doubt. Ten-year yields are around 4.4%, down from their peak in the immediate aftermath of the Nov. 5 election. Analysts surveyed by Bloomberg last month saw them dropping below 4% by late 2026, while derivatives contracts indicate traders are betting they’ll hold roughly around current levels over that period.
Not all observers are optimistic, and for good reason. The past two years have featured periods when concerns about the magnitude of US borrowing surfaced, such as August to October 2023, when the Treasury was ramping up sales of longer-term debt, sending yields higher.
Jean Boivin, head of the BlackRock Investment Institute, this month warned that yields could spike again, and didn’t rule out a sustained move toward 5%, which would alter the “ budgetary arithmetic” in an even more unfavorable direction. Pacific Investment Management Co., the bond-fund firm with about $2 trillion in assets, said it was “ less inclined” to buy Treasuries with extended maturities given the US deficit profile.
And the Federal Reserve itself last month cautioned the US government’s debt load was now the biggest risk to financial stability, in a semiannual assessment.
While Trump himself didn’t prioritize a fiscal fix during the campaign, Bessent has laid out a vision of accelerating economic growth through deregulation and an expansion in domestic energy production that helps to shrink the fiscal deficit to 3% of GDP by 2028. That compares with a 6.4% gap for the 2024 fiscal year, when the shortfall was $1.83 trillion.
“I am alarmed by the size of these deficits,” Bessent said at a Manhattan Institute event in June. He said the US budget shortfall is one reason he decided to begin speaking out on public policy, and argued it risks becoming “a national defense problem” because it could leave the country less able to ramp up the borrowing needed to deal with a crisis such as a major war.
Getting the deficit down to 3% in four years would be a dramatic achievement. The nation did substantially shrink the gap a little over a decade ago, bringing it to 4.1% by 2013 from 9.8% in 2009, at the end of the great recession. But that was during a period of recovery, when unemployment tumbled from 10% to below 7%. That was also generated by a fiscal tightening agreed to by President Barack Obama and congressional Republicans that weighed heavily on economic growth, according to the Brookings Institution’s Hutchins Center Fiscal Impulse Measure.
Jason Furman, a professor of economic policy at Harvard University who served as White House chief economist under Obama, earlier this month ran six different baseline scenarios for the deficit over the next decade, and even under rosier scenarios for productivity gains, the shortfall is roughly 6% at the end of the period.
The nonpartisan Congressional Budget Office projected in June that the deficit would average roughly 6% over the coming decade, an estimate that assumes tax rates rise in 2026 after the expiration of much of Trump’s 2017 tax-cut package — though that almost certainly won’t happen given Republican control of the White House and Congress. It means Bessent will take on the worst trajectory in modern times. By comparison, outgoing Treasury chief Janet Yellen took office with the 10-year average deficit forecast at 4.4%.
“A way station on the way to success would be to not dig the hole any deeper,” said Furman. But without tax increases or reforms to Social Security and Medicare — costly programs for older Americans — and to Medicaid, which extends health support to the needy, “you basically make the 3% of GDP target completely unfeasible,” he said.
An alternative would be reaching bipartisan agreements, but Furman said “that's not what frankly any president has ever done at the beginning of their term and I don't think this one will be an exception.”
In Trump’s first term, he enacted a 2017 tax-cut package that worsened the deficit. Federal revenue as a share of GDP dropped to 16.3% by 2019 from 17.5% in 2016, contributing to a widening in the fiscal shortfall to 4.6% from 3.1%. The incoming president wants to extend that legislation, much of which is set to expire at the end of 2025.
Today, a major portion of the deficit comes from the cost of servicing the federal debt load, which has swelled to roughly $28 trillion from less than $17 trillion at the end of 2019. As a share of GDP, debt is on a trajectory to exceed even World War II levels. A key challenge is that, as older securities mature, the Treasury has to refinance them at notably higher interest costs — adding further to the deficit.
In the fiscal year through September, the Treasury spent $882 billion on net interest payments, with the figure exceeding the Defense Department’s spending on military programs for the first time. That part of the budget alone was equivalent to 3.1% of GDP, the highest ratio since 1996.
The weighted average interest rate on outstanding debt is now around 3.3%. That’s a 15-year high, but still well below the rates the Treasury now has to pay to sell its debt, with all maturities yielding over 4%. And while the Fed is expected to lower interest rates further after beginning its easing cycle in September, few economists anticipate any return to the ultra-low borrowing costs enjoyed before Covid.
“That’s the biggest challenge,” because of the large share of the deficit that’s made up of interest costs, said Subadra Rajappa, head of US rates strategy at Societe Generale. “There's not really much the Treasury can do.”
The baseline forecast at Bloomberg Economics has the fiscal deficit widening to 7% of GDP by 2028. That’s “with a large share due to interest payments,” said Estelle Ou and Bhargavi Sakthivel at Bloomberg Economics.
That means it will require changes in revenues and spending to narrow the deficit. The Republicans oppose tax hikes, and their focus next year will be on extending Trump’s expiring tax-cut package. As for spending, while the president-elect has tapped Elon Musk and Vivek Ramaswamy from the business world to strip out wasteful outlays, the biggest programs are politically super-sensitive.
Besides interest, the main sources of outsize federal borrowing include Social Security, the retirement-benefit program with more than 67 millionbeneficiaries as of 2023. One forecast has that figure climbing by 10 millionby 2031. Medicare, the healthcare program for the aged, has almost 68 million enrolled, and will also see outlays continue to swell.
What’s left over is so-called discretionary spending. Back in the 1960s, that made up about 70% of the federal total, but it’s now little more than a third, according to the Treasury. And defense spending, which hit $874 billion for 2024, is an area where many members of Congress are likely to oppose any move towards budget cuts. Major weapons programs, in particular, are notoriously hard to kill, with jobs often scattered in multiple districts and states.
With the Republicans’ wafer-thin majority in the House next year, it could only take a handful of lawmakers to throw a wrench into the administration’s tax and spending plans.
“There is an opportunity here to look throughout government and find cost savings and efficiencies that will contribute to the solution — but they can't be the whole solution,” said Shai Akabas, executive director of the Bipartisan Policy Center’s Economic Policy Program. “You can't address the long-term fiscal challenges that we have without tackling the major drivers, which are the entitlement programs and then the tax code.”
Rapid economic growth could also in theory shrink the relative size of the deficits. Trump said at a press event Monday that his trade, energy, tax, immigration and other policies would help defeat inflation, stoke employment and allow for “paying off a tremendous amount of debt.” But economists view faster growth as a highly unlikely deficit-reducer — given that the US has already been averaging GDP gains of almost 3% over the past four years, a pace that exceeds most estimates of the nation’s longer-term potential.
Still, optimists including Stephen Jen, chief executive at Eurizon SLJ Capital, caution against dismissing the potential for progress after Trump takes office, especially given the Musk-Ramaswamy team he put in place. He sees progress in restraining government spending that then helps bring down inflation, in turn spurring more Fed rate cuts — which would help address debt-servicing costs.
“The US has no choice now but to address the fiscal situation,” Jen said. The magnitude of the deficits have become “dangerous,” he said.
One risk Bessent and other Republicans have focused on with regard to federal borrowing is “rollover risk,” or the danger that a sudden drop in investor appetite at Treasury auctions leaves the government unable to raise cash to pay for rapidly maturing debt.
Bessent on Capitol Hill in Washington, DC, on Dec. 4.Photographer: Al Drago/Bloomberg Bessent has proposed selling more longer-term securities so that less debt comes due in the short term. He was among Republicans blasting Yellen for boosting reliance on short-term bills to fund the deficit, saying she did so to juice the economy by sending long-term rates lower — a charge Yellen and her team rejected.
But Treasury watchers doubt that Bessent will oversee a quick shift in issuance away from bills. Most bond dealers see longer-term debt sales capped at current levels at least until the second half of 2025, despite what Republicans have said. For one thing, career staff at the department will likely caution Bessent about the potential reverberations that might cause in markets.
“Things look a whole lot different” when someone goes from markets to the Treasury, said John Fagan, who ran the Treasury’s markets monitoring group from 2014 to 2018 and is now a principal at Markets Policy Partners.
Right now, some 22% of US debt is made up of Treasury bills, a high share by recent standards. That may actually turn out to be an advantage to the deficit-reducing agenda — provided the Fed continues to lower interest rates in the coming years. Fed officials are set to release new rate forecasts for 2025 interest rates after their two-day policy meeting ends Wednesday.
With maturities of a year or less, Treasury bills are the US debt securities that are quickest to experience relief when borrowing costs come down, as well as to feel the sting when they go up. If the Fed cuts its benchmark to 2% by 2028, from about 4.6% now, it could save the federal government as much as 1.1% of GDP in interest payments on T-bills, according to Bloomberg Economics’ Ou and Sakthivel.
Even with that helping hand, they conclude, Bessent’s 3% deficit target“still looks like a stretch.”
