Trump’s Freakout Over Tucker Is Getting Weird (w/Tracy Alloway and Will Sommer) | Bulwark Daily

Hey, how's it going? I love that my appearance here comes with a disclaimer that, you know, he might fry your brain, but it'll all be okay in the end.

I will do my best. The first thing I'll say is, you know, that the bond market has become big news when protesters are holding actual signs screaming about yield curve control. Right? We've gone mainstream finally. This is the moment I have lived for. Okay. So, the first thing you need to know is that bond yields, so rates that are paid on US government debt, reached a 19-year high recently, which basically means people are more reluctant to buy US government debt and to finance the US Treasury and all its spending than they have been previously. So, there's a little bit of nervousness out there in the market. In general, governments do not really like their bond yields going up for seemingly no reason. And then out of nowhere, we had Treasury Secretary Scott Bessent come out and make this announcement saying that in the name of market liquidity, and we can get into what exactly that means, he was going to buy back even more Treasury bonds and replace them with short-term debt. And his whole thinking, his rationale behind that was this magic word liquidity, which you can think of as ease of trading in the market or market functionality. But the weird thing was that the market, the US Treasury market, was pretty much functioning very normally on that day. And so what most people thought when they saw this announcement was that it's not that the Treasury market isn't functioning right. It's that the Treasury is uncomfortable with the current price of US debt and they want to bring those yields down.

You named a bunch of them just then. But the interesting thing about the buying base for US Treasuries is that it's changed quite a bit over the years. So it used to be, think about other central banks in the world, like you're China and you're maintaining stability of your currency. In order to do that you have to buy US Treasuries. And I'm sure all your listeners have heard about this idea of China holding a big stockpile of US Treasuries. If you're a central bank managing your reserves or your currencies, you will be buying lots of Treasuries. Now alongside that, there's your normal investor, right? Everyone from you and me, if you have a TreasuryDirect account, to pension funds, insurers, hedge funds. What's really interesting about the Treasury market in recent years is if you look at the proportion of the different buyers in that buyer base, it's changed a lot. There are far fewer central banks, these big institutional holders that basically have to buy Treasuries because of what they're doing with their own accounts. And there are a lot more what we call price-sensitive investors. So think like hedge funds, private investors who are buying Treasuries because they think it's a good investment, because they like the price. Now what's happened because of that is that the price that they are asking for Treasuries, the return for that investment, has gone up. And so we've seen the rates on US Treasuries, the yields, start to go up more. Basically, you used to have this pool of huge buyers who had to buy Treasuries and now you don't. Now you have to convince them that buying US government debt is a good deal, and as a result of that we've seen yields start to go up. Investors are saying, actually, this isn't such a good deal unless I get a higher return in the form of those higher yields.

That's right. And the interest rate that the US Treasury is paying to its borrowers is higher. They have to pay more in order to get people to buy the debt.

All right. So, it's sort of mixed up here because Scott Bessent is saying one thing. He's saying that he's doing this in order to improve the market functioning, market liquidity. Now, as I said, there were no signs when he announced this that the market was functioning in any disorderly way. It was a very normal, what some people would call a boring day in the Treasury market despite that spike in longer-term yields. It had the effect, when he made the announcement, it had the effect of bringing longer-term yields down for like two minutes, this lasted.

You got a lower rate, which is what the Treasury wants to see. So people were encouraged to buy the debt. But on the other hand, so this is where yield curve control comes in. So you bring the longer-term yields down and you, well, hopefully don't bring shorter-term yields up, but you basically, you're trying to flatten the curve. This is the financing curve of the US Treasury. That is yield curve control. However, as I said, by the next day, bond yields were up where they were before the announcement. And so it really doesn't seem to have worked in this particular time frame, which is why presumably we've seen Scott Bessent since come out and start talking about other things that the US Treasury could do, like buy back even more debt, use the Treasury's reserve account to do that. We had an incredibly amusing clip of President Trump who was asked about bond market intervention and he basically said the final boss of bond market intervention is somehow military intervention.

Now, you'll be unsurprised to hear that there isn't. I am not aware of any president in the history of the United States who has threatened the bond market with military intervention. If you take Trump's statement at face value, which, you know, I think mostly we should take Trump's statements at face value. So, no idea how that's supposed to work.

I think every bond correspondent in history has at some point used that quote in a column and they have it like sitting on their desk, right? But the reason is it's true. There are plenty of governments out there that have been toppled by the bond market if nothing else. And you think back, I mean, we have recent examples in the form of Liz Truss in the UK who got ousted after going through a bond market crisis. So it can happen. The bond market can be a scary thing for governments precisely because it's difficult to control. It's not impossible to influence, but it's very difficult to control.

Yeah. So we should be asking the question: why is this a priority for the Treasury Secretary at this particular moment in time? And the truth is that the Treasury market is the benchmark interest rate against which all others are judged. So mortgage rates are priced off of US Treasuries. So if Treasury yields are spiking, those Treasury rates are going up, so is your mortgage rate, right? Which is probably not what Republicans want to see ahead of the midterms. There's also the question of the relationship with the stock market. So we have all these huge AI companies that are financing themselves, selling debt at really unprecedented rates. And their growth also depends on what US Treasuries are doing at the moment. They need to be able to fund themselves cheaply if they're going to keep growing, if stock prices are going to keep going up, and so that Trump can still take credit for the stock market. So everything's kind of interrelated. What you don't want to see is a huge spike in bond yields that not only increases the Treasury's funding costs, but also starts making its way into, I guess, the popular mind in the form of higher mortgage rates and maybe a stock market dislocation.

Policymakers are nothing if not creative. So there are a few more. All right. Zero. If you are a government struggling with high debt, how do you get that debt down? Okay, the easiest way is you grow your way out of debt. You grow faster than your stock of debt is increasing. That sounds nice, but, you know, kind of hard to do.

There's a lot of cognitive dissonance, let's say, in some of these economic policies. So, okay, put growth aside. Like, we're not going to do that. The second one is you could have higher inflation and you erode away the debt. All right? Like the value of $100 that you owe from 10 years ago is a lot less than, you know, the value now. You just erode it away through high inflation. We know from the past six years' experience that Americans really hate inflation. Trump was basically, you know, voted in because people seem to really hate inflation. So, let's assume that we're not going to do that. The third way is actual fiscal consolidation. So, reduce the debt, which you just pointed out. So, raise taxes, lower spending, all that kind of basic stuff. Turns out that's politically unpopular too, right? People don't like to see entitlement programs that they've been paying into for years and years suddenly go away. So that's a tough one as well. And we've seen through things like the one big beautiful bill that Trump doesn't really seem that interested in consolidating debt. And so you're left with, let's see, the fourth and final way, which is what we call financial repression. And this is stuff like yield curve control. It's stuff like finding ways to force investors to hold your debt at lower yields. And it can be anything from the yield curve control type stuff that we just described to things like, you know, Scott Bessent intervened in the Japanese yen recently, and as part of that, the way he did it was he intervened in the yen in a way that discouraged Japan from actually selling a bunch of its Treasuries to protect its currency. Or it can be something like you tell the banks that they need to hold a bunch more Treasuries to satisfy regulatory rules. So there's stuff like that that generally falls under the umbrella of financial repression that governments can do. The problem with that is someone is still losing out in that scenario, and it's usually, you know, investors, pension funds, people who aren't earning as high a return on their debt investments as they could be otherwise. But the reason that governments often like financial repression is because it's sort of politically nebulous. It's really hard if you're an average person on the street to say that, like, I am losing out because some bank has been forced to hold more US debt. It's much more, I guess, salient to you if you're living through high inflation or if your Social Security has been cut or something like that.

It's a separate issue, but I guess spiritually it's kind of similar in that you're forcing investors to hold the debt at prices they wouldn't hold it otherwise. So for instance, you're telling a bank you have to hold a certain percentage of your assets in government bonds. And so you build up like a forced buyer base for government bonds at lower yields, and that has the effect of reducing the Treasury's interest rate expenses, I should say.

My opinion is there's plenty to say about the bond market itself without getting into ad hominem attacks. So, you know, let's just focus on the debt mechanics.

I think that's absolutely fair. I mean, we've seen signs of inflation building, and a bunch of that is either through tariffs or through the war in Iran, which is pushing up energy costs, which is like the one thing that you wouldn't want to increase if you were actually concerned about bringing inflation down.

Yeah. I mean, all I can say is I'm expecting the mood at the Jackson Hole Lodge Bar to be more awkward, let's say, than in some previous years. I actually think it's going to be one of the more interesting meetings that we've seen. So, Jackson Hole, it's the Kansas Fed's annual symposium. And what it really is is a research conference. So, a bunch of policymakers get together and they present papers and they discuss them. But what it's known for is having the Fed chair of the time come out and make a big speech on Friday. No one really knows what that speech is going to be. Although, you know, in recent times we've had Powell who used it as basically another policy speech. The theme of this year's Kansas Fed Symposium, by the way, which no one is talking about, is like financial innovation and payments. You could just imagine you could not choose like a less zeitgeisty topic for monetary policy. So just ignore that bit. All eyes are going to be on Warsh. The problem that Kevin Warsh is facing is that he's coming in at a time when inflationary pressures seem to be building, when the president has explicitly said that he wants lower rates. And so there's a tension there, right? There's also a tension that Warsh himself seems to have gotten himself into because in his last press conference when the Fed decided to hold, he got up and made a very confusing speech for markets about how he doesn't want the Fed to provide as much forward guidance about its future interest rate decisions. He wants the market to kind of be the ball in the game of the global economy. Take the ball and run with it. Don't worry so much about what the Fed is doing. The problem is that now you have the Treasury, which is, you know, trying to manipulate the bond market, and so it's very tough to tell the market, tell investors that actually, you know, like, just go do your own thing, ignore what all the policymakers are doing. And so what people are going to want to see on Friday is more clarity about how the Fed is thinking about stubbornly high inflation. So, you know, we've had 3 to 4% inflation for years and years now. That is above the Fed's 2% target. People are trying to understand how the Fed is treating the trade-off between unemployment and inflation. The market didn't seem to like Warsh's explanation of how he's thinking about that relationship back in July. So this is the opportunity for him to clarify, but it's coming at a time when the Treasury market is explicitly trying to get yields down, and it's coming at a time when Trump has said that he thinks rates are artificially too high. And so it seems like a very, very tough job for Warsh to kind of thread that needle on Friday. And I suspect what we're going to end up getting is a speech that's basically all about AI and productivity and how that'll lead to deflation in the long term. And so maybe the Fed doesn't have to move that high to curb inflation now. I suspect that's going to be his out card, but we'll find out.

Yeah, I mean, who knows, right? The problem is every time the Treasury is buying back more longer-dated debt, it's issuing more short-term debt. And so it doesn't want short-term interest rates to go up either, which is exactly what the Fed would have to do if it was hiking in order to decrease inflation. So I guess we'll see. I mean, again, Warsh is in this incredibly difficult position where he's basically talked about how he doesn't want the market to be interfered with by policymakers, at the same time that we have the Treasury market very obviously interfering with investors, and we have Trump also, you know, sort of jawboning about interest rates on the other side. So...

I mean, in my mind, the big change between the Biden administration and the Trump administration in terms of the economy is what's going on with AI and the hyperscalers. And it feels like so much of US economic growth right now is being driven by the data center buildout and by big tech essentially. And there aren't that many people who are enjoying that process or who are winning because of it. Like, people with lots of stocks have seen their portfolios go up quite a lot. That's true. And in fact, there's an argument as well that one of the reasons that US consumption has kept going up even as inflation pressures start to build again, even as gas prices get higher, is because people who have stocks are, you know, enjoying that windfall. But what worries me is the sort of circularity there, where big tech is doing well building out data centers, stock prices go up, US economy keeps growing, and that then goes back to big tech still building data centers. Like, it feels very circular in a lot of ways. And this might be one reason why the US Treasury and the Trump administration itself is so focused on bond yields at the moment, because a big vulnerability for the AI buildout is those financing costs, right? And so if financing suddenly gets too expensive or becomes unaffordable in some way, then maybe that big AI boom starts to wobble a bit. Maybe stock portfolios start to wobble, maybe consumption starts to go down, and that's when you get the big, you know, economic hit. I think that's probably what they're worried about.

It feels very perpetual motion machine to me in the sense that, like, it's fine as long as it keeps going, but what happens when it eventually stops? I mean, look, there's lots of talk right now about hidden leverage of the big tech companies. So, balance sheet commitments, borrowings that you can't actually see. And there's a lot of work being done on this now because, again, it's mostly hidden. So, for instance, if you're a hyperscaler, if you've signed a bunch of commitments to build data centers, a lot of those don't actually show up on your balance sheet until the data center is operational. So you have all these forward commitments for data centers, but they're not included in your sort of official balance sheet. So your financial health looks better than it would if you were to include the, like, hundred unbuilt data centers that have yet to start operating. And some of those numbers are crazy, but like even the official numbers are kind of crazy. So I really think a lot of people, not just in general, but in finance specifically, haven't yet appreciated just how much debt the big tech companies are issuing in order to fund the AI buildout. I mean, I could throw around specific numbers, you know, hundreds of billions, but all those numbers become really meaningless after a while because they're just so large. But just to give you some context, in the investment-grade corporate bond market, this is where the best companies in the US sell their debt, blue-chip companies we call them, the big banks have historically been the predominant issuers in that market. The big banks sell billions and billions of dollars worth of investment-grade debt every year. Within two or three years, the hyperscalers are expected to be as big a proportion of that market as the big banks are. So we're seeing like this revolutionary change in one of the biggest markets in the world in just two or three years. So things are changing really, really fast. Like, again, this is an industry — think about the big tech companies, the Googles, Metas, Facebooks of the world, whatever — they used to be really cash-rich companies. They had — companies like Apple had so much cash they didn't know what to do with it. And now they're all borrowing in the market to fund this AI buildout. And it's just happened so quickly. I don't think anyone has really had a chance to digest what it means.

I would say two things. Like, setting the technology itself aside, you can have revolutionary technology that ends up being very difficult to monetize, and I think that's what we've seen so far, right? We've had models coming out of China that are a lot cheaper than the models from US hyperscalers that seem to do as good a job, like pretty close. I know a lot of US companies, they won't talk about it publicly, but if you get them quietly in a bar or something, they'll tell you that they're using a Chinese model like Qwen or Kimi because it's open source. It's easier to plug into their particular technology as it exists, and it's a lot cheaper. And so that's the question: like, we're spending a lot of money to develop these cutting-edge models. Are we going to actually be able to get enough money for them in order to pay off that debt and then keep the data center boom and the broader US economy actually going? And I think there's a lot of disagreement on that front still.

I mean, in general, like the dollar, the exorbitant privilege stuff, has that conversation's been going on for a long time, as has the idea that maybe the world is moving away from the dollar. And I think what we've seen, you know, that conversation, this idea that people aren't going to use dollars as much anymore in the future, it kind of comes into the zeitgeist every once in a while and then it kind of flows out. It's coming back in now, right? So, you mentioned Bitcoin going up last week. I'm not sure we can attribute all of that move to the dollar conversation, but we also saw gold start to rally quite significantly and that's definitely a de-dollarization kind of idea. And I think the basic thinking here is like, well, if you want a reserve currency that's safe for decades, it has been the US dollar, but there are some things that have perhaps dented that appeal. Not all of them have to do with Trump, by the way. Um, you know, when Biden went after Afghanistan's central bank assets, that kind of boosted the conversation for a little bit. You now have Scott Bessent declaring, I don't know, some sort of economic world war on Iran through sanctions. Every time you get those kinds of US sanctions, you see another bout of de-dollarization talk. I think the thing that people misunderstand in that conversation, because it hasn't yet happened, the dollar is still the world's reserve currency, a lot of people will just dismiss it as like, oh no, that's it's never going to happen. The dollar is so embedded in the fabric of the global economy that it's just going to be here forever and people can't escape it for the following reasons. But in my mind, like what we have seen is a sort of slow motion evolution to more of a multipolar currency world where people are looking at alternatives. We do know that more central banks are buying gold instead of dollar denominated assets. So they're higher, I mean, I think they're nervous about what happens to dollar assets in the future. And again, if the US Treasury is experimenting with things like yield curve control, that often means they want a lower dollar as well. Or sorry, I say it often means a lower dollar will come about as a result of those policies.