The U.S. non-farm employment data may be the wings of the butterfly, whose breaches and collapses may trigger a series of risky events that swept the world, such as the debt crisis.
There is one thing worthy of special attention this week - US Treasury Secretary Bescent published a signed article in the Wall Street Journal.
What's special about this article is that it comprehensively criticizes the Federal Reserve from multiple dimensions, believing that the Federal Reserve's monetary policy is the root cause of high inflation, the gap between the rich and the poor, and even uncontrollable debt risks in the United States, because the Federal Reserve is serving political needs.
The article therefore proposes that the Federal Reserve's monetary policy framework needs to be adjusted and the entire institution needs to be reviewed again.
As the U.S. Treasury Secretary and Wall Street veteran who has worked for forty years in top hedging companies, it is impossible for Becent, that as a government official, so fiercely accusing or even directing the Federal Reserve will cause serious consequences, such as damage to the credit of the dollar and weakening the market's recognition of the Fed's independence.
Bester cleverly found a reason for the damage to the Fed's independence - he believed that the weakening of the Fed's independence was caused by itself.
The Fed's decision-making mistakes and arrogance have led to market distrust of it. How to reshape the credibility of this independent institution?
Bester gave a plan - the Federal Reserve should return to its three statutory missions: expanding employment, stabilizing prices and moderate long-term interest rates. It is worth noting that Federal Reserve Chairman Powell has only mentioned two major missions - expanding employment and stabilizing prices, while Becente particularly emphasized the third major mission.
Long-term interest rates are both the solution proposed by Becente and its core demand. The so-called long-term interest rate can be simplified to be understood as the yield of US long-term Treasury bonds (such as 10-year, 20-year, and 30-year Treasury bonds).
Why does Becenter pay attention to this indicator? As the US Treasury Secretary, he is responsible for the economy. Historical data shows that if the United States implements a lenient fiscal policy, it will have a significant impact on the economy - this path was adopted during the Biden administration.
But the premise of loose finance is funds. Previously, the Trump administration has obtained considerable income by imposing tariffs, but the current U.S. Supreme Court is likely to rule that Trump's tariff policy is invalid, which means that it cannot continue to be collected in the future. Taxes collected previously may even face refunds.
At the same time, the "Great Tax Cuts Act" requires internal tax cuts, which further led to a decline in fiscal revenue. The main way to raise funds at this time is to issue bonds, but issuing bonds is the first to face the problem of high interest rates - if interest rates continue to be high, US fiscal funds will first pay huge interest.
According to statistics, 15% of the current annual fiscal expenditure in the United States is used to pay interest, which has nothing to do with the economic stimulus plan. Since the United States entered a cycle of interest rate hikes in 2022, the current average interest rate for repaying Treasury bonds has risen from 0.25% to nearly 3%.
So, Becente is eager to lower interest rates—the current demand for bond issuance is extremely urgent. The U.S. non-farm employment data released last Friday has illuminated the recession red light. The market originally expected that 75,000 new jobs would be created in non-agricultural jobs, but in fact, only 22,000, a significant decline.
On September 9, the United States will release the revised annual non-farm employment data, and the current expectation may be lowered by 800,000 people. The US economy can no longer be summarized as "soft", and is even on the verge of collapse. U.S. Treasury Secretary Bescent Bescent is unable to advance his actions due to the high interest rate environment.
The "moderate long-term interest rate" emphasized by Becente, in bluntly, hopes that long-term treasury yields will decline as soon as possible. Some people may wonder: The Fed has initiated a rate cut, why is Becente still anxious? It should be noted that the transmission of the central bank's interest rate cut to short-term Treasury yields is more direct - when the Federal Reserve cuts interest rates, the 2-year Treasury yield will fall accordingly.
But the transmission path of long-term treasury bond yields is more complex and is more affected by market supply and demand relationships. If the market is concerned about the US debt crisis or question the independence of the US dollar, it may reduce the purchase of US bonds or even reduce holdings, which will lead to the long-term US Treasury yields remaining high.
This is obviously not what Becente wants. If the central bank intervenes in long-term interest rates, you can refer to Japanese experience.—Before this round of interest rate hike cycle, the Bank of Japan implements a yield curve control strategy.
that is, the central bank directly enters the market and purchases large amounts of domestic government bonds by printing money, suppressing Japan's long-term government bond yields in the range of 0 to 0.25%. If the Federal Reserve adopts a similar policy, the interest pressure on the U.S. government to issue long-term Treasury bonds will be greatly reduced. But what are the consequences of this policy?
After years of control of the yield curve, the Japanese government bond market has shown its drawbacks. For example, the Japanese bond market has basically no overseas funds involved, and it is mainly taken over by the central bank and local institutions, and the market sensitivity is extremely high.
For example, recently - the resignation of Japanese Prime Minister Shigeru Ishiba has led to rising Japanese bond yields and falling prices - the market is concerned that after Shigeru Ishiba's resignation, the new government may implement more radical fiscal policies (such as expanding bond issuance and increasing deficits), which in turn intensifies debt risks. The current global long-term debt market is carefully maintaining a fragile balance.
If there is a slight fluctuation in the political and economic fundamentals of major economies such as Europe, Japan, and the United States, it may trigger a global debt crisis.
Under this background, if the United States chooses a new round of fiscal expansion (additional bond issuance) and pressures the Federal Reserve to serve government demands - the dual pressure of expanding debt scale and declining market trust, the probability of a debt crisis can be imagined.
In addition, there are key differences between the United States and Japan during the period of implementing yield curve control - the core problem that Japan faced at that time was deflation, while the United States currently faced inflation. This means that the debt crisis has not yet broken out and high inflation may have arrived first.
Before the balance between the recession and the debt crisis, the Federal Reserve and the U.S. government are on both ends of the game. No matter who has the upper hand, the ultimate loss of US dollar credit is the reason why gold has hit new highs recently.
We only hope that these risks are limited to the United States and do not spread globally.
