Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Bessent's Bond Gambit Echoes the 1970s Stagflation Playbook
Transcript
- Lucas: So the Treasury Secretary tries to calm the bond market, and instead he's stirring up inflation worries. That's the headline from this week, and it's got a distinctly 1970s flavor to it. Luna: I saw that — Bessent's buyback operation. Isn't that the thing where the Treasury buys back its own bonds to add liquidity? How does that end up being inflationary? Lucas: Right, and that's exactly the kind of question that makes this episode worth doing. So before we go deep — and I promise we'll get to the mechanics — I want to mention something. If walking through the economy with us has made something click for you, and you want to keep this show ad-free, you can support us at buy me a coffee dot com slash fexingo. It's a small thing that makes a big difference. Luna: Yeah, and we really do appreciate it. It keeps us independent and focused on the numbers, not the sponsors. Lucas: Exactly. Now, back to Bessent. The buyback program — he floated that it could be more than four billion dollars. And the market's immediate reaction? Higher inflation expectations. The ten-year breakeven is sitting at two-point-three-four percent, basically flat, but the chatter is all about whether this is just a backdoor way to keep long-term yields down. Luna: So is it fair to say the market sees this as a form of yield curve control — even if the Treasury says it's just for liquidity? Lucas: That's the crux. The Treasury's official line is that buybacks are about managing the debt portfolio efficiently, not suppressing yields. But when you're the Treasury Secretary and you're also the guy who's been talking down the deficit, and the debt just crossed forty trillion dollars — markets are going to read between the lines. Luna: And forty trillion is a big number. More than double what it was a decade ago. That's got to weigh on everyone's mind. Lucas: It does, and it's a perfect setup for the stagflation conversation. Because in the 1970s, the Treasury and the Fed tried to manage yields in a similar way — and it didn't end well. The Fed had yield curve control during World War Two, and then they had the 'Operation Twist' in the sixties. But the real lesson came later, when Arthur Burns was at the Fed and tried to keep rates low while inflation was running hot. That's when the bond market started to lose faith. Luna: So what's different now? Besides the obvious — that we're not in the 1970s. Lucas: Well, the tools are different, the scale is different, but the underlying tension is the same. When you have slow growth — real GDP growth just came in at one-point-five percent annualized, down from two-point-one — and inflation that's still above target, you're in stagflation territory. And in that environment, the bond market is hypersensitive to anything that looks like debt monetization. Luna: And Bessent's buyback, even if it's small, signals that the Treasury is willing to step in. That's what spooks people. Lucas: Exactly. And the thing is, the buyback is tiny relative to the market. Four billion dollars against a twenty-eight trillion Treasury market is noise. But the signal is what matters. It tells investors that fiscal authorities are worried about the cost of servicing the debt — and that they might use unconventional tools. Luna: So what would Bessent actually do if he wanted to calm markets? The headlines say his gambit hasn't worked yet. Lucas: He's got a few options. One is to lean on the Fed to cut rates more aggressively. Another is to get serious about the deficit — but he's already saying there's a 'very good chance' the deficit has peaked, which markets take with a grain of salt. He could also do more buybacks, but that feeds the inflation narrative. Or he could just let the market clear — but that means higher yields, which hurts the fiscal picture. Luna: It's like a catch-22. Every move he makes seems to backfire. Lucas: It does, and that's the echo of the 1970s. The more you try to manage the bond market, the more it tests you. Look at gold — it's up seven-point-two percent in five days, and gold miners are up almost twelve percent. That's not a vote of confidence in paper assets or in the Treasury's ability to keep inflation in check. Luna: And that's happening even though CPI is basically flat — the latest reading was up only a hair. Core inflation is still sticky, though. Lucas: Right, core is at three hundred thirty-six point eight, still creeping up. That's the kind of inflation that gets embedded in expectations. And when expectations move, the bond market moves with them. The ten-year breakeven is a direct measure of that — it's been stuck around two-point-three-four, which is not alarming, but it's not coming down either. Luna: So what does the 1970s playbook tell us about where this goes? Lucas: The big lesson is that fighting inflation requires credibility, and credibility is hard to build and easy to lose. In the 1970s, the Fed kept promising to fight inflation but kept backsliding — they'd tighten, then ease as soon as unemployment ticked up. The result was a decade of stagflation. Today, the Fed has been more hawkish, but the fiscal side is doing the opposite — running huge deficits, which is inflationary. Luna: And the market is starting to price that in. The recent jobs data is still decent — unemployment at four-point-one percent — but the trend is softening. Lucas: Exactly. Initial jobless claims are down a bit, but nonfarm payrolls have dipped. Job openings are down to seven-point-three-five million. That's a labor market that's cooling, but not collapsing. And that's the stagflation sweet spot — slow growth, sticky inflation, and a labor market that's starting to crack. Luna: So if Bessent can't calm the bond market, what's the endgame? Lucas: That's the question. He could try to get the Fed to adopt yield curve control outright, but that's a major policy shift. Or he could push for real fiscal restraint — but that's politically hard. The market is going to keep testing him, and each test that fails undermines confidence a little more. Luna: It sounds like we're stuck in a loop. Every action creates a reaction, and none of it feels stable. Lucas: Stable is not the word I'd use. But here's the thing — the bond market isn't panicking yet. The ten-year yield is still well behaved. But the trend is concerning. And when you combine that with gold at four thousand six hundred eighty-one dollars, you have a market that's hedging its bets. Luna: So if you're an investor, what do you do with this? Buy gold, sell bonds? Lucas: I'm not going to give specific advice, but I'd say this: understand that the era of easy fiscal policy is over. We're in a period where the market is going to be testing the credibility of every policy move. And that's exactly the kind of environment where the 1970s playbook — particularly the mistakes — becomes relevant. Luna: And those mistakes were basically trying to fight the market and losing. Lucas: Right. The lesson is that you can't fight the bond market for long. Eventually, you have to let rates clear. And that's what Bessent is trying to avoid, because higher rates mean higher debt service costs on that forty trillion. But avoiding it might just make the eventual adjustment worse. Luna: So is there any good news in all this? Lucas: The good news is that inflation expectations are still anchored, at least for now. And the economy is still growing, even if slowly. So we're not in a 1970s-style spiral yet. But the margin for error is thin, and the bond market is watching every move. Luna: And we'll be watching too. Thanks for joining us on this one. Lucas: If you want to keep these conversations going, you know where to find us. Until next time, keep your eyes on the yield curve.