Samim Ghamami on the Treasury Markets Impact on the Future Path of Interest Rates and Inflation

Samim Ghamami is former SEC economist. Samim returns to the show to discuss the fiscal trajectory of the US, the outlook of interest rates, the US Treasury market’s impact on inflation, potential reforms to the Treasury market and much more. 

Subscribe to David's new Substack: Macroeconomic Policy Nexus

Read the full episode transcript:

This episode was recorded on August 5th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you decided to join us.

Our guest today is Samim Ghamami. Samim is a returning guest. He joins us today to discuss the long-term implications of the US Treasury market for the future path of interest rates, inflation, and the ongoing reforms in this market. Samim also joins us to share his thoughts on the growth of private credit. Samim, welcome back to the program.

Samim Ghamami: Hi, David. Thank you for having me again. It’s good to be here.

Beckworth: It’s great to have you back. Now, we keep running into each other at conferences.

Ghamami: That’s right.

Beckworth: You were at the Hoover Monetary Policy Conference. There was an SOMC conference here in town. You stay engaged in this community, this policy space. I know you’re at other conferences as well. I wanted to bring you back on because you’ve done a lot of work on the Treasury market. There’s a lot happening there, as you know. In early April, we saw some turbulence in the Treasury market. It’s the one thing that caused President Trump to actually pull back from some of the extreme tariff measures. We’ll see what happens going forward.

There’s lots of reforms in the Treasury market. You’ve worked on them. Central clearing, we’ll get to those later in the program. I want to talk about that. Where does that stand? At the SEC, that was the work you were doing. You were working on the new SEC rule and other things going on there. Recently, the supplemental leverage ratio was also suggested tweaks to that. I want to come back to all those interesting developments there.

Fiscal Trajectory of the US

Let’s first jump to the fundamental, I think, core problem. That is just the path of debt in this country, our fiscal trajectory. We just recently had the One Big, Beautiful Bill passed. Depending on who you ask, it’s going to add a lot of debt to our fiscal path, our trajectory. Just some numbers here. Currently, we’re around 100% debt-to-GDP. The CBO has us getting to 120% debt-to-GDP. That’s us going from $28 trillion of marketable publicly held debt to about $50 trillion. If you ask some others, like the Committee for Responsible Federal Budget, they get us past $120. If some of these things are made permanent, it’s even larger.

In fact, I just saw recently, the CBO was asked to reevaluate the cost of the One Big, Beautiful Bill. If some of the provisions are made permanent, it went from adding, I believe, $4 trillion to $5 trillion over the decade, just extra and above and beyond the existing deficit. Just a lot of debt being added. Again, to make this concrete, the deficits are going to be $2 trillion a year, every year. We’re not in a recession. We’re not in a pandemic. We’re not in a war. That’s just crazy. Then, interest payments are about around $1 trillion. Then the CBO projects by the end of the decade, they’ll close to $2 trillion in interest payments alone. This doesn’t sound like a healthy environment, does it?

Ghamami: Not at all. Not at all. Yes, it’s scary. Exactly like you mentioned, I think the trajectory is not sustainable at all.

Beckworth: Yes. Somebody’s going to have to deal with this at some point. Maybe President Trump’s like, I’m going to get my goods passed, and maybe someone else will deal with it later. This is important for the question I want to get to here, and that is the path of interest rates. For a long time, we’ve talked about interest rates during the 2010s that were really low, close to zero lower bound in many cases. Now they’re higher. Are we on a permanently higher trajectory for interest rates in the US, and maybe globally too? I guess we should tie these together. And why?

Interest Rates

Ghamami: Yes, I think indeed that’s the case. I think part of that, at least in the US, is because of the trajectory of public debt and deficit, exactly like you just mentioned. I think there are well-founded empirical studies showing that, for example, an additional one percentage point deficit to GDP would raise long-term real rates by something around 40 basis points. An additional one percentage point in debt-to-GDP would raise long-term real rates by around three and a half to four basis points. The fiscal situation is definitely something that would push long-term real rates in the US higher. That would be a reversal from the era that you mentioned, right before the Global Financial Crisis and the decade after the Global Financial Crisis, before COVID. The fiscal situation is a big, important factor.

I think another one is the ex-ante investment and saving behavior of the private sector, both households and nonfinancial corporates in the US. In the household sector, it is now well known that there are forces, because of the dramatic changes in demographics, that would lead to households having lower and lower saving rates. We know that, for example, the dependency ratio in the US is going higher and higher, meaning we have more dependents compared to workers, and more dependents essentially means more consumers compared to producers. That by itself is inflationary.

That’s not just a factor that is playing out in the US. I think in all advanced economies, also even in China, compared to the rise of China in the 1990s and right after the GFC. The impact of demographics on the household sector, so saving ratios would go down and would go down faster than investment ratios. This would create a force that would push real long-term rates higher. Discussing this, the ex-ante saving and investment behavior of the nonfinancial corporate sector in the US is trickier, but I’ll pause here, see if you would like to discuss the household sector more before I turn to that.

Beckworth: Two things you’ve mentioned, the fiscal trajectory is pushing up interest rates or Treasury yields, as they say in the parlance, and then also household saving spending patterns are also a factor. Both of those are going to lead to higher rates. If you did not get a low mortgage rate in 2021/2022, that’s never coming back. Sorry, listeners. I have friends back home, Samim, who say, “David, you have one job in DC and that’s to lower interest rates.” I’m like, “I have no ability whatsoever,” because they saw what happened in 2021.

Let me go back to this household question and this age issue. The aging of the planet. Prior to 2020, there were a lot of people, saying that the aging of the planet would actually lead to lower interest rates. People live longer, they save more as life expectancy goes on. Now, there were people who pushed back against this, and you’re telling the other story is they have to start spending some of those savings. 

Ghamami: Exactly.

Beckworth: Okay, and dependency ratio aside. They’re not producing new wealth and savings. They’re spending what they have.

Ghamami: Exactly. I think because it would be hard to increase the participation age. It’s hard to increase the retirement age, at least in the US, going from, let’s say, 65 to 70. When the life expectancy goes up, if I die at 85, and if I retire at 65, then naturally, I would consume more as opposed to saving more.

Beckworth: Okay. Another way of saying this is, yes, as we live longer, we save more, but it’s like a one-time effect. Once we get to that point, we’re going to start spending it down.

Ghamami: Exactly.

Beckworth: We’ve reached that point, is what you’re saying.

Ghamami: Exactly. There are other things. For example, high healthcare costs associated with getting just older and older.

Beckworth: Then this circles back to another problem we’ve discussed on other episodes on the show, and that’s our declining population growth rate, declining fertility rates. All those things hugely bear on the fiscal position, on interest rates, and all those other concerns.

Ghamami: Exactly.

Beckworth: All right. We want to have a robust immigration policy.

Ghamami: Hopefully.

Beckworth: Get more people coming to this country and have more babies, but that’s for a different conversation, different time. All right. You’re saying, though, interest rates are going to stay up. Give me a ballpark range. Where do you think rates, like 10-year Treasury, where do you think? Where do you think real rates will be going forward?

Ghamami: Sure. Before that, if you don’t mind, I would just mention the potential change in the behavior of nonfinancial corporate sector when it comes to ex-ante. I think that part is a bit tricky because we know that from 1990 until 2020, overall, particularly after the Global Financial Crisis, we had really high corporate profits in the US, again, nonfinancial corporate profits. The investment ratios were low compared to saving ratios. One could think of different reasons, for example, high concentration and monopolization in the corporate sector. Another reason could be potential misalignment of management incentives. Essentially, corporate governance and corporate finance reasons.

Another is cheap labor. It is related to the demographic factor that we just discussed. If cheap labor is abundant, this means that in the corporate sector, it would be more profitable to hire cheap labor as opposed to increase fixed capital investment. If the main cause has been, let’s say, cheap labor because of the reversal of the demographics, that may incentivize the corporate sector to invest more as opposed to save more. If that matter realizes, then that would be another push to increase long-term real rates.

Again, this analysis in the household sector is a bit more straightforward compared to the corporate sector because if you believe that monopolization concentration would go on, if you believe that managerial incentives are misaligned, i.e. some corporates that focus on maximizing return on equity would not have enough incentives to make long-term capital investments, then it would be tricky to conclude that investment rates would go up, saving rates would go down. Again, if the main cause has been cheap labor, then I think we would see a similar trend that we just discussed in the household sector, similar trend in the corporate sector, that would be a force that would push real rates high.

Now, going back to your question, I think it’s just a very crude guess, but I think we won’t be back anytime soon in the era that long-term real rates would be anything below 1% or 1.5%. Let’s say if inflation would get closer to the target, this means that on average, let’s say for 10-year Treasury yield to 30-year Treasury, we won’t see yields being below, let’s say, 3.5%. If we see that, that might be inflationary.

Beckworth: Okay. What you’re saying is all the stars are aligning for higher interest rates, no matter how you slice or dice it?

Ghamami: I think so, except for that huge uncertainty in the investment for the nonfinancial corporate sector.

 Beckworth: Higher interest rates, just circling back to why this matters for policy. It means we’re going to have higher financing costs on the national debt. We’re going to see these trillion-dollar-plus interest payments going forward. I believe this year is the first year where we’ve seen higher federal expenditures going toward payment on interest on debt compared to national defense. That’s usually not a good sign for the health of a country.

Ghamami: Exactly.

Beckworth: We worry about that. We also worry about tough choices we’re going to have to make going forward. No one wants to touch entitlement reform. If we start running out of options, there’s very little left in the bucket of discretionary, nondefense spending. We nibble at that thing, try to make cuts, but that’s getting really small. What’s left is entitlements, defense. Those are really the two. Then interest on debt, which we can’t. We have to meet our obligations there.

The choices are getting very narrow and few going forward. Tough choices have to be made going forward. Or the alternative, and this is maybe a nice segue into the next point, the alternative is we finance all of this with inflation, higher trend inflation. That’s one way to pay for this. I suspect that might be what we have to endure. Before we get into inflation, any final thoughts on interest rates? Like the global picture, are you seeing something similar happening globally?

Ghamami: I think it would be more difficult to say at the global level right now because of the whole uncertainty with regard to trade policy. It would impact exchange rates. For example, in well-known studies of the determinant of forces behind long-term real rates, we know that, for example, all advanced economies would be considered as one block. The reason was net capital flows, net current accounts among countries in the advanced economy block were not variable, and the absolute net values were small. That would make that type of study for the real rates in advanced economies well founded and meaningful.

Now, because of the trade war, for example, we know that the US dollar depreciated heavily, around 8% to 9% from early 2025 till last month. The same thing happened with Chinese yuan, with renminbi. That type of huge exchange rate movements and volatility would make it very difficult to study and analyze long-term real rates at the global level.

Beckworth: One observation, if we view the trade war as a negative supply-side shock, wouldn’t that lower, at least temporarily, lower the equilibrium rate a little bit? Maybe put some downward pressure on interest rates or less productive? Less return on capital?

Ghamami: I personally think it would be difficult to say because of even one-time increase in inflation. It would also be difficult to say because, for example, some good economists predicted that when the trade war begins, the US dollar would appreciate. The exact reverse of that happened, at least for the first six months of 2025. I think it would be very difficult to say.

Beckworth: Difficult to say, but at least in theory, in ceteris paribus, all else held equal, if you make the global economy less productive, you lower the return on capital.

Ghamami: That’s right.

Beckworth: The point is there’s many moving parts.

Ghamami: Exactly.

Beckworth: We don’t know what’s going to fall out at the end. Okay. It’ll be interesting to see where global rates go because there is this convergence through arbitrage and markets that would pull rates together. Emerging markets will be different than advanced economies, but there’s still some common trend there, right?

Ghamami: Exactly. It used to be the case, like we just discussed, before 2025, at least in all advanced economies, long-term real rates move very closely to each other, even during crisis episodes.

Beckworth: Yes. Just stepping back, the 10-year Treasury yield, if we look at it right now, it’s 4.3 something. It’s still not terribly high by historical perspectives.

Ghamami: By historical perspectives, exactly.

Beckworth: It’s high compared to the 2010s, 2000s before 2020. It’s high there, but it’s low if you go to the ’90s, ’80s. In the grand scheme of things, we’re still not that high. I joked earlier, if you didn’t get a mortgage in 2021, you can still get a mortgage 6%, 7%, which is low compared to, say, the 1980s or 1990s, right?

Ghamami: Exactly. It’s not high compared to the history of interest rates in the US.

Beckworth: All right. The concern is it could get worse. 

Ghamami: That’s right.

Beckworth: Especially the fiscal trajectory, if we crowd out private investment. There are concerns going forward. So far, it hasn’t been as bad. I am actually quite surprised yields on Treasuries haven’t gone up more. Are you?

Ghamami: Why are you surprised? For example, at the very beginning, an episode that we’re going to discuss is the short April turmoil in the US Treasury market. We could have episodes that Treasury yields would go up, but if we believe that the long-term real rate, the so-called r-star, is something between 1%, 1.5%, if we believe that we are close to the 2% inflation target, a little bit above that, that would make the 4%, 4.5% more—

Beckworth: Seem reasonable.

Ghamami: Exactly.

Beckworth: Okay. Here’s why I’m surprised. Maybe I’m surprised, to be clear, about nominal interest rates being higher. Maybe real rates will be where you said, they are 1% to 1.5%. I’m surprised because I look at the fiscal trajectory, and it seems to me there’s no way we’re going to pay for that with taxes. We’re going to be paying that with, I’m guessing, inflation. 

Ghamami: Unexpected inflation.

Beckworth: I mean, the bond market is far smarter than me. There are people who have skin in the game who are trading. They look at far more information than I do, but in my mind, it seems pretty clear the easiest path forward is to have higher trend inflation. Why hasn’t the bond market seen that, or am I just being naive or misguided, or what?

Ghamami: No, I think it’s part of that is because of the strong commitment of the Fed to using its interest rate tools to target inflation.

Beckworth: Okay, so inflation-fighting credibility is still strong.

Ghamami: We can discuss that further.

Beckworth: For now.

Ghamami: Exactly. Because of the relatively strong commitment to inflation targeting to the so-called Taylor principle.

Beckworth: Okay. I’m going to go out on a limb here and say that we have not awakened up yet to the regime change that is coming. There’s going to be something that triggers, and one day—

Ghamami: I agree with you.

Beckworth: —we’re all going to be like, “Oh my goodness, this is going to be higher trend inflation and we need to do something about this.”

Ghamami: I agree.

Beckworth: Maybe that’s it. You listen to Fed officials. They’re still in a very much a monetary dominance regime mindset. We set the trend inflation rate. We set overnight rates as opposed to fiscal dominance regime. They’re subordinate to what Treasury and Congress needs. I think we’re getting close to that. Maybe the realization hasn’t dawned on them, on the markets. Again, in saying that, Samim, I’m being pretty bold because I’m saying I know more than they do. I’m very leery to do that because I have made some pretty bad calls in the past. Listeners, don’t take me too seriously.

Inflation

Let’s move on to inflation. We’ve talked about interest rates. This is a nice segue because it is, I think, useful to talk about Treasury markets, debt, and inflation. I’m going to read to you an exchange that took place in 2021 between a prominent MMT-er, and we would classify this group as post-Keynesian, very functional finance. There’s some truth in there. They take balance sheets, sectoral approaches seriously, which I appreciate. They also push it a little too hard, in my view.

Stephanie Kelton is having an exchange with Jason Furman. It’s a real famous exchange on what was then Twitter, now X. They’re going back and forth. This is April 2021. She says, “Have you considered the possibility that raising rates might move inflation higher?” Jason Furman emphatically says, “No.” That image I have here in front of me as we’re talking was shared widely. She was mocked. How crazy is this idea? We know when rates go up, it slows aggregate demand down. It slows spending. It slows inflation. It’s actually more complicated than that.

Ghamami: Exactly.

Beckworth: She was onto something, but it depends on the regime we’re in. Sometimes the Taylor principle is not enough.

Ghamami: Exactly.

Beckworth: Let’s talk about that. Again, this is all weaved together. We are now having interest payments on debt at $1 trillion. They’re projected to grow every year over the next decade by 2034, about a decade from now, they’re going to be close to $2 trillion. Where’s all that money going, and how is it being financed? Walk us through why this is more complex.

Ghamami: Sure. I think, politics aside, it is very well known among economies, particularly macro economies, that a hard precondition for an inflation-targeting central bank to achieve price stability is that government would have a balanced approach to its budget. If that condition is not met, then there are different settings that, theoretically, you can show that higher interest rates could lead to inflation spiral. There is also empirical evidence on that.

For example, in a relatively well-known paper titled “Tight Money Paradox,” Eduardo Loyo, an economist, Brazilian economist, assigned exactly this phenomenon to what happened to Brazil between 1975 to 1985. At that time, Brazil was experiencing high inflation rates. From 1975 to 1980, they didn’t have a strongly anti-inflationary central bank, meaning responding more than one-for-one to inflation. That approach switched from 1980 to 1985, and the moment that the central bank in Brazil became aggressively anti-inflationary, they experienced hyperinflation between 1980 to 1985.

For example, I had the opportunity to discuss one of Mike Woodford’s papers last December, his 2001 paper titled “Fiscal Requirements for Price Stability.” Essentially, the essence of the paper is that if the public debt and deficit, the trajectory of that is not sustainable, the central bank, which is inflation-targeting using Taylor-type principle, could become dysfunctional. That’s a hard precondition. I mean, the government having a balanced budget approach is a well-known strong precondition for a central bank to be able to function well. We can discuss the details of the model, but that’s a very well-known result.

Beckworth: That’s so interesting. In Brazil, from 1980 to 1985, they actually followed the Taylor principle, which says, raise interest rates more. Raise it more so that you get ahead of, in front of inflation. John Taylor came out about that. It’s in a Taylor rule. It’s in most macroeconomic models, the Taylor principle, but it’s regime dependent. It doesn’t always work if you’re in a regime where it’s a fiscal dominant regime, where the debt stock is so large.

That’s the thing. We assume a monetary dominance world in our minds. Living in the US and Europe, it’s been the case that we’ve been in a monetary dominant regime where, at least implicitly, we’re fiscally solvent. Taxes, spending’s being managed in the background. This should be fairly intuitive. If the amount of debt gets so big, how do you pay for it? How do you pay just the interest? How do you roll it over? If you follow the Taylor principle, inflation’s going up, that’s going to be very costly. How does a central bank finance? It’s going to have to start borrowing money itself. It’s going to be effectively printing money to pay on that. It just feeds into it.

Here’s my point. Going back to Stephanie Kelton’s comment, though, in 2021, I think Jason Furman’s answer, an emphatic no, made sense at that time. At the time, it was at least perceived, and I think fairly so, that the debt stock wasn’t as big or unsustainable. You could debate that. The point is, the markets, at least, believed that we’re not in this place yet.

Ghamami: Exactly.

Beckworth: It looks like we’re getting closer. That’s the point. We’re getting closer in the US to this place where we trip into or fall into it.

Ghamami: Closer in the sense that the trajectory is not sustainable. For example, if you ask me whether that would materialize 10 years from now, when the deficit to GDP is 6% now, it could be 10%, I think it would be very hard to put estimates on it. I think everyone knows that I think maybe it would be a good time that we are flagging this strong precondition of the government having a balanced budget approach so that the central bank can be independent, can achieve price stability. I think this is a good time to discuss it.

Beckworth: Yes. To be clear, you can still run deficits during recessions. The key is to, during the good years, you run primary surpluses. You pay off the debt. You pay down what you incurred in the bad years. You balance it over the business cycle, or are you saying, this flat out, no matter what, you have a balanced budget?

Ghamami: This happens, strictly speaking, when fiscal policy is not Ricardian in the sense that when this constraint that the real value of nominal debt more or less should be equal to the present value of expected future surpluses.

Beckworth: Yes. So, tax receipts coming in. 

Ghamami: Exactly. If that equality gets violated, we say that we are in a non-Ricardian regime. When we are in a non-Ricardian regime, there might be situations where aggressively anti-inflationary central bank could make the inflation situation worse. Again, this has been shown theoretically in good papers 20, 25 years ago, and also empirically.

Beckworth: Yes. In fact, there was a new paper that just came out. I’ll mention that Lukasz Rachel and Morten Ravn, “Brothers in Arms: Monetary-Fiscal Interactions Without Ricardian Equivalents.” They make the same point. If you don’t have Ricardian equivalents—in other words, plain English for those who don’t know the macro language, what we’re saying is, the government runs a deficit this year, and it’s not committed in the future to paying that off. It’s not going to have taxes in the future, revenues coming in to offset it, so it’s not being paid for over some long horizon. In that case, it’s going to be potentially inflationary given the circumstances.

Ghamami: Exactly.

Beckworth: Particularly in the context of, in the real world, we see this when there’s a huge amount of debt, and there’s literally a belief that the government’s just going to finance through printing, through creating liabilities of the central bank, and that’s just going to shoot prices through the roof. Now, let’s go to an example. In Argentina, President Milei, he’s actually bringing inflation down. It’s still positive, but it’s come down a lot. I believe he turned the fiscal picture around quite dramatically, so he’d be an example where he’s taken this idea seriously, right?

Ghamami: Exactly. That happened also in the Paul Volcker era. During the fight for inflation in the US, at some point, the US government adopted an essentially balanced budget approach, essentially conventional deficit targeting. You can contrast it with what happened around the same time in Brazil, as we just discussed.

Beckworth: You’re saying, then, it wasn’t all Paul Volcker that brought the inflation [down]?

Ghamami: Maybe it was him convincing the government to fight inflation. The ideal situation is the central bank following the Taylor principle, and the government having a balanced budget approach by, for example, conventional deficit targeting. That’s the ideal situation, and that ideal situation, I think Paul Volcker was able to achieve it in his era.

Beckworth: Again, just to be clear, it doesn’t mean you have to run a primary surplus that year, but it’s the expectation in the future. 

Ghamami: Exactly. Yes.

Beckworth: Even if there were deficits during Paul Volcker’s years, the question is, one, was it a primary deficit or just a deficit? It could be a deficit due to interest costs. More importantly, was there an expectation that the government was changing directions on its fiscal path?

Ghamami: Exactly.

Beckworth: A lot of this is expectation management, right? Credibility, expectation management.

Ghamami: Exactly. People’s beliefs about government’s fiscal policy. I think it would be maybe one way to say it is that inflation expectations, that are extremely important, are themselves, at times, functions of people’s fiscal expectations. If fiscal expectations go in the wrong direction, that could adversely impact inflation expectations, and that could lead to inflation spiral.

Beckworth: Make it much harder to get things back in order. The key is we still have relatively stable inflation expectations, which again is a little surprising to me. My worry is there’s going to be some regime change. We wake up one day, and we’re like, “Oh my goodness,” we’re headed off a cliff, and there goes inflation.

Ghamami: Right. I think another factor maybe to mention here is that because we discussed Brazil and US around the same time, ’70s and ’80s, at that time in Brazil, most of the government debt was in short maturity contracts, the equivalent of Treasury bills. Right now, I think Treasury bills are less than 30% of the marketable government debt in the US. The basic idea is if you have most of the government debt in short-term maturities, what we just discussed would be exacerbated in the sense that that inflation spiral, because of the unsustainable path of public debt and deficit, may materialize faster.

Beckworth: Okay. If I’m Treasury Secretary Bessent, I should try to finance everything long term. I know the system needs T-bills, but finance long term if you think there’s going to be high inflation in the future, unsustainability, because it would help, right?

Ghamami: Right now, it’s below 30%. I think if that goes highly above 30%, that could be potentially more inflationary.

Beckworth: It’d be a sign. It might be a sign too. That’s the other thing. Ideally, you lock in those nice long-term rates. Even though they’re higher now, 4.5%, it may be even higher in the future.

Ghamami: That would delay the rise in inflation.

Beckworth: It wouldn’t avoid it, just delay it. At the end of the day, you’ve got to get your fiscal house in order.

Ghamami: Exactly.

Beckworth: One last thing on this. I want to, again, tie this into the present. I’ve mentioned this on previous episodes, so I apologize to the listeners who have to keep hearing this from me. I really think we’re getting close to this point because we see what I think are symptoms or signs that we’re in trouble. President Trump’s pressure on the Fed to cut rates has been largely for fiscal reasons. We will say if he goes anywhere from $800 billion to $1 trillion, “if only Powell would cut rates.”

What he says has very little to do with the state of the economy. Maybe we just got a really bad jobs report. He’ll change his tune. It’s about the economy, too. President Trump’s calls for Jerome Powell to cut rates has been about reducing fiscal pressure. We’re going to talk more about this in a minute, but supplemental leverage ratio. Why are we even talking about that? I think one reason is because it would make it easier for banks to bear more Treasury debt. If we had a much lower debt-to-GDP ratio, it may not be as consequential.

Senator Ted Cruz talked about ending interest on reserves. Why? Because it would save the government $1 trillion. I’m not sure that’s correct. The point is, all this talk, this noise about ways to save money here or there, has me worried. Now, I bring that up. I also want to mention that many people who are Fed watchers like ourselves are getting worried about Fed independence because Trump has been so aggressive. He’s gone after them for many reasons. Rate cuts, the cost of the Fed building overrun, they’re just not doing their job. He’s threatened to fire Powell with cause. “Oh, the political independence of the Fed.” “Oh, the legal independence of the Fed.”

I think what you’re getting at is actually something more fundamental than norms. Those are all norms. Fundamentally, it’s the economic independence. Can the Fed actually use the Taylor principle and it work? That’s only true if we have our fiscal house in order.

Ghamami: Exactly.

Beckworth: I’ll put a plug in for a Substack newsletter I wrote. For those who are not subscribing, please do so. Ben Shapiro says, “The facts don’t care about your feelings.” I played with that and I said, “The Consolidated Government Budget Constraint Does Not Care About Your Fed Independent Feelings.” There is no Fed independence if we are in a fiscal mess because the government consolidated budget constraint is going to say, well, the Fed’s going to be forced to help out.

Ghamami: That’s right.

Beckworth: Okay, so realistically, then, let’s say we go into fiscal dominance, Samim. What is your realistic assessment? Is it going to be higher inflation to pay off some of that debt? Is it going to be tax spending changes? How do you see it as a realistic path?

Ghamami: Honestly, I can’t think of any way other than fiscal consolidation, other than having a target for conventional deficits. I think that would be the ideal scenario. I think you mentioned along the way One Big, Beautiful Bill. I think it’s good that it is pro-growth. But we know that long term, it would add, I don’t know, depending on who you ask, $3.5 to $4 trillion, 10 years to 30 years to the debt. It would not change the deficit if you have more than $300 billion revenues from tariffs by the end of this year and next year. This wouldn’t do anything about the trajectory of the public debt and deficit. Honestly, I don’t see any solution other than, again, the government having a balanced budget approach. That would mean finding ways to cut spending, finding ways to increase taxes.

Beckworth: One other point I want to bring up, Samim, is a recent article by  rne. He’s, I believe, at Johns Hopkins. He has a paper, really interesting NBER working paper, where he talks about the stages of financial repression, I would say fiscal dominance. He looks at a bunch of cross-country data. It may not always apply in every case. In general, he notes, “Between 100% to 120% is when you begin to see the cracks in the system,” where you begin to see calls for the central bank to do more, to start lowering rates.

Not only central bank, but banks. He mentions banks. In the case of the US maybe money market funds to start holding more securities. Again, I look at a supplemental leverage ratio. That could be seen as a symptom of these greater pressures. Let’s go into Treasury market reform in the time we have left here.

Ghamami: Sure.

Treasury Market Reform

Beckworth: Tell us about where it stands. Maybe we can go through that. At the very end, we can circle back to how this relates to what we’ve been talking about. Let’s start with central clearing. Where are we with that?

Ghamami: Like we discussed last year, in roughly two years from now, most of the secondary part of the Treasury market, Treasury cash, repos, and reverse repos, would be cleared through central counterparties. Definitely FICC, which is a subsidiary of DTCC, and maybe CME as well. I think that’s a positive. We just discussed that the fundamental problem is supply and demand imbalances in the Treasury market. The Treasury reform has been mainly targeting what we can do to make sure that the US Treasury market remains liquid. Central clearing would help that, and it gets implemented in two years from now.

You mentioned supplementary leverage ratio. We know that, for example, because of the disruption in the Treasury market in March 2020, large banks that are major market makers in the Treasury market could not absorb a sufficient amount of Treasury securities because of balance sheet constraints. The reform of the SLR, or to be more specific, enhanced supplementary leverage ratio, the version that applies to US global systemically important banks, that would hopefully help increase the intermediation capacity of large banks. Another element of the reform was trying to align the capital and liquidity requirements and rules for nonbank affiliated broker-dealers that are essentially liquidity providers active in the Treasury market. The reform of capital requirements for nonbank broker-dealers is another one. I stop here.

Beckworth: What about Treasury buyback program? Is that more of a liquidity tool? That’s something the Treasury has introduced.

Ghamami: Exactly. I think that would also help, but in normal times. The Treasury introduced the buyback program on a regular and predictable basis I think one and a half year ago. It would help maintain the liquidity in the US Treasury market in normal times. Another thing that we discussed last year was the standing repo facility. I think that’s very important. It continues to be open only to the trading counterparties of the New York Fed. We discussed that if there would be ways to open it to more than just trading counterparties of the New York Fed, it would help maintain the liquidity in the US Treasury market.

Central clearing could facilitate that. I think two factors that we did not discuss last year were the GENIUS Act. If the market in stablecoin would scale up, and we know that, for example, in Tether, more than 70% or 80% of the stablecoins are backed by short-term Treasury bills, essentially. That could itself increase demand for Treasuries. We can discuss potential financial stability concerns associated with scaling up in the stablecoin market, in general, in digital asset market, but that’s something that could be increased demand for Treasuries.

Lastly, tokenization of Treasury securities. That could also lead to some increase in demand for Treasuries that, in the long run, could help the liquidity in Treasury market. Again, there are many caveats here because during stress episodes, we need to be very careful about financial stability risk as well.

Beckworth: We talked about this last time, but part of the problem with the Treasury market is that it’s changed so much, and the broker-dealers are a smaller part of the market. You rely much more on these high-frequency traders, and they’re in and out of the market. Things go bad, they get out. They have no incentive to stay.

Ghamami: That’s right.

Beckworth: You’ve got to have these facilities, these tools, these innovations in place to keep the market robust. Going back to the standing repo facility, I love what you suggested: bring central clearing. I know Darrell Duffie has suggested this. The Fed would only face the FICC or some central clearing body, and they, in turn, would face these other counterparties.

Ghamami: Exactly.

Beckworth: I’m all for that. If anyone’s listening, let’s go. I would love to see us in the long term, move to a ceiling operating system, demand-driven ceiling system, which is what many other central banks are moving to. It’s a long journey, another long conversation, but this would be part of the way of getting there, is making this standing repo facility more functional. Also, the discount window more functional. There’s a lot of issues to work through.

Again, stepping back in the minutes we have left here and circling back to the discussion we’ve been having, are we not talking about all these reforms to the Treasury market because the Treasury market is getting so big, and the expectation is going to get bigger with the fiscal trajectory? In other words, hypothetically, if our debt-to-GDP was 50%, not 100% going on 120%, we probably wouldn’t be as concerned in talking about all these innovations. Is that fair?

Ghamami: Exactly. The main problem, supply-demand imbalance, is the main problem, the unsustainable trajectory of public debt and deficit in the US. One could say, because of the cutback in globalization, for example, we know that in around 2009, Treasury holding of foreigners, private sector, official sector, was around 50%, 53%. Now it’s around 30%, 35%. All these forces, I think, are not in our favor.

Beckworth: Yes. It’s important that we’re doing these reforms. They’re needed. We’ve got to do something. I can’t stand by and let markets blow up like we did in 2020, but fundamentally, it’s not going to be the fix. Fundamentally, there’s still going to be stresses on the Treasury market, no matter what we do. We need to really get at the demand-supply imbalance, as you said, or just really find a way to rein in those primary deficits. It’s just shocking, again, to me that we have primary deficits in an economy that’s near full employment, no war, no recession.

Ghamami: That’s right.

Beckworth: Now, maybe we’re headed into one. The job market data we got last week says things are softening. Unemployment, I think it’s 4.2%, 4.3%.

Ghamami: That’s right.

Beckworth: It’s still, I think, safe to say we’re in a full employment economy, and yet we continue to run large primary deficits.

Ghamami: That’s right. Exactly like you mentioned, the labor market is weakening, but again, there would be probably interest rate cuts, two or three of them, in the next couple of months. We know that because of the One Big, Beautiful Bill. Probably, we have higher growth next year, even up to 2027. I just don’t know how the trajectory of the public debt and deficit would change, at least in the near future.

Beckworth: Whether we go into recession or not, it’s a small part of this bigger story that we’ve been really drilling into and should be thinking about seriously. Now, Samim, we did not get to your private credit growth discussion. You have the actual paper you’ve written with Moody’s, so we’ll provide a link to it in our transcript, so I’ll encourage listeners to go there. With that, our time is up. Our guest today has been Samim Ghamami. Samim, thank you so much for coming back on the program.

Ghamami: Thank you, David. I enjoyed our discussion. Thank you.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.