Bessent caps bond yields to counter Warsh strategy
- Kevin Warsh engineered a long-end Treasury selloff to force credit tightening without raising benchmark interest rates.
- Scott Bessent used Treasury interventions to cap long yields and protect debt-financed corporate AI spending.
- Macro analysts warn long-term bonds face systemic liquidation as fiscal dominance overrules central bank independence.
Kevin Warsh and Scott Bessent are locked in a quiet war over the US bond market.
On Forward Guidance, analysis highlighted how Federal Reserve nominee Kevin Warsh intentionally engineered a selloff in long-term Treasuries. By holding short-term rates steady while allowing 30-year yields to spike, Warsh tightened credit conditions automatically. The maneuver bypassed the political blowback of an explicit Fed rate hike, forcing mortgage lenders and private credit markets to price real risk while preserving clean rate optics for the White House.
The rate shock immediately exposed overleveraged tech funds. On Forward Guidance, the discussion centered on the collapse of the Icorus fund, where Citadel bought out forced liquidations in Anthropic and semiconductor stocks. Luke Gromen warned on What Bitcoin Did that AI infrastructure resembles a debt-financed real estate trap. With AI accounting for up to 90 percent of recent US growth, a spike in borrowing costs threatens the entire expansion.
"The market is now digesting the damage left by players who were too aggressive with borrowed money."
- Quinn, Forward Guidance
Treasury Secretary Scott Bessent moved aggressively to blunt Warsh's tightening. As detailed on Forward Guidance a few days later, Treasury altered its refunding strategy to issue short-term bills while capping long-term coupon sales. Bessent also deployed the Exchange Stabilization Fund and FIMA repo facility to shore up the Japanese yen, neutralizing forced Treasury liquidations that could widen corporate credit spreads and crush hyperscaler capital expenditure.
This clash reflects a deeper structural shift toward Hamiltonian state capitalism. Gromen argued on What Bitcoin Did that the Treasury is enforcing high tariffs and domestic industrial protectionism, prioritizing factory reshoring over Wall Street bondholders. Under this framework of fiscal dominance, long-term bonds become toxic assets as the government tolerates higher inflation to devalue its sovereign debt.
The Fed's ability to wage an independent fight remains doubtful. Strategist Viktor Shvets noted on Macro Voices that Warsh holds only one vote out of nineteen on the Federal Open Market Committee. Shvets argued that Warsh's goal of scaling back official guidance to restore risk pricing will crumble during the next liquidity crisis.
"A non-communicative Fed increases market uncertainty without changing structural financialization."
- Viktor Shvets, Macro Voices
When fiscal dominance collides with monetary tightening, the central bank usually blinks first.
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Danny Knowles
The Fed Can’t Let the AI Bubble Burst | Luke Gromen • Aug 3
- Gromen identifies three fiscally impossible alternatives to currency devaluation: cutting defense spending by 90% (from ~3% of GDP), slashing Medicare/Medicaid by 30-35%, or engaging in a war that doesn't significantly impact US resources.
- A 'gimmick' to resolve fiscal dominance involves revaluing gold to $20,000-$30,000/ounce, creating a Treasury General Account deposit, and buying back debt to reduce debt-to-GDP from 120% to 50-80%.
- Luke Gromen interprets commentary from Treasury nominee Bessent and 'Warsh' as aligning with Hamiltonian economics: high trade barriers, capital controls, and net gold settlement to protect domestic industry.
- This Hamiltonian approach is evident in Trump's economic policies, who cited 1870-1913 as the period of highest US tariffs, and in gold being America's biggest export in eight of the last ten months.
- While necessary, reshoring US industrial production will be slow and expensive due to a lack of skilled labor and engineering, making long-term bonds a poor investment as their real value will be destroyed.
- Gromen contends America's open capital account makes it a 'victim' of countries like China, who acquire US industry; closing the capital account, as discussed by Henry Kissinger in the 1970s, would force capital into gold, protecting domestic industry.
- Gromen notes that 80-90% of US GDP growth over the last 12-24 months has been driven by AI-related spending, and Google recently became cashflow negative for the first time.
Also discussed on this episode: (14)
Macro (3)
- Luke Gromen believes the US fiscal situation is unfixable without significant devaluation of the dollar and other fiat currencies, maintaining his long-term thesis on Bitcoin as an energy-linked neutral reserve asset.
- During the COVID period (2020-2022), the US's 'true interest expense' (gross interest plus entitlements as a percent of receipts) peaked at 120%, falling to 85% by late 2021 after the Fed bought $600 billion/month in treasuries.
- Gromen argues the dollar index fell from 103-105 to 81 during the Fed's aggressive bond buying, indicating the currency devaluation necessary to reduce fiscal dominance.
Fed (1)
- Gromen suggests the Fed can exit fiscal dominance only by cutting rates to zero and partnering with Treasury to issue front-end bonds at zero rates, effectively financing deficits with printed money.
Markets (2)
- Historically, closing the capital account to foreigners has caused the gold-to-Dow ratio to fall to one, as seen in 1933 and 1980, reflecting a significant shift in wealth.
- For the average investor, Gromen suggests a 'Jacob Fugger portfolio' allocation of 25% cash, 25% gold/Bitcoin, 25% real estate, and 25% equities to be resilient across various economic conditions.
AI & Tech (4)
- The US AI sector is debt-financed and overvalued, making it vulnerable to Chinese competition and rising rates; this could trigger a crisis if growth slows, potentially leading to a government bailout.
- The 'Groundbreaker' substack, published July 2nd, argues the 2008 crisis wasn't from falling home prices, but a slowdown in their growth rate; it applies this to OpenAI, suggesting its valuation and financing could trigger an AI real estate-like bust.
- Gromen warns that an AI bubble collapse could lead to a severe stock market problem, recession, rising unemployment, and significantly higher interest rates - a situation akin to the 1970s but more extreme.
- Gromen views the AI sector as a bubble of companies, not the technology itself, likening it to the railroad and dot-com bubbles where fundamental technology proved useful despite many company failures.
Politics (1)
- Luke Gromen believes current US political instability, driven by elite overproduction and wealth inequality, is at its highest point since 1855, according to Peter Turchin's historical research.
Society (1)
- Gromen highlights bleak social indicators: medical examiners in major US cities are busier than during COVID lockdowns, and there's a shortage of funeral directors in states like Ohio, indicating widespread despair.
War (1)
- Gromen states that US military action is conditioned on the 10-year Treasury yield being below 4.7% and the S&P 500 not dropping more than 5%, alongside sufficient Patriot missile stockpiles.
BTC Markets (1)
- Luke Gromen maintains a current Bitcoin position of approximately 3-4%, aiming for an average 25% allocation to gold and Bitcoin combined over the next five years, after previously holding up to 47-48% in Bitcoin.