With the July 29th Fed (Federal Open Market Committee (FOMC)) Meeting completed, the vote was 9-3 not to raise interest rates, this raising of interest rates being considered because of the of inflation caused by the present re-startup of attacks on ships and other regional bombing by Iran.
Just to back up a bit, Kevin Warsh took over as the new Fed Chair on May 22nd with the belief that interest rates need to be lowered making it easier for businesses to take out loans which stimulates growth, the economy and a higher GDP/GNP and as for individuals and families to take out home loans thus stimulating our home construction industry and other related business activity. But on May 15th, a week before, the conflict with Iran began with U.S. air strikes that killed Iran’s supreme leader and other senior officials. As a result, Iran fought back and blocked shipping going through the Hormuz Strait. Consequently, the price of oil shot up to a $120 per barrel affecting the price of gas, diesel, jet fuel and the tons of fertilizer needed by farmers to grow their crops, the prices for which were all “going through the roof”. But then with a MOU (Memorandum of Understanding) later signed by the U.S. and Iran, oil then dropped to $70 a barrel. But shortly thereafter, the fighting started up again and oil began climbing back up and with all this happening not knowing what to expect next, Chair Warsh understood that now would not be the time to begin to lower interest rates and, In fact, at the Fed’s June 17th meeting, the first under Kevin Warsh—Chairman Warsh and the Federal Open Market Committee (FOMC) ALL voted unanimously to maintain and not change the Fed (target range) funds rate which was at 3.50% to 3.75%.
And now because of the present re-startup of attacks again on ships in the Hormuz Strait and other regional bombing by Iran and our retaliatory air strikes on Iran, the price of oil is “shooting back up” again and causing another wave of inflation and because of this, there was a “real push” and opinion that The Fed would and should raise interest rates!!!
But just to review some “Fed Basics”, The Fed has two mandates–(1) full(est) employment (realistically possible) typically meaning keeping interest rates low or lowering them when appropriate to encourage borrowing and investment and (2) price stability (i.e., controlling inflation) and this is done by raising interest rates to curtail business activity cooling down an overheated economy but where the price increase is from a “SUPPLY SHOCK” caused by SHORTAGES–THAT’S THE EXCEPTION to this rule to AUTOMATICALLY raise interest rates. And with our previous above example of oil having climbed to $120 a barrel and now “shooting back up” again, where oil affects the price of gas, diesel, jet fuel and a wide variety of other “things” and is integral to the operation of just about every business, Chairman Warsh and eight other members of the Federal Open Market Committee (FOMC) in a 9-3 vote at their July 29th Meeting, voted NOT to increase interest rates and thus maintain the Fed (target range) funds rate at 3.50% to 3.75%.
This caused an uproar when Chairman Warsh announced this at the press meeting following The Fed decision due, in part, because of inadequate explanation to the press and economists present at this meeting as to why no interest rate hike was implemented (the reasons for which are discussed in the just-ending previous paragraph.) Further consequences of The Fed’s decision not to raise interest rates (though there still may be an interest rate hike at The Fed’s next meeting scheduled in September) was the stock market and, in particular, the DOW dropping a 1,000 points but since then has fully recovered, climbing right back up point-wise and in the bond market, the almost immediate reaction with Treasury bond yields showing an immediate steepening of the 2yr/10yr yield curve (which, in this case, is viewed as a GOOD THING) with the 10yr hitting 4.7 percent and additionally the 30yr bond yield shooting up to 5.2 percent the highest since 2007!!!
The importance of the 10yr hitting a 4.7 yield rate is directly tied to the funding of our mounting and growing $40 trillion Dollar National Debt as our Debt to GDP ratio which was 2-3 percent more than our annual GDP but has grown to 6 percent (more than annual GDP) and because of this higher 4.7 percent 10yr yield rate, this will enhance more investors INCLUDING FOREIGN GOVERNMENTS and other foreign investors to purchase more 10 yr bonds to better help cover our annual budget overruns and “backside” as well, Double LOL on that!!!!!
Also, let it be noted that the following Friday on August 7th, the Jobs Report was released showing a loss of 23,000 jobs which, if anything, would have called for The Fed to lower interest rates. So, it looks like The Fed made the “right move” after all by not making any “move”, keeping the Fed funds rate the same!! Now, one other report came out after the Fed meeting showing that Exxon and other oil companies made record profits!!! Now shouldn’t that call for The Fed to raise interest rates? But the counterargument is that the thousands and thousands of companies that rely on oil “where oil affects the price of gas, diesel, jet fuel and a wide variety of other “things” and is integral to the operation of just about every business”, all would have “taken a further hit” on their already “tight profit margins”!!! Again, not a good idea to raise rates!!! In fact, it would just be “further punishment” on their already “tight margins”!!!
Now let’s discuss another thing Chairman Warsh has a strong opinion about—that of reducing the size of the Fed’s Balance Sheet? Yes, reducing the size of the Fed’s balance sheet is “always a smart thing to do”, the ultimate goal of which helps to make Our Economy and Dollar stronger and is (theoretically) NEVER a bad idea, but this author thinks now would NOT be the right time and this IS for reasons other than the situation with Iran. But let it be noted that Kevin Warsh after “assuming” The Chair and with Trump constantly asking for additional defense spending, and the ordered refunding of his tariffs ($100 Billion so far of $166 Billion collected) and Trump’s “pet” projects–the Lincoln Memorial reflecting pool with significant cost overruns and his new White House ballroom first said to be paid with private donations but now by taxpayers, Chairman Warsh then voiced the opinion that “ample funds” in The Treasury were needed and reducing The Fed’s Balance Sheet would not be appropriate now. But after The Fed’s July meeting, “word is out” he may soon be re-addressing the “zeroing out” of The Fed’s Balance Sheet!!
Again, as stated, this author thinks it would NOT be the right time NOW to reduce The Fed’s Balance Sheet but, again, for reasons other than the situation with Iran and Trump’s recent additional budget requests and demands. Specifically, the problem is with our National Debt now at $40 Trillion and growing with “no end in sight,” And what Trump did with his Liberation Day tariffs beginning on April 2nd of last year and his attitude and treatment of our trading partners certainly ISN’T helping matters either!!
Just to review the events of the past year beginning with Trump’s April 2nd, 2025 Liberation Day multi-nation tariffs when, on the same day, the stock market crashed and China and Japan, our two biggest foreign government bondholders, threatened to dump their Treasury bonds, causing Treasury yields to “shoot up” while stocks plummeted—the exact opposite of what one would expect when the stock market “takes a dive” with Moody’s subsequently dropping their Triple-A (AAA) rating for the U.S. to a Double-A (AA) rating reflecting loss of confidence in the Dollar which brings us to possibly the worst situation where The Treasury is running out of money and not being able to cover current expenses and payouts on maturing Treasury bonds becoming due and even more importantly possibly not being able to sell enough new Treasuries to keep funding our growing Debt with this, in time, all possibly leading to The Dollar losing its status as The World’s Reserve Currency!!
Basically with our present situation and Debt, the worst thing we could do would be to lessen or reduce the amount of available cash The Treasury has “on hand” when we’re always “running above budget” and especially with foreign governments now threatening to and are actually buying less Treasuries from us for various reasons which the buying of bonds by foreign nations is “the one thing” that keeps us in enough cash “to cover current expenses and payouts on maturing Treasury debt.” Therefore, reducing the available cash for any reason The Treasury has “on hand” which reducing the Fed’s balance sheet will do IS “the last thing” we want to happen!!
To make this clearer, the Fed has its own balance sheet and it’s “in the red”, created by way of Quantitative Easing (i.e., the Fed printing money done in emergency situations when money needs to be injected into certain sectors of The Economy) and the Treasury also has its own balance sheet which is also “in the red”, like $39 Trillion going on $40 Trillion “in the red.” This is where domestic institutional investors such as banks, retirement-pension funds, insurance companies and individual investors buy bonds as an investment and collect yields on their bonds AND foreign governments (as well) do the same thing.
Now let’s focus on The Fed’s balance sheet which, as stated, is when the Fed “in times of need” and the normal issuance (the selling) bonds will NOT be enough, The Fed will print money and “take back” bonds from The Treasury–the Federal government, in effect, borrowing from itself!! Go figure!!!
This happened during World War II, the 2008 financial crisis where banks “too big to fail” were “bailed-out” by The Fed (printing money and pumping it into the banking system) and recently the Pandemic where the public and businesses needed stimulus checks to stop from “going under” and to pay rent and put food “on the table” and this debt “to this day” relating to the Pandemic is still “on the books”!! Please note—as everyone recalls and particularly those receiving stimulus checks, no one was expected to pay this money back, i.e., this was a public debt incurred by the government with no expectation that the millions of people receiving these stimulus checks were required to pay the government back. Hence, a public debt that would be paid back by extra tax revenue and to this day, it’s still on the Fed’s balance sheet.
This is the part of the Fed’s balance sheet that Kevin Wursh wants to “attack” first. But because of our present situation with foreign governments for one reason or another buying less Treasuries from us, balancing “the budget” and NOW NOT having as much in reserve with The Treasury (due to our ginormous $40 Trillion Dollar National Debt and running “over” budget every year) while needing to handle government expenses and payouts, this Pandemic-related (public) debt and other debt we still have on the Fed’s balance sheet would be “the last thing” we would want to reduce NOW!!
Because–if we addressed this balance sheet problem now and reduced it and foreign governments dramatically cut back even more on buying bonds causing the Treasury suddenly not to have enough assets (“cash on hand”) to take care of current expenses and debt coming due, The Treasury would have to dramatically raise yield rates to attract enough buyers thereby increasing debt-servicing costs or if The Fed couldn’t raise enough funds by way of selling bonds, The Fed would again have to print money. This would affect our credit rating, de-value Our Dollar (its relative value in relation to other currencies) and ultimately could cause Our Dollar, at some point “down the road”, to be put in such a precarious position that it could eventually lose its status as The World’s Reserve Currency.
So, ok, reducing the Fed’s balance sheet though generally an excellent idea—NOT A GOOD IDEA for right now!! Right?? But then, what is???
What this author suggests, in addition spending cuts and tax increases to the Federal Budget (basically “balancing our budget” which will take time in Congress) is to also take steps, in the meantime to make sure our Treasury Bond Market in lieu of our present budget overruns and annual deficit of $1.9 trillion for this year and projected to increase to a whopping $3.1 trillion by the year 2036 per calculations by the CBO (Congressional Budget Office), that it (The Treasury Bond Market) continues to be able to provide the required funds for Our National Budget, its overruns and for payouts of Treasuries not being renewed (in view of lingering repercussions from Trump’s Liberation Day tariffs and other trade relation recent events) as newly legislated spending cuts and tax increases to the Federal Budget are implemented. Hopefully as AI (Artificial Intelligence) is integrated into Our Economy, this will increase our productivity, GDP/GNP, and raise tax-base revenue “to make up” for what we need to arrive at a more balanced budget and get Our Growing National Debt under control!!
But, in the meantime, if foreign governments dramatically cut back even more on buying bonds causing the Treasury suddenly not to have enough assets (“cash on hand”) to take care of current expenses and debt coming due, is there an immediate solution we could pursue?? Jamie Dimon, CEO of JPMorgan Chase has echoed this warning in the past saying, “It’s better to get ahead of a crisis than wait until it falls into one’s lap.”
Now especially with The Supreme Court’s recent ruling on Trump’s reciprocal tariffs as being unconstitutional in that it’s actually a tax and therefore solely within purview of Congress, The Court struck down Trump’s authority to impose tariffs through the International Emergency Economic Powers Act (IEEPA). except for limited exceptions under Section 232 used for national emergencies and, for example, are levied on imports such as aluminum, steel and copper intended to protect these industries here which if not produced domestically could threaten national security.
Another exception allowed was under Section 301 to employ tariffs against countries having “discriminatory” or “unfair” trade practices including currency manipulation and the subsidizing of industries producing exports. However, limitations within Section 301 mean Trump cannot use the statute to replace his existing tariffs right away. First, an investigation must find that a foreign country restricted U.S. commerce through discriminatory practices, which could take months to uncover but under Section 122 Trump would be allowed to impose a 10 to 15 percent global tariff which he did on Feb 21st but for only 150 days. Congress would then need to approve an extension to go more than 150 days.
Just recently under Section 301, Trump “imposed a 12.5 percent tariff on some 60 countries around the world [including member nations of the European Union] under the pretext that this is necessary to combat their importation of goods that use forced labor:”
But even with this, one must, to be “on the safe side”, concede, accept and plan for the situation where tariffs, at some point, become a significantly diminished source of revenue for The Treasury. This IS especially true with The Court also ordering Trump to refund $166 Billion to those importers who paid these reciprocal Liberation Day tariffs. So, with this “in mind”, what else can be done to generate extra revenue on a more permanent basis or, at least, make funds available for the Treasury to “cover” government expenses?
Now, one way “to fill the void left by disenchanted governments” because of China’s and Japan’s (our two biggest bondholders) threat to sell their Treasuries and to prevent a potential WHOLESALE bond sales threat by a collective of foreign nations should such ever materialize, as per the newly enacted Genius Act and U.S. Stablecoin, that is, “The rapidly expanding stablecoin market is projected to be able to fill the void left by disenchanted governments that are dumping Treasuries and “de-dollarizing” in response to Western sanctions and U.S. tariffs.”
As Author Ellen Brown further explains stablecoins “are cryptocurrencies that are backed by safe assets (e.g., short-term U.S. Treasuries).” And that, “As of March 2025, their total market capitalization reached $232 billion, a 45-fold increase since December 2019. Projections suggest this figure could hit $400 billion by year-end and as much as $2.8 trillion by 2028” with further projections of $3 trillion by 2030. Treasury Secretary Scott Bissent also asserts, “stablecoins are a strategic tool to ‘lock in dollar supremacy’.”
Another way “to fill the void left by disenchanted governments” and “get ahead of the game” as Jamie Dimon suggests should Stablecoin use not be enough (by itself) to fully keep up with our expanding National Debt, this author STRONGLY ADVOCATES, would be to require (domestic) importers to purchase U.S. Treasuries with a certain percentage (say 10 percent) of their sales when importing goods here–therefore, in essence, creating a NEW 3rd class of U.S. Treasury purchasers!!
As it stands now, there are two (2) main groups of bond purchasers–domestic institutional investors such as banks, retirement-pension funds and insurance companies, with the second class of large-scale bond purchasers being foreign governments. But because of their present concern over our rising National Debt, they are now buying less and are also investing more in developing their own country’s infrastructure and economy and that of their trading partners. A prime example being China’s Belt and Road Initiative.
But with a large-scale third class of U.S. Bond purchasers also being required to be a MANDATORY class of purchasers, this would stabilize the U.S. Bond Market giving “guaranteed” relief and confidence to domestic institutional investors and foreign governments AS WELL! This way, there would always be, as a result of this New 3rd class of bond buyers, the required minimum of cash reserves The Treasury would need to make scheduled payments and for current government expenditures coming due. This, alone, would stabilize the bond market and act as a “hedge” against (AND ALLAY) any fears causing large scale selloffs or future non-purchases of U.S. Treasuries by foreign governments or domestic investors fearing a loss of value to their investment!!
Also, with this New 3rd class of bond buyers and this is VERY IMPORTANT, this would STABILIZE our Bond market, that is, making the Treasury less dependent on their bond auctions not having to sell as many Treasuries otherwise not “being put in a position” to sell at higher yield rates to meet their quota thereby saving on debt servicing costs!!! Just to give an example, our debt servicing costs on outstanding bonds this year was a trillion dollars!! Fortune Magazine reports that 19 percent of our National Budget, as of now, is spent on Our Debt and If the Treasury was forced to pay higher yields, debt servicing costs could soar to over 2 trillion per year!! And if interest rates climbed to 18-20 percent as they did in the days of Carter, we could be looking at $3-4 trillion per year in debt servicing costs!!!
Now if Congress does not make these proposed bond purchases mandatory for domestic importers and Trump adopts this mandatory bond purchase plan for domestic importers “on his own”, wouldn’t the cost of these bond purchases that could be potentially “passed on” to the consumer also be a “tax” and therefore unconstitutional??
Before we answer this question, obviously, the best way to handle our growing National Debt is to simply balance our budget and NOT spend more than what we take in!! But because of the many things we must do to protect society, one’s health and safety, to regulate business and prevent fraud and provide for defense on land, sea and air and now in space, “balancing the budget” would be extremely difficult!! Fortunately, all advanced industrialized G7 nations have national debts that are more than what they make. Though our debt to GDP ratio is currently at 124 percent. Some nations are even higher with Japan at 237 percent!!
Fact is, it simply takes more to adequately protect and police a society than what we collect in taxes and, as a result, bonds must be issued in the form of debt to do everything that must be done!! Please note–the CBO’s “Break Glass” Plan intended to counter the “Next Economic Shock” which can be viewed at https://www.crfb.org/papers/break-glass-plan-next-economic-shock and similar plans to reduce budgetary overruns by budget cuts and various tax increases will be fully addressed in a later article.
Now, getting back to our question, if (domestic) importers were required to purchase bonds instead of tariffs, wouldn’t that still amount to a tax? Fact is institutional commercial bond buyers would be extremely interested in “relieving” these domestic importers of their bonds and the bidding amongst them would hence be very competitive and probably go up to as high as 90 to 95 cents (“on the dollar.”)
But wouldn’t someone just offer, say, 50 cents “on the dollar”? Well, let’s say that’s true! But then again, someone else would then offer 60 cents “on the dollar”, then another 70 cents, then still another 80 cents and still make a profit!! But couldn’t these major institutional bond-buyers get together and agree to offer domestic importers only 60 or 65 cents “on the dollar”? That would be patently against the FTC’s (Federal Trade Commission’s) anti-trust, anti-competitive laws that have “been on the books” for years which prevent “price-fixing.” That is, sellers industry-wide can’t “gang-up” and agree to all sell at a “fixed” high price nor can potential buyers “get together” and only offer to buy at lower than fair market prices.
With this in mind, having a free-market (bidding) system, basically the bidding would probably go up to as high as 90 to 95 cents (“on the dollar”) as such domestic importers would also be buying imported goods several times a year thereby also buying Treasuries multiple times a year with these institutional commercial bond purchasers seeing that even at 90 to 95 cents, a reasonable profit could still be made.
But even at this relatively minor 5-10 percent loss of say the 10 percent levy on what they pay for their imported goods therefore amounting to 5-10 percent of 10 percent of what they pay for these goods equaling a half percent to one percent of the total sales costs to the domestic importer, a relatively miniscule amount, wouldn’t that still, in some way, be a “tax” that the importer could theoretically “pass-on” to the consumer?
Well, if Congress enacts a law that requires domestic importers to buy Treasuries but doesn’t require these importers to absorb the costs of buying Treasuries, these costs could legally then be “passed-on” to the consumer or the government could reimburse our domestic importers with cash so there is no potential pass-thru loss to the consumer or better yet reimburse them with Stablecoin which then could be used to pay their foreign importer-shippers which would be then redistributed throughout the world further stabilizing our bond market and help keep our Dollar as The World’s Reserve Currency!!!
And in conclusion, just to be “on the safe side”, in case Stablecoin use is not enough to keep up with our expanding National Debt as Congress hopefully will enact a more balanced budget (suggestions for which will be addressed in our next article), additionally requiring domestic importers to purchase bonds would solve the problem of making sure the Treasury always has enough funds “on hand” “at all times” to (1) fully finance our budget, (2) any of its cost overruns and (3) the debt servicing costs on outstanding Debt!!
