Tag: economics

Next Stop 6 Percent – The Treasury Bond Crisis Is Officially Out Of Control, And It Is Starting To Look A Lot Like 2008 All Over Again

A historic Treasury bond crisis has erupted and hardly anyone that doesn’t work in the financial world has any idea what is actually going on. We are literally witnessing the most dramatic financial crisis since 2008, and it isn’t even on the radar of most people in the general population. But it soon will be, because it is going to have tremendous implications for all of us. Economic conditions were very painful for several years after the financial chaos of the fall of 2008, and it appears that we are headed for a similar scenario now.

When average people on the street hear that bond yields are going up, most of them think that must be a good thing.

But bond yields and bond prices move inversely to one another, and so when bond yields are spiking that means that bond prices are crashing.

And when bond prices crash, that is not good at all.

Investors were waiting to see whether or not the yield on 10 year U.S. Treasury bonds would smash through the 5 percent barrier, and that is precisely what happened.

Subsequently, investors have been closely watching the 5.25 percent barrier, because historically that is when market conditions really begin to go haywire…

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Will AI Devalue The Real World?

Economic reality embeds many paradoxes, unexpected outcomes that go the opposite direction of what you might intuitively predict. The best example concerns a new innovation that seems to make more efficient use of existing resources. Intuition might suggest that the result will be less resource use but reality often goes in the other direction.

This is called the Jevons Paradox and it is based on a famous debate over the steam engine which made coal power far more effective than ever before, leading to wide predictions that the coal industry would experience a dramatic pullback in production need. Economist Henry Jevons said the opposite: the demand for coal will soar precisely because each unit will become more valuable in the task it serves.

He was correct. The lesson applies in many areas of life. Sometimes that very thing we believe is endangered by an innovation that seems to nearly replace it prompts the very opposite: the original resource becomes more valuable than ever before.

Consider the problem of counterfeit luxury goods. We are talking about Nike tennis shoes, Gucci accessories, Louis Vuitton luggage and bags, Rolex watches, and so on. There is a massive global economy supported by fakes. There is simply no way that a single brand can possibly stamp them out. I’ve been to cities in Turkey where the real and fake stores sell identical looking products happily, happily but at wildly divergent prices.

Economists have studied this phenomenon for many years and the results of the empirical studies are nearly always the same. The counterfeit good does not diminish the value of the authentic good. In fact, the valuation push goes in the other direction. The prices of the authentic thing rise in price, which is precisely why luxury brands know better than to crack down with a heavy hand.

Why might this be? The fake good provides brand advertising in two directions. It gets the name out there. And the very fact that these companies are dedicating time and resources to try to replicate the original only sends a market signal that the original is worthy of being copied. The result is a mad scramble on the part of consumers who can afford the real thing to find it, authenticate it, and brag about it.

The end result: the real thing becomes more valuable than ever.

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Americans Are Spending More Because Everything Costs More

Economists keep pointing to consumer spending as proof that the American economy remains strong. Americans spent 0.9% more in August, and naturally this is being celebrated as the resilient American consumer. But real disposable income did not increase AT ALL, while the personal savings rate fell to just 4.1%. Americans are spending more while their inflation-adjusted income is going nowhere and savings are being depleted to maintain their standard of living.

The cost-of-living crisis is showing up in the numbers. Consumer spending can rise during inflation simply because everything costs more. If your grocery bill rises from $150 to $200, you increased consumer spending by 33%, but you did not become wealthier or eat 33% more food. You simply handed over more dollars for the same necessities.

Personal consumption expenditures increased by $190.8 billion in August while personal income increased only $66.6 billion. Real consumer spending rose 0.6%, but real disposable income was flat. You can maintain that imbalance temporarily by reducing savings or borrowing, but you cannot maintain it forever.

This is what Washington never understands about inflation. They tell people inflation has fallen because the RATE of increase is lower than it was at the peak. That does not mean prices went back down. Consumer prices are roughly 30% higher than at the end of 2019. Something that cost $100 then costs roughly $130 today. Lower inflation merely means prices are rising more slowly from an already elevated level.

This is why consumer confidence can collapse while spending remains strong. The Conference Board’s Consumer Confidence Index plunged to 81.9 in September, its lowest reading since 2014. The University of Michigan’s sentiment index fell to 48.1 and is now 15% below January. People are continuing to spend because they must continue living, but they are increasingly worried about what comes next.

The University of Michigan reports that consumers’ expectations for inflation over the next year climbed to 4.6% in September, up from 3.4% in February. Consumers’ assessments of both their current and expected personal finances also deteriorated. The paycheck may still be coming in, but it simply does not stretch as far as it once did. Americans feel the conditions of the economy daily.

Even if inflation fell to 2% tomorrow, today’s elevated price level would remain. Prices would simply continue increasing from that higher base. This is how inflation quietly destroys the middle class. Savings decline, debt rises, homeownership becomes harder, young people delay families, and retirees discover that their savings purchase far less than expected.

The American consumer has kept this economy moving, but there is a limit to how long households can spend faster than their real incomes grow. You cannot raid savings forever, increase credit-card balances forever, or finance your standard of living indefinitely.

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Trump’s Other War

As the midterm election draws near, a number of Republicans in tough races are distancing themselves from President Trump’s war. The war is unpopular because it has inflicted economic pain on the already-suffering American people.

No, I am not talking about the Iran War. I am talking about President Trump’s tariff war.

The Tax Foundation estimates that, since he returned to the White House, President Trump has imposed tariffs on about 54 percent of imported goods.

Contrary to the claims of power-hungry politicians and corporatists seeking protection from overseas competitors, the financial burden of tariffs falls on American businesses and consumers, not foreign exporters. Tariffs are a tax on Americans.

President Trump’s tariffs have been estimated to impose an over 800 dollars tax on the average American household this year.

Tariff defenders claim tariffs boost domestic industries, thus strengthening the US economy. The truth is, while tariffs may benefit some industries that have major competition from abroad, tariffs harm American businesses, like farms, that rely on exports for a substantial share of revenue. Additionally, countries often respond to increased tariffs on goods exported to the US by raising tariffs on imports from the US.

High tariffs also hurt businesses that rely on importing raw materials and parts necessary to make their products.

According to a survey of 4,150 registered voters conducted by the Cato Institute and Morning Consult, 74 percent of Americans view tariffs as a factor in the price increases that continue to bedevil American families, while 53 percent of Americans understand that tariffs weaken the US economy.

The survey’s most disheartening result — at least for President Trump and Republicans preparing to face the voters in less than a month — is that 49 percent of Americans say President Trump’s tariffs have made their lives worse.

President Trump launched his tariff war without receiving approval from Congress, even though Article One of the Constitution gives Congress, not the president, the power “to lay and collect” taxes. In order to get around the Constitution, President Trump claimed that federal laws giving the president emergency powers give him the authority to impose tariffs and thus increase taxes on the American people.

President Trump’s claim regarding his authority to impose tariffs without authorization from Congress was struck down by the Supreme Court. Then, instead of taking the opportunity the court gave him to end his tariff war, President Trump simply found new justifications to impose tariffs.

One of President Trump’s latest tariff targets is Canada. The Canadian government responded to President Trump’s tariffs by imposing tariffs on US goods. President Trump then responded by forbidding the importation of a long list of Canadian goods. Once again President Trump acted without getting authorization from Congress.

President Trump’s tariffs have raised prices for American consumers, increased production costs for many American businesses that rely on imported materials and goods, and hurt farmers and other export-reliant business.

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The Inflationary Backlog 

Everyone looks at the headline manufacturing number and moves on, but buried inside the September ISM report is something far more important. The Prices Index surged 6.8 points to 77.9 while the Backlog of Orders Index jumped 4.6 points to 56.4. When backlogs move above 50, unfilled orders expand, meaning manufacturers are receiving work faster than they can efficiently complete it. When that happens at the same time prices are surging, the supply chain is telling us there is still pressure in the pipeline.

ISM reported that 43.5% of respondents were paying higher prices while only 2.7% reported lower prices, so this is not merely a story about stronger orders. Costs are rising sharply while unfinished work accumulates.

That combination can become inflationary because shortages change behavior. Companies begin ordering earlier because they fear they will not receive what they need later. Buyers become less concerned about negotiating the lowest price and more concerned about securing supply. Suppliers gain pricing power because customers cannot simply walk away when everybody else is waiting for the same materials. We saw precisely this during COVID when shortages encouraged businesses to order more inventory as protection against future shortages, making the bottlenecks even worse.

This is why the backlog matters more than most people realize. These are orders already sitting in the pipeline waiting to be completed, meaning they represent future production even if new demand begins to weaken. Consumer confidence can decline and the labor market can soften while manufacturers simultaneously face rising costs and unfinished orders. That is how you end up with economic weakness and inflation at the same time.

The Federal Reserve cannot fix this with another 25-basis-point move. Higher interest rates do not produce another barrel of oil, manufacture copper, eliminate tariffs, reopen shipping lanes, produce semiconductors, or build another factory. The Fed can suppress demand, but it cannot manufacture supply, and higher borrowing costs can actually make expanding productive capacity more expensive.

This is precisely why inflation can come in waves. CPI tells us what consumers have already paid, while manufacturing data can reveal pressure moving through the system before those costs reach the final customer. Manufacturers can absorb higher costs for a while by sacrificing margins, but eventually somebody pays. If the Prices Index remains elevated and backlogs continue expanding, businesses will increasingly attempt to pass those costs down the chain.

The September numbers should therefore be watched carefully. One month does not establish a trend, and backlogs could fall again, but a Prices Index of 77.9 alongside a Backlog of Orders Index at 56.4 is not a signal that inflationary pressure has simply disappeared. While Wall Street obsesses over every sentence from the Federal Reserve, the people actually producing goods are telling us something much more useful: their costs are rising while the work waiting to be completed is piling up.

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Trump Says Inflation Will Pay Off The $40 Trillion Debt “Very Rapidly”

President Trump thinks ‘certain levels’ of inflation could take care of the $40 trillion national debt. 

“You know, inflation. Certain levels of inflation will also pay off that debt very rapidly. Very rapidly,” he told TIME in an interview published Thursday, after the outlet pointed out has grown by about $11 trillion over his five years in office. In response, Trump first blamed Joe Biden, then the Fed, then hinted at a plan he wouldn’t share.

“I know I’m the best in the world,” Trump said. “The best – I don’t want to tell you what those means are, but you can pay off the debt through other means. But the one thing that you can do is pay it off through growth, and we’ve never had growth like this.”

Later he circled back, saying “the growth is going to pay off the debt” and that the Fed’s hikes were “hurting our country more than inflation is hurting our country.”

He didn’t say what level of inflation he had in mind, or whether he wants the Fed to tolerate more of it. Earlier in the same interview, though, he blamed Biden for “the biggest inflation in history” and said he “inherited the greatest inflation in history,” adding that “the only thing I have to get down now is the gas.”

Headline CPI rose 3.4% in the 12 months through August, with core at 2.4%, according to the BLS. On Sept. 16 the Fed raised rates for the first time since July 2023 – a unanimous quarter-point hike to 3.75%-4% that included Trump’s own pick for chair, Kevin Warsh – and penciled in another before year-end. Trump told TIME he “probably would have voted against the board” if he were Warsh, and has called for rates of 1% “or less.”

On Thursday, the day TIME published the interview, the 10-year Treasury yield touched 5.34%, its highest since 2002. It closed at 5.24%.

He’s Floated This Before

None of this is new for the self-described “king of debt.” In May 2016 he told CNBC the US could buy back its own bonds at a discount if rates went up. That was widely read as a default threat, so a few days later he went on CNN to walk it back. “You never have to default because you print the money, I hate to tell you, OK?” he said.

A month before that, he told the Washington Post he could wipe out what was then a $19 trillion debt “over a period of eight years” – a debt that has since more than doubled.

Buybacks are back, too. After the debt crossed $40 trillion and long-dated yields kept climbing, Treasury Secretary Scott Bessent tripled the cap on the first expanded buyback to $6 billion. As we noted at the time, yields surged anyway, since $6 billion barely registers against more than $2 trillion in gross issuance a year.

Bessent, for his part, prefers to talk about growth. In June 2025 he told CBS’s Margaret Brennan that “everything has been alarmist” on inflation and that the US would never default. And the day after Treasury reported the $40 trillion milestone, he went on CNBC to say there was “nothing magic” about the number and “we can grow our way out of that.”

The Part He Left Out

Last year we ran a piece arguing Bessent was effectively putting the national debt on an adjustable-rate mortgage by leaning on floating-rate financing, which also projected the debt would top $40 trillion by the end of fiscal 2026 – it got there in mid-August, about six weeks ahead of schedule.

Back in April 2025, Bloomberg’s Simon White made the case that higher inflation and a weaker dollar – where US policy seemed to be headed – were consistent with a falling debt burden. But he warned that unlike Britain’s post-WWII “beautiful deleveraging,” erratic policymaking could wreck trust in the dollar system, spark capital flight and end up adding to the debt.

Nick Giambruno spelled out the mechanics in July: financial repression, where the government keeps interest rates below inflation and the difference quietly moves wealth from savers to the Treasury. With 9% inflation and 4% rates, he noted, that’s a 5% transfer every year, and it compounds.

It has worked before. A 2011 BIS paper estimated negative real rates wiped out debt worth 2-3% of GDP a year in the US and UK between the late 1940s and the 1970s. But that was under Bretton Woods, with interest-rate caps, captive domestic buyers and capital controls – and the paper found financial repression works best “when accompanied by a steady dose of inflation.”

The catch is that it only works if the Treasury can borrow below the inflation rate. Right now it can’t: the 10-year yields nearly two points more than headline CPI, interest on the debt already runs over $1 trillion a year, and everything that matures gets rolled at today’s rates.

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$40 Trillion in Debt and the Interest Bill Keeps Growing

The United States has crossed $40 trillion in gross federal debt, and Washington will treat it as another unfortunate milestone before returning to the business of spending money it does not have. The more immediate problem is what it costs to carry that debt. Treasury’s figures show approximately $1.17 trillion in gross interest expense through July, just ten months into fiscal year 2026. That works out to roughly $117 billion a month, or $3.85 billion every single day over that period. These are interest costs, not repayments that reduce the principal. Washington incurs this expense while the debt itself continues climbing.

There are two different interest figures, and they should not be confused. Treasury’s gross interest expense includes interest credited to government accounts holding Treasury securities. The federal budget’s net interest measure excludes those internal payments and includes other offsets. The Congressional Budget Office’s February outlook placed net interest at approximately 3.3% of GDP in 2026, implying more than $1 trillion for the full fiscal year. Even on that narrower measure, Washington is devoting roughly one dollar in five of projected federal revenue to interest. The distinction matters for accounting, but neither number describes a government bringing its finances under control.

The issue was never simply that government had borrowed a large sum. It was that borrowing had become a permanent arrangement, with interest added to budgets already running deficits. Politicians take credit for the original spending, while the cost of financing it survives long after they leave office. Their successors inherit the bill and issue more debt rather than confront the promises that created it.

Consider what refinancing actually means. When a Treasury security matures, its holder must be repaid. If Washington finances that redemption by selling another security, the creditor has changed, but the government has not eliminated the obligation. It has renewed it at whatever rate the market will accept. Borrowing to refinance principal is separate from the interest bill, yet both require continued access to willing buyers. This is why a government can make every payment on time while its underlying financial position deteriorates.

The mathematics of higher rates becomes brutal at this scale. Every additional percentage point on $1 trillion of debt means another $10 billion in annual interest once that debt carries the higher rate. Apply that to successive waves of refinancing and the expense builds year after year. The entire $40 trillion does not reset overnight, and it would be misleading to suggest otherwise. Existing fixed-rate securities retain their coupons until maturity. That delay, however, can conceal the developing burden and give politicians another excuse to postpone action.

There is no magic number at which a country automatically collapses. Confidence, borrowing costs, economic growth, and the ability to raise revenue all matter. The danger is that higher interest expenses require more borrowing, while concerns about that borrowing encourage investors to demand still higher yields. A deteriorating fiscal position can then begin reinforcing itself.

CBO projects net interest costs reaching $2.1 trillion in 2036, or 4.6% of GDP. That is a projection under its stated assumptions, not a guaranteed outcome, but it demonstrates that the problem does not disappear even in an orderly baseline. Washington is not merely struggling with a temporary expense left over from an emergency. It is carrying an interest burden expected to grow while elected officials continue making commitments against future revenue.

War makes this arithmetic harder. Military operations require resources today, while the interest on borrowing to finance them can remain for decades. If conflict also raises energy costs or disrupts production, it can complicate the Federal Reserve’s inflation problem. Higher rates may be necessary to restrain inflation, but they also increase the cost of new federal borrowing. Demanding that the Fed cut rates does not repair that conflict, especially when long-term investors remain free to demand compensation for inflation and fiscal risk.

Republicans cannot explain this away by blaming Democratic spending while defending every unfunded commitment of their own. Democrats cannot promise an expanding government without confronting the cost of financing it. Both parties have constituencies they refuse to disappoint and obligations they prefer to leave to the next administration. The interest bill does not recognize party affiliation, and the bond market does not have to accept a campaign promise as repayment.

The $40 trillion figure should therefore be understood through the income required to sustain it. America possesses enormous productive capacity, but that is not permission for Washington to claim an ever-larger portion of future revenue before the public receives any new service. More than a trillion dollars in annual net interest is already a substantial claim on that income. The question is how much further government intends to mortgage the future before admitting that borrowing has become its substitute for governing.

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Treasury Sec. Scott Bessent Schools Elizabeth Warren – Offers Her ‘Foreign Exchange for Dummies’

Treasury Secretary Scott Bessent recently smacked down Massachusetts Senator Elizabeth Warren and it was a thing of beauty.

Apparently, Warren sent Bessent a letter a few weeks ago claiming that she had ‘serious questions’ about foreign exchanges happening under Trump.

From Warren’s letter:

U.S. Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee, sent a letter to Secretary of the Treasury Scott Bessent pressing for more information regarding the Trump Administration’s decision to deploy its Exchange Stabilization Fund (ESF) to boost financial markets and inflate the Japanese yen after it rapidly dropped to a 40-year low. Warren noted that the Administration has yet to provide a detailed justification for its intervention, nor has it officially disclosed how much taxpayer-linked funds were spent purchasing yen.

“The mechanisms through which Treasury executed the yen purchase raise serious questions regarding the costs to American taxpayers,” wrote Ranking Member Warren.

Bessent’s response was EPIC. He posted it on Twitter/X. Here it is in full:

In her latest sciolistic letter to me, @SenWarren made it clear that she knows even less about foreign exchange markets than she does about banking.

What is equally shocking, but not surprising: not a single member of the media mob has a rudimentary-enough level of financial market literacy to spot her remedial error.

To reiterate: under @POTUS, the United States delivers for America’s trusted partners.

For a fuller explanation, I recommend Senator Warren take any entry level course in international finance for her and her staff, or I can personally give her a tutorial on Foreign Exchange for Dummies. Although I am not holding my breath, I hope her next letter will demonstrate that she has learned the difference between a currency purchase and a swap or a loan.

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Bessent Suggests Economic Warfare Against Iran Could ‘Blow Up the Global Financial System’

With the United States unable to militarily defeat Iran in President Donald Trump’s illegal US-Israeli war of choice, Treasury Secretary Scott Bessent on Monday escalated the administration’s economic attacks on Tehran, warning countries and companies around the world that continuing to do business with the nation could expose them to punitive sanctions.

“Let there be no ambiguity as to the position of the United States,” Bessent said during a news conference unveiling what the Trump administration is calling Operation Economic Outcast. “An economic engagement of any kind with this murderous regime will expose those responsible to the full reach of American power.”

The “economic D-Day” campaign targets five sectors – technology, gold, aviation, shipping, and digital assets – and is intended to choke off virtually every remaining source of hard currency for Iran.

Bessent warned that it is “no longer acceptable to operate in the gray spaces” of US policy. The secretary said he anticipates the announcement of sanctions against a major financial institution as soon as next week.

Asked if Chinese banks that do business with Iran would be sanctioned, Bessent replied that “no one is above the reach of US sanctions.”

While Bessent did not say which countries would likely be targeted, China, Türkiye, and the United Arab Emirates are Iran’s biggest trading partners.

The secretary was also asked why sanctions aren’t being imposed immediately.

“Well, we are giving everyone the opportunity to remedy bad behavior,” he replied. “Why would I want to blow up the global financial system?”

“We believe that it is important to level set and give people a cure period, but they should know that that will move very quickly and that we are serious,” Bessent added. “So we believe that a warning shot and a level set of expectations is appropriate, and if people do not want to meet our expectations, then we expect – and they should expect – that they will leave the dollar system.”

Iranian officials largely scoffed at Bessent’s “economic D-Day” threat. Deputy Iranian Foreign Minister Kazem Gharibabadi asked on social media, “Is this a victory or an admission of America’s failure!?”

“You say Iran’s military capability has been ‘dismantled,’ 100% of its military factories ‘destroyed,’ and its nuclear program ‘buried’; but for this very Iran, the ‘largest financial assault in history’ and the mobilization of ‘all US institutions and authorities’ have been necessary!” he mocked.

While Trump has said the war is “over” or nearly over dozens of times, Iran currently appears to have the upper hand, as shipping has overwhelmingly avoided the US-supported route through the Strait of Hormuz, with most vessels using a course set by Tehran or avoiding the waterway altogether.

Trump’s war on Iran is proving costly not only in Iranian lives and US taxpayer dollars, but in the increasingly strained budgets of American families. Disruptions to oil shipments through the Strait of Hormuz have pushed gasoline prices above $4 a gallon nationally – roughly a dollar more than a year ago. Trump has dismissed Americans’ concerns about high fuel prices, saying $4 is “not very high” and vowing to “never apologize” for the economic pain his actions are inflicting.

That pain doesn’t stop at the pump. More expensive gasoline and diesel ripple through the economy, raising the cost of transporting food and other goods while keeping inflation elevated.

The pain is far worse for the people of Iran. Trump administration’s escalation comes as Iran’s currency, the rial, has plunged to record lows amid an economic crisis largely caused by the war and years of preceding US-led sanctions.

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Functional Unemployment in USA Reaches New High

The government claims unemployment stands at 4.1%, yet a new analysis cited by CBS News found that 24.9% of American workers were functionally unemployed in July. Functional unemployment includes those who cannot find employment, people forced into part-time work because full-time jobs are unavailable, and workers earning less than $26,000 annually before taxes. Washington can call these people employed, but try paying rent, food, insurance, utilities, transportation, and medical expenses on barely $2,000 per month before the government takes its share.

The Bureau of Labor Statistics is not measuring whether people are prospering or even surviving. If you worked as little as one hour during the survey period, you can be classified as “employed.” If you have searched for months, become discouraged, and finally stop looking, the government simply removes you from the labor force. You did not find a job and your circumstances did not improve, but you cease to exist statistically. Politicians then point to the lower unemployment rate and claim their policies are working.

Functional unemployment has now risen for four consecutive months while workforce participation has moved lower. Employers reportedly eliminated 23,000 jobs in July, consumer prices rose 3.4% year over year, and wages increased only 3.2%. Therefore, the average worker lost purchasing power even after receiving a nominal raise. This is why people become angry when politicians lecture them about a strong economy. The statistics say they are employed, inflation is under control, and everything is wonderful, yet the paycheck no longer covers the monthly bills.

This is how the political establishment disguises economic decline. Inflation statistics do not reflect the actual cost of maintaining a household, GDP rises when government borrows and spends money it does not have, and unemployment declines when people surrender and stop searching for work. Every major statistic has been constructed to make government appear competent while the standard of living steadily deteriorates. They measure whether money changed hands, not whether society became wealthier.

Americans have been forced to replace income with debt. They have depleted savings, increased credit-card balances, postponed major purchases, and begun cutting necessities because discretionary spending was already eliminated. Consumer spending may represent roughly two-thirds of the economy, but consumers cannot continue spending indefinitely when prices rise faster than wages and employment becomes increasingly unstable. Credit can postpone the reckoning, but it cannot replace real economic growth.

Functional unemployment explains why Washington can proclaim prosperity while millions of Americans feel trapped in a personal recession. The economy has produced millions of positions that satisfy the government’s definition of employment but cannot provide an independent life. The political class counts the number of people receiving paychecks while refusing to ask what those paychecks can actually buy. That is poverty disguised by statistics.

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