What happened?
In a Sunday CNBC interview, Treasury Secretary Scott Bessent expressed support for the "big and beautiful" tax bill. He described economic growth as a means of reducing the current sky-high budget deficit and government debt levels. This stance contrasts sharply with the beginning of the year, when the focus was on DOGE and reducing the deficit through government efficiency.
We've inherited a 6.7% deficit-to-GDP, the highest outside war or recession.
— Treasury Secretary Scott Bessent (@SecScottBessent) May 18, 2025
Our focus is to grow the economy faster than the debt, that’s how we will stabilize debt-to-GDP. pic.twitter.com/yblwrunO9t
Why does this matter?
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Austerity is dead, pt.2: Markets perceived Bessent as a budget hawk due to his previous views on reducing the deficit to 3%. However, his recent comments make it clear that he has abandoned that position.
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Bond markets are on edge: They crave some semblance of budget discipline for reassurance. However, Bessent offered the opposite, which now threatens to destabilize long-term U.S. yields.
What’s the counterpoint?
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Trump could further increase tariffs: The current market assumption that a 10% tariff on all US imports would offset the cost of the tax bill might be inadequate. To generate more tax revenue, Trump could raise tariffs.
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The Fed or Treasury could intervene: This would prevent bond yields from rising. However, it would likely lead to a sell-off of the U.S. dollar and higher inflation in the future.
finformant view
The tax bill is fiscally irresponsible because it increases the debt when the deficit is already at historic highs. A financial market tantrum is the most likely scenario that will force the government to scale it back.
Member discussion: