Bessent v. bond vigilantes: higher interest rates will prevail

“The bond vigilantes have come out of hibernation” says Johns Hopkins economist and FFSF board member Steve Hanke, explaining this week’s spike in 10- and 30-year T-bond interest rates to the highest levels in 19 years.

To drive the 10-year and 30-year below his apparent 4.5% and 5.0% redlines, Treasury Secretary Scott Bessent intervened on July 31, buying Japanese Yen and on August 19 announcing his plan to buy long-dated T-bonds. “It’s a deadly cocktail,” said Hanke in a feature story interview with Fortune. If Congress does not regulate its reckless fiscal policy, “bond investors will.”

These finger-in-the-dike moves, the most interventionist Treasury Department activity in decades, will not defeat the bond market and mark the ugly moment when policymakers find themselves boxed in between painfully higher interest rates and painfully higher inflation.

As of close of business this week, inflation-hedge gold is up about 6% from moments before Bessent’s August 19 bond-buying announcement was apparently leaked at about 8:30 am. The 10-year, to which home mortgages are pegged, bounced all the way back to within 20 basis points (0.2%) of its 19-year peak rate.

Here is Thursday’s Wall Street Journal story explaining why these interventions will likely drive interest rates higher, not lower,

Treasurys, long the world’s preferred “safe” asset, are looking less safe …The main reason for this is that since the pandemic, the U.S. has flooded the market with additional debt, reaching $40 trillion, including intragovernmental debt, this week. There is no sign that the flood will abate. The U.S. Treasury’s surprise announcement Wednesday that it would boost buybacks of less-liquid longer-term debt simply treats the symptoms rather than the underlying cause. The move, while reducing yields in the short run, might yet raise them in the long run by eroding the U.S.’s reputation for stability and predictability.

Commenting on Secretary Bessent’s recent moves, Steve Hanke and FFSF board chair and former Comptroller General of the United States Dave Walker warn,

This is just another example of the federal government taking tactical actions to treat the symptoms associated with our structural fiscal imbalance rather than taking substantive action to address the disease. It is time for Congress to get serious and pass a modified version of the bipartisan Fiscal Commission Act and approve HCR15 that calls a limited Article V Convention to propose a fiscal responsibility amendment. Only a Constitutional amendment can force the Congress to restore and sustain fiscal sanity.

For the record, note that House Budget Committee Chair Jodey Arrington is the single sponsor of HCR15. This and his similar 2023 resolution have sat dormant without a hearing for over three and a half years. Why? Congress is hopelessly addicted to debt. It rests with the states, specifically state Attorneys General, to sue Congress to enforce state power to propose and then to ratify the needed fiscal responsibility amendment.

For policymakers done with talk, this litigation is the only sufficiently-ripe and politically-feasible solution to the debt crisis.

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This week, our nation’s now $40 trillion national debt hit the top of the headlines, generating abundant wishful thinking and finger pointing, but no concrete action.

Scott Bessent told reporters on Thursday that we can “grow our way out” of the debt and that we should not count $7.8 trillion of intragovernmental debt, $6.5 trillion of which is held by the Social Security, Medicare, and Military and Civil Service retirement and disability trust funds. We can ignore this unfunded debt until Social Security and Medicare beneficiaries get hit with automatic benefit cuts in 2032 and 2033.

Passing HCR15 and allowing the states to craft the needed fiscal limits amendment is the single most timely and effective thing Congress could do. Not a peep on that from any member … other than from the lonely voice of retiring Congressman Jodey Arrington (R-TX):

Our national debt continues to pose an existential threat to the future of our nation. We are mortgaging our kids’ entire future to pay for today’s spending – promises we’ve made, which we are unwilling to pay for ourselves … It’s for reasons such as this our founders included Article V of the Constitution—providing a path for the sovereign states to amend the Constitution in the face of a runaway federal government.

Take careful note of my March 8 post on FFSF chair Dave Walker’s meeting with House Speaker Mike Johnson. Speaker Johnson acknowledged Congress’ incapacity to tackle the debt crisis and encouraged the states to sue Congress to enforce state power to propose the needed fiscal limits amendment.

I’ll be speaking at an October conference at Harvard Law School called VThePeople, convened by Larry Lessig and focused on ongoing work to amend the Constitution through an Article V convention. This conference will bring together scholars, advocates, legislators, organizers, and others working on Article V from across the country -- both those for and against -- to discuss, debate, and deliberate about how to move forward faster.

For the first time in several years, leaders of all of the major amending organizations will be present and hopefully collaborating: Convention of States, American Promise, National Federalism Commission, Balanced Budget Now, U.S. Term Limits, and Federal Fiscal Sustainability Foundation. If you work on or follow these issues, please consider joining us for this game-changing networking opportunity.

Find more information at VThePeople or register here.

Big media & podcaster acid test: which is more important for the health of the republic? Harry and Meghan returning to the U.K … or this conference?

Several leading scholars (and yours truly) think yes, most prominently, Sanford Levinson (University of Texas School of Law) and Jill Lepore (Harvard Professor of History and Law), who will be keynoting the VThePeople conference. Congress itself contributes mightily to the tortured amending process through its passive and active obstruction of the states’ constitutionally equal power to propose amendments. Since 1789, Congress has failed to perform its ministerial duty to formally receive, catalogue, and count the more than 400 Article V applications from the states. Most notably in 1979, Congress failed to perform its non-discretionary obligation to call a convention for proposing a fiscal limits amendment when more than the required two-thirds of states had submitted valid applications pertaining to that subject.

To address these difficulties, please welcome OurRenaissance.org to the amending movement. Our Renaissance proposes an ingenious new approach, adding an amendment to the Constitution (no change to Article V) providing for a third route to amending, one entirely controlled by the states and removing any role for Congress. Their model amending amendment requires 26 states to adopt resolutions agreeing on a single-subject, mandates one-state-one-vote convention rules, requires that a proposed amendment be agreed to in convention by at least two-thirds of the states, and specifies that ratification be by at least three-quarters of the states via ratification conventions.

Ratification conventions have been used twice in U.S. history, to ratify the Constitution and to ratify the 21^st Amendment repealing prohibition. For this mode of ratification, most state legislatures set up local district elections to select convention delegates. Delegates typically campaigned in their districts either for or against ratification, were elected largely on the basis of their pledges, and largely voted accordingly during state ratification conventions. Thus, local voters had an almost direct say in these overarching constitutional decisions, making ratification as close as possible to a national referendum while preserving the tempering and refining role of multiple deliberative bodies.