Economist Justin Wolfers on the Trump Treasury Emergency Scheme

This was the announcement that the U.S. Treasury will double the size long term U.S. government debt

“buybacks following the rapid surge in U.S. 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 or 20 year and 10 year Treasury yields, 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 the language like this, I go, what are you really

trying to do here? It says the U.S. 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 and longer dated nominal sectors where there is consistent strong sponsorship from market participants as evidenced by the significant volume of high quality offers, treasure 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 going to 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 bitcoins value is surging as well and is this related and what the heck is going on? I want to bring in Justin Wolfer's platypus economics is his channel on YouTube. Everybody

subscribe there. It's also the Chief Economist for the Mindest 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 at the on the debt that is out there and that's not a good thing and that's going to cause more good rates to increase and impact us in a lot of other ways as well. 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. It does seem like a move. It's in billions. 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 days live in and make some money and support their family doing this environment. 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. I'm going to put them to three categories if I made it. 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. The first thing to think about is, why is everyone talking about the bond market to start? Second question is, what the hell is percent actually doing and what 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

“just get the first thing right, which is everyone's talking about bond markets. Why they're doing that?”

Okay. The bond market, it's not where you go on, sell, 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 taxes. You and I would go to the bank instead what the federal government does is it issues bonds, basically a 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 is going up very sharply. It was as low as one and a little bit percent just after COVID, and now it's up to five and a little bit percent. That's a very, very

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 is some 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 that it's a bubble, some people are not. I think anyone who thinks they know needs the 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 U.S. government. And here basically, the U.S. government's doing so much borrowing is not much money left to lend to you and me. Because of that, that's pushing interest rates up. Why is the U.S. government doing so much

borrowing? We'll let a mechanical level the answer is we're running huge budget deficits.

An under-remarked fact right now is that the U.S. budget deficit is at the highest level it's been in the post-war period with the exceptions of COVID in the Great Recession. Our deficits, say, in 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.

In any sort of sense of responsibility is just going out the window and that's a big part of what's driving bone yields up. So markets don't really believe that the U.S. government is looking like a 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 don't matter because it shapes our government? If at the beginning of the

year, the first thing you've 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 their 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 rates going up. So these are factors that play out directly into affordability. Can people get their pay check to go as far as they would like it to and the answer of course is the big year interest bill every month, the less cash you've got to get buy. So that's the big picture. I want to pause on that Ben, make sure we're a board on that and then we can talk about this weird stuff that's got the sense doing today. On board with that, what's the interplay

though between the Fed, which we hear a lot about in 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 when I want it a little bit of today's news. Okay, so look if you want to line what you do is you're walking to 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 a thousand dollars a month for the next 30 years or however much it is. The way a bond works is the Treasury, under Treasury, Secretary Scott, the send, sells off a piece of paper. The piece of paper says in a years time, I'll give you a hundred dollars. There are lots of different kinds of pieces of paper. There's a different one that says I'll give you a hundred dollars every year for the next 30 years. There's

all sorts of different bonds, but basically think about it conceptually as it sells a piece of paper

and then I might go and buy that piece of paper for 95 dollars. So I bought a piece of paper for 95 dollars that in a years time I'll be able to turn up to the Treasury and say I want my hundred bucks now. I made a $5 profit. We'd call that a five dollar interest. We'd call that a five percent interest rate. So normally it's the Treasury that issues bonds. Now you've brought me to what was the second of my issues here which is what's this big announcement from Scott the send. So the

Treasury, 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 which one bank lends to another bank for 24 hours. They're linked though. But that's what the the Treasury the Fed normally does. In really bad times the Fed is where it can't get interest rates down low enough. So what it will do is it will go and get engaged in long-term bonds that the market will long-term bonds. This is

easing what the Fed will do is it'll try and affect not just the overnight the one-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 you might that's why it's such”

a good question. Wait who's moving around these who's intervening in bond markets right now? Kevin Worsh, the new Fed chair, said he doesn't like it when the Fed is munking 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. When the Fed goes and buys long-term bonds they have to write it down on their balance sheet. So he doesn't like munking around at all.

What was today's news? Today's news was that the Treasury Secretary Scott Percent

has said that he is going to move from two billion a day to four billion a day of buying and

selling long-term bonds. One thing noticed, two to four billion sounds like a lot. In this market it's not really very much at all. The other thing to notice is what Percent is doing is very

“different than what Kevin Worsh would want to do. I'm going to pause here because there's so many”

things here that could cause confusion. But when you're ready for it then I want to explain what it is that that program's meant to do. And what we think Percent is actually doing with this getting 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 Worsh'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 going to have to deal with this an unravel a lot of this stuff that's happening that feels you're a little bit robbing from Peter to PayPal 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 long-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 bandaid 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

apologising 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 the bottom market it doesn't affect me. No it affects you. I want to reinforce and 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”

U.S. government debt is growing that the deficit is at a rate that it'll level that just doesn't make sense our economy is doing okay part of the reason is the speaker's are open in a way that no previous president whatever have engaged with and it's the bond market. Stop to say hey you guys actually serious about it 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 on a method 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's got percent 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 years of money every year for the next 10 years and that bond began yesterday or maybe it's today I forget which and the 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 I are used from the government. If you happen to own one of 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

be many people in the market buying or selling and that kind of sucks because you might need to get

you money out and so what the treasury's job is to is meant to do under this program and 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 they're out enough buyers and sellers in the market there's lots of buyers and sellers and some types of pieces of paper many feel it 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 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 planning everything's all right but this comes at a very unusual

moment anyone has been watching the financial press will know the most important news story all

week has been the bond yields arising one possible explanation for that is bond yields arising for the reasons we talked about that there's a lot of borrowing for AI and a lot of bought 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 in particular treasury secretary percent 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 their debt and they shouldn't be if that were true I think the sense 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 man what is this meant to signal well it could be this is just something pretty boring trying to make all the technical stuff work outright 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 succeeded 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 Alik in the dyke and plugging the different you know the the issue here and you and I have talked about it a lot of the economic ebs 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 it was rising throughout but especially as Trump's plans seems to be you know I use an economic term which you don't necessarily want to say in a

war that you start lazy fair which is just I'm going to disengage I'm not going to do anything and let's just let the war resolve itself I feel like use what do you mean we you're going to do a free market war what do you talk you started the catastrophic war the straight and for

“Moses clothes your plan now is nothing and that's what we're going to do we can trust you United”

States and there seems a correlation to that and so what I see happening and what I don't want to sound like I hyperbolic alarmists but I also looked at 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 say let's check back on that one because that's correlated to the you know to war in geopolitical affairs as all in Japan and then I look there and I go wait a minute the Yen is falling again

that five to ten billion dollar thing you know is not working out and so we plug that whole we

plug this whole 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 what I see

I see up 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 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 at you on in the eye 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 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 businesses normal with the nerds doing what the nerds are meant to do and most folks at home 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 a line to the fed and the answer right now is that nobody knows and that fog of uncertainty afflix the bond market right now it afflix the the yen exchange rate netflix 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 and platypus economics it's why”

the role of having a chief economist that the minus 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 gas or go into the bank if they're lucky enough for fortune enough although it's so hard right not even afford a home but it could be the 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 come at there 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 it's why this is really important why”

why would 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 three to five minutes segments without that where we can give a full picture and then build the pond and so everybody subscribed to platypus economics just in chief economist that might as well thank so much we appreciate you

great pleasure man everybody hit subscribe let's get to seven million subscribers

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