Inflation, Rates, and Financial Repression

Yesterday’s CPI numbers came in benign, right on the screws, with no surprises.

It was the worst thing that could have happened.

Chart 1, above, shows the headline CPI Y/Y at 3.4 percent (white line, left axis) and the headline CPI M/M +0.1 percent (orange line, right axis). Inflation has been coming down for the past few months.

The bond market agreed with me - it was no bueno.

Chart 2, above, shows the relentless climb of the U.S. 10-year yield after the CPI release at 8:30am yesterday.

So why were discerning bond buyers puking up Treasuries yesterday?

Because the CPI print will give Warsh cover to not hike rates… which means inflation will get worse, and when he finally has to do something, he’ll be way behind the curve.

After spending years correctly criticizing Janey Yellen (in her Treasury Secretary role) for not locking in long-term debt financing at 5,000-year low interest rates… Bessent has turned into Yellen 2.0.

I know, rates are much higher now. Spoiler alert: they’re going much, much, higher.

Or maybe not.

The Treasury Department and the Federal Reserve have worked to keep long-term rates down. This is the driving force behind the Yen intervention that I wrote about in the Bessent Sells Maybachs for Mazdas post. This is also the theory behind Bessent going full Yellen. If they don’t issue many long-term bonds, then demand will be high for them, and that will keep rates low.

Bessent will continue to do all of the above.

This is known as “financial repression”. Why would the government do such a thing? Because, brother, they will be forcing banks, pension funds, insurance companies, and individual savers to lend them money at artificially low rates.

The other ways out are: austerity (higher taxes and lower government spending) or default (not paying back our debt). Neither of those are on the table.

Under financial repression, tax receipts will rise with inflation, but borrowing costs will be below inflation. This is how you “inflate away” your debt. It is an ancient formula used by the Greeks and Romans, and every other government that figured out how to replace silver with lead in their specie, or to hit CTRL+P.

If the government keeps long-term rates artificially low while inflation rises, then real rates (the after-inflation return that you can eat) go negative, which has serious investment implications.

One investment, in particular, will go Goose and Mav ballistic.