Sec. Bessent's big plan to finance the national debt

The good news is, we're going to tell you a story. The bad news is that it's about the bond market. From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Rizdahl. It is Thursday today. This one is the 20th of August. Good as it always is to have you along, everybody. We're going to go on a little journey to start the program today. An odyssey of sorts. No sirens or cyclops to deal with. Something scarier, though, perhaps. The Wall Street Journal's Greg Ip started our story on Thursday last. Hey, thanks for having me, Kai. All right, 5.216%. What was that? What is that? So, Kai, that is the interest rate that the government will be paying on 30-year bonds that were sold at auction today. And the reason that matters, it's one of the highest rates. In fact, I believe it is the highest rate that the government has said that it will pay on a newly issued 30-year bond in almost 20 years. And I suppose that as taxpayers, that's the kind of thing that's going to bother us because we have a lot of debt. And every time these rates go up, it means we have to pay even more interest to service that debt. That 30-year yield spent last Friday and on into this week, trying to say something to us. Robin Brooks from the Brookings Institution picked up the narration for us on Tuesday. Of course, 30 years, as you said in your intro, that's a very long horizon. So financial markets over that long horizon, price risk premium for inflation, for policy uncertainty, for the amount of debt that you have. And so what we've seen the last couple of days and honestly, over the past year, is that these long-term yields have risen massively. Most of all, in places that are highly indebted or and or politically dysfunctional. So places like Japan, France, the UK, Italy, and of course, also the United States. United States. Yeah. So, of course, I had to ask this super quick. We got like 30 seconds. How worried are you? Scale of like one to 10 about the bond, you know, all of this stuff. So I ask a better question. You know what? I mean, so if you look at the 10 year, right, we're at four point seven. Doesn't seem very worrying. It gets more worrying if you look at the 10 year yield, 10 years forward. So that's what markets price. Right. Implicitly in longer term yields, 10 years from now. And that's six percent on a scale from one to 10. I'm a six or seven. All right. We'll take a six or seven for now. Call me when you get to like a nine and then we'll have you back. All right. Thanks. The Brookings Institution. We'll see. Much like the actual odyssey, this bond market story is long and it's complicated. Secretary Besant tried yesterday to prop up the bond market, which meant we had to call Robin Brooks back. Do you think that Secretary Besant has solved the underlying problem that you and I discussed yesterday? The problem is fiscal policy, right? We have deficits that in a non-crisis period. We don't have COVID. We don't have the pandemic. We have a deficit of seven percent of GDP, give or take. And if you want yields to come down sustainably, then that is what you need to rein in. I would call what we're doing now this buyback. I would call it financial engineering. It is really shuffling, shuffling the deck chairs. I said this to Robin yesterday. And I'm going to say it again today because there is a critical balance to be struck here. There are a lot of structural reasons why this economy in particular can handle these higher rates for now. But we took so much time today explaining things again, because believe me, when I tell you this story is a big deal. The bond market du jour is kind of ignoring the Treasury secretary trying to talk the long bond off the ledge. And in fact, And this isn't new. Secretary Besson has been saying he wants to sell fewer of those long term bonds and more short term debt. Marketplace's Justin Ho explains what Treasury hopes that will do and what is likely to actually happen. Part of the problem here is that demand for long term debt has been a little shaky lately. Buyers just aren't all that interested. So to attract them, says Chris Lowe with FHN Financial. Bottom line, if the U.S. issues a ton of long term debt, long term interest rates are going to be higher. But short term rates are usually lower. Alex Wolff with J.P. Morgan Private Bank says that's motivating the Treasury Department to issue shorter term debt. Part of that effort is taking advantage of what's happening in terms of market pricing and simply borrowing at lower rates versus at higher rates. The kind of short term securities that the federal government's been issuing more of are called Treasury bills. They come in several flavors. Zachary Griffiths with Credit Cite says they mature in just months. One month, two months. Three month, four month, six month, and 12 month T-bills. Griffiths says there's a lot of demand for these T-bills, mostly from big investors that want a safe place to park their cash for a little while. And the government is well aware of that. And frankly, if you're running a $2 trillion annual deficit and you have a $40 trillion debt stock outstanding, you need to tap every market where you think there's demand. But pivoting to T-bills could backfire. Alex Wolff with J.P. Morgan Private Bank says that's motivating the Treasury Department J.P. Morgan says rates on short term debt closely track what the Federal Reserve does with interest rates. And so if the Fed's on hold, then that rate should remain unchanged. If the Fed hikes, that rate will go up. Remember, these securities mature in months, which means the Treasury has to keep issuing new ones over and over again. As a result, interest rates on them can be volatile, says Chris Lowe with FHN Financial. You know, funding the U.S. government with T-bills is like buying a house with a credit card. The card company can reset the rate and does every time short term interest rates change. And in order to buy back its own long term bonds, Lowe says the Treasury is going to have to issue even more short term debt. He says you can think of that like squeezing a balloon. You're increasing the risk of something going wrong by increasing reliance on short term funding. Because short term rates, Lowe says, are probably headed up. I'm Justin Ho for Marketplace. On Wall Street today, bond. Traders were not happy. Stock traders were really not happy. We will have the details when we do the numbers. Part of all the bond market unease is inflation being stuck where it is, which is high. We're going to get a new reading next week. The Personal Consumption Expenditures Price Index, PCE, is the jargon. This one, however, will be the last PCE of its kind. The Bureau of Economic Analysis is changing how it calculates inflation. Changes that are coming as inflation still and again is economic and political. Topic A. Marketplace's Kristen Schwab has more on that. We're going to start this story about the Personal Consumption Expenditures Price Index exactly where you'd expect. At a Spanish restaurant in Ohio. I am Laurie, L-A-U-R-I-E, Torres, T-O-R-R-E-S, and I own Mallorca Restaurant in Cleveland. Mallorca has been plating up patatas bravas and pouring sangria for 30 years. And in that time, Torres. Torres has seen a lot of change. More diners have been requesting dishes that are vegan or gluten-free. She's watched the price of scallops climb. And it's forced her to adjust her menu and her paella recipe. So if you're going to start putting in more shrimp, which is saltier than a scallop, then you have to balance it out with maybe, like, calamari. Paella can have 10 or more ingredients. Rice, saffron, seafood. When scallop prices change or diners' preferences change, Torres. Changes her paella. You're constantly having to kind of go back to the drawing board. Now, hear me out here. The way Torres tweaks her paella to get a slightly different dish is not so different from how the Bureau of Economic Analysis tweaks its own paella, the PCE. Moonsub Lee, an economist at UC San Diego, says the BEA regularly considers making its own tweaks. BEA is revising its recipe based on how the world works. For instance, it's adjusting how computer software and accessories are calculated because demand for AI has sent prices soaring. It's also making changes to investment and legal services categories. Economists I talked to say it's common for the government to tinker with its formulas. And they say that these changes. mean inflation is going to look a bit lower, maybe a tenth of a percent. to three-tenths of a percent lower. Right now, with the old formula, PCE inflation sits at 3.7%. Alan Detmeister used to be an economist at the Federal Reserve. He's now at UBS. The reason people are focused on it a little bit more is that you have an administration that has been talking about how they need to get inflation down. And for Detmeister, that doesn't mean the BEA is cooking the books, but it does raise an eyebrow. They're focusing so much on these items that are pushing up inflation at a time where the administration has wanted the Fed to lower interest rates. The lower inflation appears, the easier it is for the Fed to cut, or at least not hike, interest rates. And yeah, a reading that comes in a little lower than it's been lately will not rock anyone's world. Inflation will still be a problem. It will still be too hot. But the new recipe could buy the Fed some time, like they're cooking with a crockpot instead of a microwave. We really don't know exactly what the impacts are going to be. So it is a little bit of a black box. This could alter how the economy is run. Of course, we know interest rates influence how much businesses borrow, what kind of house or car you can buy. What it will not change is the price of food. Prices people see with their very own eyes. New PCE recipe or not, Lori Torres, the restaurant owner in Ohio, gets a receipt from her supplier every week. And here's the part where I tell you she also has an advanced degree in economics. Total coincidence, I swear. At the end of the day, the inflation is the inflation. You're going to feel it however you feel it. You're not all of a sudden be like, oh my God, I was wrong. Scallops haven't gone up in price like they have. And that's that. Like, in the real world, everyone's kind of got their own PCE. I'm Kristen Schwab for Marketplace. So for three days, next week, Jackson Hole, Wyoming is going to be the center of the global economy. The world's central bankers meet there every August for a symposium put on by the Federal Reserve Bank of Kansas City. The feature attraction, as it is every year, will be a speech by the chairman of the Federal Reserve, a speech that will be all the more closely parsed this year as new-ish Chairman Kevin Warsh makes his debut. But as the most important people in monetary policy gather, there is a whole local economy happening all around them. Margot Brady is the owner of Knit on Pearl. That's a knitting supply store in Jackson. Welcome to the program. Thanks so much. So this is the first time you and I have chatted. So what's your store all about? Give me the vibe, would you? Actually, it's been around for about 30 years. We're celebrating 30 years in January. It's a great community. We have a bunch of crafters in Jackson who are part-time or full-time residents. And then in the summer, we enjoy a lot of visitors who, well, track us down when they're on vacation. So the Fed's coming to town next week, all the economic bigwigs, as it were. Are you going to notice? Is that going to be a thing for you? Or is it just like a blip that happens and traffic gets busy and everybody gets in line? You know, it's funny. We don't really see that much of them. I've seen this happen over the years. There's a little lag at the end of August where we feel families go back to school. And that's when the Fed shows up. And we don't see a lot of them. They are whisked from our beautiful airport to a beautiful location. In Grand Teton National Park. Anyway, it feels like they're sequestered. I'm not sure if they actually are. I think they kind of are. Yeah. But we don't really feel that, but it'll pick up again in September. Your business, like many small businesses in this country, I imagine, you're getting whacked a little bit by tariffs, a little bit by consumers, being a little agitated. How's your personal, you know, small business sentiment index, if you would? So, it's a little bit confusing because there's a lot of enthusiasm around crafting. I'm not sure if you're aware of that right now. Oh, yeah. Oh, yeah. We've done those pieces for sure. I think there's a mental health component about using your brain with your two hands, especially I feel with like 20-somethings. And at the same time, there's also this kind of like feeling that it is tenuous. You know, the tariffs are still sorting themselves out. I've been raising prices at a clip I haven't seen before, but also people are equally committed to it. When you are at the local Chamber of Commerce meetings, which I imagine, you know, probably monthly, whatever, there's a get-together, or maybe you're just chatting with people at the coffee shop, what do you and your fellow small business owners talk about? Well, I think the big concern in the past, well, years, but also weeks and months, we've been feeling it a lot lately, is retail space. It's. Like, sorry, literally space? Like brick and mortar? Literally retail space. Wow. Okay. Brick and mortar. And that's what I do. I don't have my inventory online. My personal space. My personal space that I'm in, which is not huge, it's an old house. It's like 700 square feet. And that, the block has been sold twice in the past couple of years. So we're all wondering where, you know, in addition to where, like, we're going to end up, a couple of small businesses on my block have had to move. But. Staying in town? Or are they leaving town? No, I think they're going to find nooks and crannies to go to, but I'm not sure how long those are all going to hold out. Because we're just, you know, in addition to the fact that there's a lot of competition to competing with other businesses and nonprofits, there's also maybe not national brands that are coming in, but niche-y brands that are coming in. Right. They have some, you know, backing for that. Yeah, they've got the big guns. Let's say Kevin Warsh, the chairman of the Federal Reserve, and Christine Lagarde, the head of the European Central Bank, go out for a walk next week and they pop into your store. You never know who's a knitter. You never know. You never know. What would you. Who'd tell them? What would you want them to know? Oh, goodness. The keepers of the global economy. To what extent do they think about small business? That's my question, I guess. Yeah, look, that's the question I have. That's a totally fair question. To what extent do you think about small businesses? And I'm lucky to be here. I'm not sure anybody could start my business today. I'm here at the benefit of having been here for a long time, having a staff who's here. I've just been here for a long time. I came in 1992, and if I hadn't, and the business hadn't been started, the original founder is my accountant. It happens a few times a day. People come in and they're surprised that I'm. Oh, I was here a couple years ago. I'm surprised you're still here. Wow. Yeah, I hear that a lot. Margaret Brady, the store, should you happen to find yourself in Jackson, Wyoming next week when the Fed's there, or any time, the store is Knit on Pearl in Jackson. Margaret, thanks a lot. I appreciate your time. Yeah, thanks for having me. Coming up. Summer camp for adults that has popped. Fun for everybody, huh? First, though, here comes some fun. Let's do the numbers. All right, it's fun for me. How about that? Dow Industrials down 703 points today, 1.3%, 52,759. The NASDAQ down 263 points, that is 1%, 26,067. S&P 500 down 66 points, 9 tenths percent, 76 and 41. Walmart reported earnings today that beat analyst estimates. Executive said the retailer would use an estimated $2.9 billion in tariff refunds to lower prices for consumers. However, Walmart slumped 9.2 tenths percent on the day in part because of much slower same-store sales, the slowest in six years as it happens. Target, which also cited a boost in tariff refunds in its earnings report, put back about a half percent on the day. Bonds down, yield on the 10-year T-note, rose to 4.70%. You're listening to Marketplace. Marketplace. This is Marketplace. I'm Kai Risdahl. What do you do when buying a house isn't happening for you? For most people, you rent. So a lot of home builders are betting on rental housing. We learned this week, permits for construction of multifamily properties picked up in July, up 9% compared to June. Marketplace's Nova Safo spent his day digging into that critical slice of the U.S. housing market. Construction permits are aspirational. Their bets placed with the near term future in mind. I see builders looking at the underlying housing fundamentals and betting that renter demand will continue strongly over the next couple of years. George Ratsu at the National Apartment Association says that's because a lot of people can't afford to buy, so they have to rent. And with the single-family housing market unlikely to thaw anytime soon, apartment builders are seeing opportunity. From early signals, we're seeing a lot of investor interest beginning to show up, right? Several funds are beginning to start fundraising. A big caveat. yacht. About multifamily construction, though, builders are getting pickier about where they build, says Jay Parsons, an industry consultant. You're seeing more focus on deals that have some type of subsidies or tax incentives, tax abatements that help the deals pencil out. They need to pencil out because it's gotten a lot more expensive to build due to several challenges, including an ongoing, persistent, skilled labor shortage. Robert Dietz is chief economist at the National Association of Home Builders. We continue to face challenges with building materials, and that includes the lagging effects of tariffs. Higher costs, Dietz says, for things like copper and aluminum mean not all of those permits pulled in July will actually turn into completed multifamily housing units. Our overall sentiment reading of multifamily builders is slightly negative right now. Sentiment is better in some parts of the country versus others. Builders are more optimistic in areas where rents are going up the most right now, says Daryl Fairweather, chief economist at Redfin. Milwaukee is one. As Chicago has gotten so expensive, Chicagoans have moved up to Milwaukee, and that has put pressure on rents there. Cincinnati is another. Pittsburgh is one that comes up. Baltimore. Conversely, in cities like Denver, Charlotte, and Dallas, renters are more likely to get discounts. That's because there's a lot of a flurry of apartment building in those markets early on in the pandemic. Fairweather expects builders to avoid those cities for the time being. I'm Novosafo for Marketplace. July retail sales we learned last week were down six-tenths of one percent from June. That is the glass half empty. The glass half full is that sales were up five percent for the year. That's the data. To get the anecdata, we called Ashley Morkin. She owns Unglued. That's a craft and a gift shop in Fargo, North Dakota. August right now is looking a little bit better than last year, August. And what we want to see is just like that steady, slow growth over each year if we can to make sure that we can keep up with the growth. And I think that's going to be a big part of can keep, you know, like raising our wages and adding more crew when we're able to and that type of thing because of all the events that we do. It's usually about 75 percent is our retail store for revenue and about 25 percent is events. This has grown over the past few years for us where it was more like an 80-20. So for the event side of our business, I think one of our best examples is our summer camp for adults. We're going to be doing a lot of summer camp for adults. That has popped off. It always pops off. It sells out instantly, which is why we have to do a lottery for registration. But the silly little video that I did in June to promote the lottery opening that was very deadpan and with a tiny mic kind of exploded. We've never gone viral before, but it went very viral. It grew our social media reach. It still is growing because of that video. And so I would say people are for sure wanting more experiences. We have actually added some employment. We just added or promoted somebody on our retail side to become the assistant retail manager. We also literally last night added somebody to do more craftatorium support, which is our private party part of Unglued. So we have grown, but very slowly. My husband and I just did one of our loon stained glass workshops. We had two people cancel super last minute. I got to sit down with some people who shop our store quite a bit and just hang out while we made our stained glass loons together. And that was really lovely, especially in the midst of craziness. Sometimes you just have to remember that the things that you tell other people they should do are actually the things that you should really do. And that has been very life-giving. She's busy, huh? Ashley Morkin. She owns Unglued. She's in Fargo, North Dakota. This final note on the way out today, you have seen and heard, I am sure, that the federal debt topped $40 trillion this week. The Treasury Secretary was asked about it on CNBC this morning. There's nothing magic about the $40 trillion number, and we can grow our way out of that. So, look, he's right. There is nothing magic about $40 trillion, other than it is an incomprehensible amount of money. But that last bit about being able to grow our way out of it? Ordinarily, yes. Growth can cure many, many economic ills if an economy is growing faster than its debt is. So, the facts do seem relevant here. In the second quarter, the U.S. economy grew at an annualized rate of 1.5 percent. Secretary Besant and the U.S. government are borrowing for 10 years at 4.7 percent, for 30 years at 5.3 percent. That math simply doesn't math. Andy Corbin, Mika Ellison, Maria Hollenhorst, Sarah Leeson, Sean McHenry, and Sophia Terenzio are the Daily Production Team. Supervising Senior Producer of this program, I'm Kyle Rizdahl. We will see you tomorrow, everybody. This is APM.