Transcript of Economist Justin Wolfers on the Trump Treasury Emergency Scheme

What the heck is Treasury Secretary Scott Bessen doing? This was the announcement that the US Treasury will double the size long-term US government debt buybacks following the rapid surge in US Treasury yields. Repurchases of $2 billion will now be increased to at least $4 billion, the Treasury said. On this news, if you looked at the 30-year, 20-year, and 10-year Treasury yields, they all of a sudden went down very quickly when they were going up very quickly. And we'll talk a little bit why you don't want those going up very quickly. But I put my guard up right away when people start to talk like this and when I see massive market moves like that. And sometimes it feels a little bit like a manipulation. And so I want to get to the bottom of it when I see language like this. I go, what are you really trying to do here? It says the US Department of Treasury is increasing by at least double the size of liquidity support buyback operations for longer-dated nominal coupon securities. The 10-year to 20-year sector and the 20-year to 30-year sector. The current maximum size of $2 billion per operation will be at least $4 billion per operation.

It's then explained as thus: This increase in buyback operation sizes reflects the Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations. So when you hear that, you say, how in the world is an average American who is paying a lot more for their gas prices right now, or a worker who's paying a lot more money for diesel on average, $5.50 right now, and that's gonna, I think, trickle in a bad way down to the rest of the economy by causing inflation to surge. What the heck is going on here? And then we see on this news Bitcoin's value is surging as well. And is this related? And what the heck is going on? I want to bring in Justin Wolfers. Platypus Economics is his channel on YouTube. Everybody subscribe there. He's also the chief economist for the Midas Touch Network. Justin, great to see you as always. I've been talking about the Treasury yields increasing, how the 30-year was approaching 5.3%. We were talking about the 10-year approaching 4.7%. And I had explained to our audience that that also means that the Treasury Department's going to be paying a lot more interest or high on the debt that is out there.

And that's not a good thing. And that's gonna cause mortgage rates to increase and impact us in a lot of other ways as well. But you're the economist here. I just, occasionally pretend to be one on YouTube. What's going on here? What's this move? It appears to be signaling, you know, it does seem like a move. It's in billions. You know, we talk about billions and trillions, but it appears to be sending messages that the market is receiving. And I also wonder, well, what are the American people who are out there who are just trying to get by and work, do a good honest day's living and make some money and support their family do in this environment?

Ben, it's a very good day to have a cheap economist, mate, because there's a lot going on, some of which is really important to people at home, some of which is less so, and some of which we don't know. So I'm going to put it under 3 categories, if I may, and I'm going to bite one off and then we'll go back and forth on that and then come back to the second and come back to the third. So the first thing to think about is what's— why is everyone talking about the bond market to start with? Second question is, what the hell is Bassett actually doing and what's he meant to do? And the third is, what does this signal to financial markets and the implications for the broader economy? So Ben, let's start and just get the first thing right, which is everyone's talking about bond markets. Why are they doing that? Okay. The bond market, it's not where you go and buy and sell James Bond figurines. It's basically the bank where the federal government goes to borrow money. Because the government at the moment is spending a lot more money than it takes in in taxes.

You and I would go to the bank. Instead, what the federal government does is it issues bonds. Basically, it borrows from anyone who's willing to lend to it. Everyone's talking about the bond market because the interest rate that it is charging to the US government has gone up very sharply. It was as low as 1 and a little bit percent just after COVID, and now it's up to 5 and a little bit percent. That's a very, very large rise. It could be that markets are worried that inflation's about to take off, but that turns out not to be what's going on. We can tell because we can look at inflation index bonds. So the big question is, why is everyone looking at these high interest rates and why are these interest rates so high? And I think the answer rests on two things. Basically, borrowing is like any other product. If more people want to borrow, the price of borrowing goes up. And right now we have two groups that are doing a lot of borrowing and that's led the price, which is the interest rate, to go up. The first group is huge investments as part of the AI rollout.

Some people are convinced it's a bubble, some people are not. I think anyone who thinks they know needs a dose of modesty, but that's a big part of what's going on. It's part of our economic future. The second part, which worries me more, is a huge amount of borrowing from the US government. And here, basically, the US government's doing so much borrowing, there's not much money left to lend to you and me. Because of that, that's pushing interest rates up. Why is the US government doing so much borrowing? Well, at a mechanical level, the answer is we're running huge budget deficits. An underremarked fact right now is that the US budget deficit is at the highest level it's been in the postwar period, with the exceptions of COVID and the Great Recession. Our deficits, say another way, are at the sort of level that would only make sense if we were at a moment of extreme economic distress and needed a lot of fiscal help. But we're not in extreme distress. Yet the administration has passed very large tax cuts, hasn't pulled back on spending at all, and any sort of sense of responsibility has just gone out the window.

And that's a big part of what's driving bond yields up. So markets don't really believe that the US government is looking like as sound of a borrower as it once was. That's a big part of it. And then why does this matter to folks at home? Why it matters, because it shapes our government. If at the beginning of the year, the first thing you got to do is pay last year's credit card bill and there's not much left, that means fewer roads, fewer schools, fewer police, fewer of all the good things government is meant to do. So that's one part of it. The other though is the government's in there borrowing money and it's borrowing, it's sort of lined up at the bank ahead of you and me. So it's pushed interest rates up and what that means is if you're trying to get a mortgage right now, the interest rate on that has gone up. If you want to buy a car, the interest rate on that has gone up. If you have credit card debt, the interest rate's gone up. So these are factors that play out directly into affordability. Can people get their paycheck to go as far as they want?

Would like it to? And the answer, of course, is the bigger your interest bill every month, the less cash you've got to get by. So that's the big picture. I want to pause on that, Ben, make sure we're aboard on that, and then we can talk about this weird stuff Scott Bessant's doing today.

On board with that. What's the interplay though between the Fed, which we hear a lot about, and the Treasury? Who's actually buying the bonds? Where do they come from? Where are they being physically purchased from?

Okay, great. I love this because I get to do a little bit of Economics 101 and a little bit of today's news. Okay. So look, if you and I want a loan, what you do is you walk into the bank and you say, "Here's the house I want to buy and I want to borrow 80% of the value of it." And you do some paperwork. Instead, and then that you write a contract that says, "I will pay you back $1,000 a month for the next 30 years," or however much it is. The way a bond works is the Treasury, under Treasury Secretary Scott Bessant, sells off a piece of paper. The piece of paper says, "In a year's time, I'll give you $100." There are lots of different kinds of pieces of paper. There's a different one that says, "I'll give you $100 every year for the next 30 years." There's all sorts of different bonds, but basically let's think about it conceptually is it sells a piece of paper and then I might go and buy that piece of paper for $95. So I bought a piece of paper for $95 that in a year's time, I'll be able to turn up to the Treasury and say, "I want my $100 now.

I made a $5 profit." We call that a 5% interest rate. So normally, it's the Treasury that issues bonds. Now you brought me to what was the second of my issues here, which is what's this big announcement from Scott Bassett? Sorry, let me go back. The Treasury normally issues bonds and it manages our debt. Here's something else. The Fed runs monetary policy. Remember, the Fed sets interest rates. The way it does it is not by borrowing or lending money for 10 years at a time. That's what the federal government does. What the Fed does is it manages the rate at which one bank lends to another bank for 24 hours. They're linked though, but that's what the Fed normally does. In really bad times, the Fed is worried it can't get interest rates down low enough. So what it will do is it will go and get engaged in long-term bond— the market for long-term bonds. This is sometimes called quantitative tightening or quantitative easing. So during a period of quantitative easing, what the Fed will do is it'll try and affect not just the overnight, the 1-day interest rate, but also the 10-year interest rate.

And the way it will do that is it will buy a lot of bonds, pushing the price up, which means pushing the interest rate down. So that's why it's such a good question. Wait, who's moving around these? Who's intervening in bond markets right now? Kevin Walsh, the new Fed chair, has said he doesn't like it when the Fed is monkeying around in long-term interest rates. He's against it. The language you hear him use is, "I want to reduce the Fed's balance sheet." Look, when the Fed goes and buys long-term bonds, they have to write it down on their balance sheet. So he doesn't like monkeying around at all. What was today's news? Today's news was that the Treasury Secretary, Scott Bessent, has said that he is going to move from $2 billion a day to $4 billion a day of buying and selling long-term bonds. One thing to notice, $2 to $4 billion sounds like a lot. In this market, it's not really very much at all. The other thing to notice is what Bessent is doing is very different than what Kevin Walsh would want to do. This is— I'm going to pause here because there's so many things here that could cause confusion, but when you're ready for it, Ben, I want to explain what it is that that program's meant to do and what we think the Fed is actually doing with this, uh, getting in with Treasury, getting involved in the, in the bond market right now.

Let's get to that next point, but it does seem he's managing Warsh's desire not to be involved in this area by sending at least a signal to the broader market to say, here's the vision that we have, and at least short term, we got your back, short term. The problem that I see observing this is long term, which is something that you and I talk about, that this is a problem where the bucket gets kicked down in a bad way to who's gonna have to deal with this. And unravel a lot of this stuff that's happening that feels you're a little bit robbing from Peter to pay Paul and you are taking the long-term treasuries out of the market to lower the prices, but you are issuing a short-term fix with these short-term bonds to lower the longer-term yields down, which you still have a debt issue. You're still issuing a lot of debt and that's still going to increase the deficit and that's still going to increase that $40 trillion number we're approaching. But you've put a Band-Aid on a broader problem. And then who becomes the next president? You deal with it. And so anyway, that's kind of my fear about what's happening.

What do you make of it?

Yeah. So I want to start by apologizing to everyone at home. I'm going to be using my professor voice the whole time. The reason I'm sort of going to teach rather than talk is the levels of complexity here mount up so quickly that lots of people just lose track of the whole story. They're like, "Oh, the bond market, it doesn't affect me." No, it affects you. I want to reinforce and vehemently agree with the thing that you just said, Ben, which is the most important issue right now in the bond market is the level of US government debt is growing. That the deficit is at a rate that— at a level that just doesn't make sense. Our economy's doing okay. Part of the reason is the spigots are open in a way that no previous president would ever have engaged with. And it's the bond market's job to say, "Hey, are you guys actually serious about ever paying us back?" And increasingly, they're worried that maybe they're not. That's the big picture. Hold on to that. And everything else today, all this complexity about the bond market, it's all the footnotes underneath it. But we're a nerdy audience here, so let's go to the nerdy footnotes.

What There is a reason. Let me tell you, the program that Scott Bassett increased today is actually really small and really uninteresting and not meant to make news. Okay, so let me try and explain. We often talk about things like the 10-year bond rate or the 30-year bond rate, which is basically what's the interest rate markets charge the federal government for borrowing for 10 years or for borrowing for 30 years. But in fact, it's not quite that simple. The government every month or so issues new bonds. So there's a bond which promises to pay the user money every year for the next 10 years. And that bond began yesterday, or maybe it was today, I forget which. And then next month they might issue a different one. And so there's not one 30-year bond. In fact, there's a 30-year bond, there's a 29.9-year bond, a 29.8-year bond, and blah, blah, blah, blah, blah. There's thousands of sheets of paper out there that are basically IOUs from the government. If you happen to own one of the— and so that makes it really hard for people in markets to have to think about the price of thousands of different pieces of paper all at the same time.

And if you happen to own one of the pieces of paper that not many other people own, then there won't be many people in the market buying or selling. And that kind of sucks because you might need to get your money out. And so what the Treasury's job is meant to do under this program is say, In some of these pieces of paper, for some types of pieces of paper, there's just not enough buyers or sellers in the market. So we're going to come in and just smooth things out so that everything's okay, even if there aren't enough buyers and sellers in the market. There's lots of buyers and sellers in some types of pieces of paper, many fewer. And all it's meant to do is just smooth things out to ensure regular market functioning. That's why people use words like fix the plumbing. Okay, that's what this program is meant to do. So in a normal time, if Treasury did start to work under this program, I'd just be like, oh, that seems fine. They're just fixing a few technical issues, putting a few Band-Aids on some of the financial plumbing. Everything's all right.

But this comes at a very unusual moment. Anyone who's been watching the financial press will know the most important news story all week has been that bond yields are rising. One possible explanation for that is bond yields are rising for the reasons we talked about, that there's a lot of borrowing for AI and a lot of borrowing by the US government and markets are like supply and demand means when there's a lot more borrowing, the price of borrowing goes up. That raises the possibility that maybe the folks over at Treasury and in particular Treasury Secretary Bessant sees things differently. He sees these bond yields have gone up and he's like, oh, hang on, I think the markets are reading it wrong. I think they're worried about our debt and they shouldn't be. If that were true, I think Bassett's on the wrong side of that. And so maybe what he's doing is actually using this program that's just meant to smooth things out to try to actually push down those long-term bond yields. The long-term interest rates are the market trying to send a signal to the government and this is the government saying, "Stuff it.

I disagree with you." completely. And this then comes back to your opening question, Ben. What is this meant to signal? Well, it could be this is just something pretty boring, trying to make all the technical stuff work out right. Or it could be the Treasury saying, "I don't care what's going on over at the Fed. We are going to buy and sell long-term bonds." So we push down, artificially push down long-term interest rates. Notice, even if they succeed at that, that doesn't change the underlying reality. The underlying reality is that the US government has borrowed an enormous amount of money. And markets are sending out warning signals that that requires higher interest rates.

You know, I think about the plumbing example. I think about the famous cartoon, A Leak in the Dike, and plugging the different— but you know, the issue here, and you and I have talked about it, a lot of the economic ebbs and flows are not necessarily related to what one individual in the Oval Office and the cadre around him is specifically doing. It's usually more reactive and doing plumbing. What seems to be the difference here is that whether it was the tariffs against the world, and then we saw also at that period of time the Treasury yields rising. When we saw the catastrophic— currently we're still in this catastrophic war in Iran and it also seems to be rising on also Trump's, was rising throughout, but especially as Trump's plan seems to be, you know, I'll use an economic term, which you don't necessarily wanna say in a war that you start, laissez-faire, which is just, I'm gonna disengage, I'm not gonna do anything, and let's just let the war resolve itself. I feel like, what do you mean? You're gonna do a free market war? What are you talking? You started the catastrophic war.

The Strait of Hormuz is closed. Your plan now is nothing? And that's what we're gonna do? We can't trust you, United States. And there seems a correlation to that. And so what I see happening, and what I don't wanna sound like a hyperbolic alarmist, but I also look to videos we do and I say, wait a minute, didn't we just do another urgent intervention by selling euros and swapping it with yen? And I said, "Well, let's check back on that one 'cause that's correlated to the, you know, to war and geopolitical affairs as all in Japan." And then I look there and I go, "Wait a minute, the yen is falling again. That $5 to $10 billion thing, you know, is not working out." And so we plug that hole, we plug this hole, we plug, you know, and it seems like there's a lot of plugging taking place and it's just past this leaking ship to the next person. I guess that's my broader analysis here. Of, of, of what I see going on. Give you the final word, but I wanted to give that example, that metaphor, if you will, of what I see happening.

Right. So look, let me try and draw it together and agree with you. So the most important thing for people to understand is the US deficit is large. Our debt is growing. It's growing in a painful way that's pushing up interest rates. That's the big story. The thing that this story has in common with many of our past conversations, like the yen intervention, is Economics is complicated, but I don't want to look anyone in the eye and say, "It's too complicated for you, just trust me," which is— there are a whole lot of difficulties. There are some technical programs that do things that are mostly uninteresting and under a typical administration, you would sort of trust the nerds to get it right and it might make page 87 of the Wall Street Journal, but most folks don't need to know about it. There's one version of this current story where the intervention in bond markets where That's what's going on. But we see time and time again, this is an administration where they take powers that have not really been fully granted to them, say the trade war, and they use them for purposes that are to be polite, idiosyncratic, or to be more direct, that reflect the president's weird sudden desires.

They use these powers in very, very unusual ways. And with today's intervention, the question is, is this business as normal with the nerds doing what the nerds are meant to do and most folks at home don't don't need to worry about it, or is this the Treasury taking a bold step to try and get involved in a set of financial markets that we usually leave alone to the Fed? And the answer right now is that nobody knows, and that fog of uncertainty afflicts the bond market right now. It afflicts the yen exchange rate, and it afflicts, I think, many, many aspects of how folks are interacting with and thinking about the government right now.

And this is why I think the work you do is so important at Platypus Economics. It's why the role of having a chief economist at the Midas Touch Network is so important because to me, this information is not just a fog of uncertainty, which it is amongst groups of people who study this. It's a fog of uncertainty. So I think about people who are just going to fill up their tank of gas or going to the bank if they're lucky enough or fortunate enough, although it's so hard right now to even afford a home. But it could be the, uh, what you're paying for your car loan or whatever it is. And you're seeing these numbers and they seem to kind of be coming from somewhere. And it is these inaccessible forces that allow the demagogues to come in and kind of make up stuff. And tell you that this is— that they're the ones who are going to fix it. But you could break it down and say, wait a minute, y'all seem to be the ones creating it. And so that's why this is really important, why I want everyone to subscribe to Platypus Economics and why I prefer this format where we can talk in a professorial way, but in an accessible way without the yelling in 3 to 5 minute segments, without that, where we can give a full picture and then build upon it.

So everybody subscribe to Platypus Economics. Justin, chief economist at Midas as well.

All.

Thanks so much, we appreciate you.

Great pleasure, mate.

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