Bessent's message to the public on US debt default is hardly reassuring

That the Treasury Secretary even needs to stand up and reassure the rest of the world that America will not default is a bad sign.

US Treasury Secretary Scott Besse (via 3BCDH3W/ Alamy)

Can I have been dreaming? I was struck over the weekend by an article in the Financial Times, titled “US Treasury Secretary Scott Bessent insists US will 'never default’ on its debt” which began: “Treasury secretary Scott Bessent has insisted the US would never default on its debt as he sought to assuage Wall Street concerns over the state of the country’s public finances.

“The United States of America is never going to default, that is never going to happen,” Bessent told CBS’s Face the Nation on Sunday. “We are on the warning track, and we will never hit the wall.”

Investor jitters over the size of the US federal debt have mounted as President Donald Trump has urged Congress to push through his “big, beautiful” budget bill, which is expected to ratchet up the federal deficit. Bessent dismissed concerns raised by JPMorgan Chase chief executive Jamie Dimon on Friday that the US bond market would “crack” under the weight of the country’s rising debt.

“I have known Jamie a long time and for his entire career he’s made predictions like this. Fortunately, none of them have come true,” said Bessent.

Can I really have been dreaming? Where have we come to if America’s finance minister has to reassure us that the country will not find itself unable to meet its obligations in its own domestic currency? I’d have thought he should know more about managing the national debt than that.

Not long ago I wrote a column, republished in Reaction, that pointed out that, in its own currency, a government can issue as much debt as it likes, albeit that the cost will rise at the same time as the value of the currency declines. Default generally occurs when a country can due to that devaluation no longer afford to service its foreign currency debt. The eurozone presents its members with a different problem given that all sovereign debt of any one of the 23 countries that use the euro, Andorra and the Vatican included, is to all intents and purposes issued in a foreign currency. Hence the Greek debt crisis which in 2010 came close to tearing the grand project apart. But that’s another story.

Bessent even needing to stand up to reassure the rest of the world that the USA will not default is the nightmare. No, it won’t default but it might end up triggering a catastrophic loss in the creditor nations’ faith in Washington’s fiscal infrastructure which in turn will kick the stool out from under the greenback which will eventually lead to a significant rise in Washington’s cost of borrowing.

What the country has done, however, is to burden itself with what was once believed to be a virtuous act of fiscal rectitude that presents itself as the federal debt ceiling. First introduced in 1917 as the 2^nd Liberty Bonds Act, it proscribed the Treasury from raising debt beyond a pre-approved limit without supplementary congressional approval. As debt has spiralled, consecutive administrations have with monotonous regularity had to go cap in hand to Capitol Hill to beg for the debt ceiling to be raised in order for new and vital borrowings to be permitted. So, from that perspective, the Treasury could technically default, and we are regularly faced with the Grand Guignol theatricals of debt ceiling increases being turned into party political high drama with individual sections of public services being closed down and state employees being sent home unpaid. That is not a case of the administration not being able to raise more debt. It is one of it not being allowed to. Debt ceiling increases are usually accompanied by some form of hollow promises of future fiscal constraint. Yeah, yeah, sure.

Despite Bessent’s reassurances that all is well in the garden, there is to the casual observer little doubt that the wheels are threatening to fall off the Trump administration’s grand plan. There has in the past few days been much mirth with respect to “TACO”, an acronym supposedly emanating from Wall Street which stands for “Trump always chickens out”. I must say, I don’t find it particularly funny as it notionally trivialises the Donald’s evermore desperate thrashing around, the latest example of which is his insistence on imposing a near immediate 50% tariff on all steel and aluminium imports. As we learnt in the aftermath of the Court of International Trade’s ruling on the big and beautiful tariff regime, steel and aluminium are not included which means that this is an area in which he can act without let or hindrance and which permits him to book a quick and visible win.

Meanwhile, I could scream. Not a day goes by when I don’t wonder why it has taken so long for markets to realise that growth funded by increasing debt is not growth at all. A big house with a pool and a gym with big cars in the drive is not a measure of wealth. Net worth – assets minus debt - is a measure of wealth. And a government that needs to borrow in order to fund its lifestyle is doing little other than quietly impoverishing its people whilst purporting to provide them with care. Again I must harp back to Plato, his cave and the question as to what extent perception may be presented as reality.

The purpose of quantitative easing - long practiced in Japan but not introduced in the West until implemented in the US by Fed Chairman Ben Bernanke in the aftermath of the GFC and loyally followed by the Bank of England and eventually also by the ECB - was twofold. It relieved the private sector balance sheet of much of its excess debt whilst at the same time – try to follow this – crushed the cost of long term borrowing in order to encourage more borrowing. Yes, it is true. The only cure they could think of for the global debt crisis of 2007/2008 was to fight debt with more debt. Anyone looking for a subject for their Ph.D. thesis?

The low cost of long-term debt was fine for borrowers but its effect on investors was also twofold. On the one hand, favourably and supportive cheap money meant that defaults by borrowers who might have been struggling to meet obligations became less frequent which in turn distorted credit risk statistics. On the other, it forced investors to slide ever further down the credit curve in order to generate the cash returns they needed to meet their liabilities. So, because rates are so low overleveraged borrowers are offered a lifeline which is turbocharged by investors who are hunting for yield and keep up the flow of money to low grade borrowers to whom in a regular market environment they would never lend. Whether low rates ultimately created a vicious or a virtuous cycle is a matter of opinion.

The rebranding of sub-BBB minus credit as “high yield” rather than its traditional nomenclature of “speculative grade” is one of the greatest marketing successes of the last fifty years. Actually, calling debt credit isn’t a bad one either. Fact is that the performance of low grade debt, call it high yield credit if you prefer, has been anchored by the artificially low cost of money. The sharp steepening of the yield curves which is driven by both short rates falling and long rates rising will ere long present those needing to refinance outstanding debt with problems. Corporate balance sheets that had been liberally leveraged up in the name of so-called shareholder value will find themselves under pressure and we might – I say might – wake up to find that both debt and equity risk have for the better part of twenty years been chronically mispriced.

The question as to what has happened to the old 60:40 investment portfolio is not new. Is holding 60% equities and 40% bonds back? It had certainly gone away as the low interest rate environment had for too long boosted stocks and spoilt bonds. In the same way in which President Trump is trying to recalibrate global trade flows – in his words for equity to be re-established – so he is also arguing against markets in general and rates in particular to be given freedom to find their own level. Yet, whilst politicians around the world are trying to find the most diplomatic way possible of communicating with Trump and the gang, markets know no such diplomacy and are proving to be the only voice that is able to speak to him directly. As an old bond dog I have no problem telling equity markets that it is not they but bond markets that have questioned his objectives, constrained his actions and that will in the fullness of time have kept him honest.

I was mildly amused yesterday to see that Morgan Stanley has advised its clients that it sees the dollar weakening by 9% in the year ahead. It argues that a slowing US economy and the Fed’s expected rate cuts will be the cause. This is the same Morgan Stanley that just a week ago made a call for US stocks to be a buy because of its bullish forecast for the US economy. As for the 9% figure, why not 10% or 8%? How does it arrive at 9%? We stand here not knowing what the US administration will have done by close of business tonight but the foreign exchange desk at Stanley’s can tell us that the greenback will by 2 June 2026, have devalued by 9%. It calls the likely beneficiaries to be European currencies. Really? Is that British pounds, the euro, Polish zlotys, Swedish kroner or Swiss francs?

Do me a favour guys. We are in the midst of a generational shift in the geopolitical backdrop as well as in the pricing of both financial and physical assets and you tell me that the dollar will drop by exactly 9%. This is not AI but RN, resounding nonsense. That said, it doesn’t take as much as high school economics to predict a strong probability of the dollar falling further over the coming year. Yet four and a bit decades of eating and breathing markets has taught me that today’s probability is tomorrow’s after dinner joke.