The US Treasury's recent moves to manage the bond market signal potential panic over the country's fiscal position, according to economist Kenneth Rogoff. With the federal deficit near 6% of GDP and the national debt surpassing $40tn, long-term interest rates are rising globally, causing increasing strain.
Treasury's bond buyback strategy questioned
Until now, Treasury Secretary Scott Bessent has dismissed concerns about US debt as a "big nothingburger," arguing that growth will be so spectacular that the US can meet its interest obligations without significant tax rises or spending cuts. However, Rogoff questions why Bessent is attempting to strong-arm the bond market by fiddling with the maturity structure of government debt if he truly believes this.
The obvious first move, and the one markets are looking for, is to address the underlying problem by reining in the massive federal deficit. Bessent has repeatedly assured markets that the Trump administration's borrowing is temporary and that AI-led growth will bring the deficit down to a more manageable 3% of GDP.
Fiscal challenges and dollar dominance
Rogoff argues that pain-free budget consolidation is wishful thinking, noting that AI profits are likely to prove much harder to tax than labour income. Near-term costs of supporting an ageing population, paying for a surge in military spending, and caving to populist pressure for more public spending will probably rise at least as fast as revenues.
The premium on long-term US treasuries, a major part of the dollar's "exorbitant privilege" as the global reserve currency, has largely evaporated. US debt no longer trades as a special safe asset relative to other advanced economies. If budget pressures eventually trigger a crisis, the result could be a rapid loss of the dollar's global market share.
Bessent's credibility at stake
Rogoff suggests the textbook answer is major budget consolidation, not the blundering cuts pursued by Elon Musk and his Doge acolytes in 2025. Bessent's problem is that his boss, Trump, understands that American taxpayers are not prepared for genuine austerity.
Bessent's turn toward bond buyback gimmicks, promising to take long-term debt out of the system and replace it with short-term debt, is worrying. Such an approach can make sense in a panic, but there is little evidence that the market is panicking right now. Global long-term real interest rates are rising everywhere, suggesting US exceptionalism no longer applies to the same degree.
Rogoff concludes that Bessent's ham-fisted attempt to control the bond market undermines his hard-earned credibility as the safest pair of hands on the Trump 2.0 economic team. With no meaningful debt reduction expected before November's midterm elections, bond markets have good reason to remain deeply sceptical of America's fiscal trajectory.
