Scott Bessent finds himself at a critical juncture. Once enjoying a flourishing life managing his hedge fund, Key Square Group, alongside his family in Charleston, his recent political aspirations have raised eyebrows.
His support for Donald Trump’s presidential campaign led to his nomination as Secretary of the Treasury. While this might have seemed like a strategic move, it places him at the center of a challenging economic landscape that he may come to regret.
This week, Bessent faced the Senate Finance Committee’s confirmation hearing, expressing his ambition to be the steward of Trump’s economic plans that apparently aim to “unleash a new economic golden age.”
However, as he prepared for the hearing, Senator Elizabeth Warren targeted him with scrutiny. Warren is known for her extensive proposals, boasting 81 plans addressing various government initiatives, ranging from “Affordable Higher Education for All” to “A Blue New Deal for our Oceans”.
On January 12, Warren sent Bessent a comprehensive 31-page letter, complete with 185 footnotes, containing 180 questions demanding written responses before confirmation.
As a Senate Finance Committee member, Warren’s role involves scrutinizing Bessent, yet her questions seemed more politically driven than genuinely inquisitive…
Interestingly, amid all the inquiries, Warren neglected to pose the most critical question:
How will Bessent manage the impending debt obligations?
Yellen’s Oversight
What is often overlooked is the significant misstep made by outgoing Treasury Secretary Janet Yellen during her tenure. Her approach of funding the national debt with short-term Treasuries has burdened taxpayers with escalating financing costs, potentially exceeding $1 trillion annually.
In 2020, interest rates reached historical lows. For example, the 10-Year Treasury Note hit an astonishing 0.62 percent in July 2020, prompting many homeowners to refinance their loans at attractive long-term rates. It was a smart choice then, and the same should have applied to Treasury policies.
Yellen took office in January 2021, a time when interest rates remained historically low. However, rather than securing long-term debt at these rates, she issued debt with brief maturities—typically less than two years.
As interest rates climbed alongside inflation in 2022, the government faced the challenge of refinancing at significantly higher rates. The interest expense on the debt for fiscal year 2021 was $352 billion, which escalated to $882 billion by FY2024. Projections indicate that by FY2025, this burden will surpass $1 trillion, with estimates potentially reaching $1.5 trillion annually by the decade’s end.
As these costs inflate year after year, Washington will increasingly allocate larger portions of its budget to cover interest payments, consequently limiting available funding for other essential priorities.
This predicament could have been avoided had Yellen locked in favorable interest rates for longer periods.
Now, Bessent is left to navigate this complicated landscape.
Debt Dynamics
As interest rates continued to surge in 2023 and 2024, Yellen maintained her reliance on short-term maturities, further compounding her earlier miscalculations. With rising interest rates, Bessent will be forced to make difficult decisions regarding debt issuance. Will he opt for short-term T-bills, hoping for a dip in rates, or will he choose long-term debt to lock in what could be more advantageous rates?
Securing rates at around 5 percent for 10 years is a wise strategy compared to the risk of refinancing at 7 or 8 percent in just two years. Jared Dillian, contributing to Reason, comments on the challenges Bessent faces:
“This will be painful. The United States finances itself through debt auctions. As Bessent sells more bonds with longer maturities, the increased supply will elevate long-term interest rates, leading to higher costs for mortgages and long-term borrowing. Yet failure to act could have dire consequences.”
“The debt is a national security concern; at 123 percent of GDP, we risk a financing crisis where skyrocketing short-term rates could initiate a debt spiral reminiscent of the issues faced by Southern Europe in 2012. That predicament necessitated austerity measures, yet it was ultimately alleviated by the ECB’s commitment to take all necessary action, even including debt monetization.”
In the U.S., ‘whatever it takes’ could imply an extensive increase in quantitative easing, whereby the Federal Reserve creates credit out of thin air to purchase Treasuries. Essentially, this would mean dollar debasement as a response to fiscal irresponsibility.
Bessent Faces Significant Challenges
The Federal Reserve’s balance sheet currently stands at $6.8 trillion, a decline from the April 2022 peak of $8.9 trillion, yet substantially above the pre-pandemic level of $3.7 trillion.
The Fed has been steadily decreasing its balance sheet in anticipation of future needs to purchase Treasuries. However, financing Treasuries with created credit during a time of heightened deficit is dangerously inflationary.
Amid these challenges, the Congressional Budget Office recently revealed that the first quarter of FY2025 has already seen a federal budget deficit of $710 billion, suggesting a path toward a record $2.8 trillion deficit by fiscal year-end. Although spending may moderate as the year progresses, estimates still point toward a deficit exceeding $2 trillion.
Additionally, as of January 2, 2025, the statutory debt limit has been reinstated at $36.1 trillion. Should Bessent receive confirmation, one of his immediate tasks will be to suspend debt issuances and perform financial maneuvers to avoid breaching this limit.
Once he navigates the politics surrounding the debt limit, Bessent must address the impending obligation of nearly $3 trillion in debt maturing in 2025, compounded by the anticipated $2 trillion deficit—both of which must be financed at significantly higher interest rates than those seen just a few years ago.
This looming crisis will further strain Washington’s budget, likely leading to a credit crunch and panic in the markets, prompting the Fed to ramp up its money printing efforts.
Ultimately, this could result in the Fed’s balance sheet climbing toward $15 trillion, with the dollar bearing the brunt of the ramifications…
…and Bessent may find himself caught in the crosshairs as he navigates these turbulent waters.
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Sincerely,
MN Gordon
for Economic Prism
Return from Bessent Enters the Meat Grinder to Economic Prism
