Shall We Repeal the Laws of Economics – Part III

Summary

• In September 2024 and June 2025, memos were written arguing that government attempts to override economic laws are likely ineffective & potentially harmful.
• Economies function as natural organisms where steering them distorts operations & usually worsens results, though selective intervention may be necessary to prevent unacceptable outcomes like widespread poverty.
• On August 17, the yield on the 30-year U.S. Treasury bond closed above 5.3%, marking a 19-year high.
• On August 19, the Treasury announced it would at least double the maximum size of its long-dated buybacks from $2 billion to $4 billion to provide liquidity support.
• Treasury Secretary Scott Bessent indicated a willingness to increase buyback sizes further, describing the move as a "whatever-it-takes" promise.
• Long-term rates declined immediately after the August 19 announcement but rebounded the following day.
• Investor Stanley Druckenmiller argued that artificial yield suppression acts as a subsidy to procrastination & that governments defending prices against fundamentals always lose.
• Druckenmiller previously earned approximately $1 billion in 1992 by betting against the Bank of England's ability to support the pound against fundamentals.
• Rising rates are attributed to stubborn inflation, with PCE inflation at 3.7% in July versus the Federal Reserve's 2% target.
• Elevated oil prices associated with the war with Iran threaten to keep inflation high.
• The U.S. is incurring massive deficits during economic prosperity rather than during slowdowns, with the deficit near 6% of GDP & unemployment at 4%.
• Net interest outlays are projected to exceed $1 trillion this year, surpassing the defense budget.
• Increased long-term bond buybacks financed by general cash resources ultimately replenished through additional issuance do not change overall indebtedness but shorten the debt maturity pattern.
• Strong demand for capital is driven by routine economic growth needs & multi-trillion-dollar investments in AI, with McKinsey & Company estimating over $5 trillion in global AI data center spending through 2030.
• The Treasury faces the need to refinance an enormous volume of maturing securities while financing a net new issuance of roughly $2 trillion.
• On August 22, Treasury Secretary Bessent argued that yields do not reflect underlying fundamentals, citing the Iran war & poor liquidity in the 30-year Treasury market.
• On September 9, Evercore ISI reported that markets remained underwhelmed by the Treasury's ramped-up buyback operations, with yields moving higher.
• The U.S. debt is denominated in a currency it issues, & the dollar accounted for 89% of foreign exchange transactions in 2025 & 57% of allocated official reserves in the first quarter of 2026.
• The euro remains the second-largest reserve currency but has not closed the gap with the dollar, while the renminbi accounts for only about 2% of allocated official reserves.
• Gold recently surpassed the dollar as the world's leading central bank reserve asset according to a MUFG Bank note.
• Actions to distort markets to cap borrowing costs may cause the currency to fall & lead to higher interest rates as investors demand compensation for reduced purchasing power.
• Warren Buffett stated at the May 2025 Berkshire Hathaway annual meeting that the current fiscal deficit is unsustainable over a very long period.
• The current fiscal situation involves spending more than is taken in, increasing debt relative to GDP, & growing interest bills.