Stephen Miran on Activist Treasury Issuance and the Monetary Policy Implications of a Second Trump Term

Stephen Miran is a former senior advisor to the US Treasury Department, a senior strategist at Hudson Bay Capital, and a fellow at the Manhattan Institute. Stephen is also a returning guest to the podcast, and he rejoins David on Macro Musings to talk about his recent paper with Nouriel Roubini titled, *Activist Treasury Issuance and the Tug-of-War Over Monetary Policy,* as well as his thoughts on what a second Trump presidential term would mean for the Fed and financial markets.

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Read the full episode transcript:

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: Stephen, welcome back to the show.

Stephen Miran: Thank you. It's a real pleasure to be here. Thanks for having me.

Beckworth: It's great to have you on again. Previously, I had you and Dan Katz on to talk about your paper, where you called for reforms of the Federal Reserve. [It was] another interesting paper in addition to the one that we're going to talk about today. So, you are just filled with great insights and opportunities for reform in the financial system.

Miran: Well, I don't know about insights, but I certainly enjoy asking questions that are difficult to ask. 

Beckworth: Okay, and as a previous guest, you are now also probably drinking from a nominal GDP targeting mug as well, so welcome to the club.

Miran: And everything tastes better from it.

Beckworth: Absolutely. Okay, so you have this paper and it's really been one that has received a lot of attention. In fact, the Secretary of the Treasury, Janet Yellen, has responded to it. I wish that I had a paper that someone like Yellen would have responded to. But you have this paper with Nouriel Roubini titled, *Activist Treasury Issuance and the Tug-of-War Over Monetary Policy.* So, tell us about it.

Breaking Down *Activist Treasury Issuance and the Tug-of-War Over Monetary Policy*

Miran: Sure, so the paper came out of a genesis that Nouriel and I were working on at Hudson Bay, where if you go back in time, say, five years, and you told anyone, "Hey, the Fed is going to hike over 500 basis points. They're going to do QT on top of it," and you say, "What do you think [is] going to happen?" Most people would probably say, "Well, the world's going to end," right? You'll have a financial crisis. The stock market will hit a permanent low valley type of thing, and it's going to be a disaster. Not only has that not happened, but growth has been significantly stronger than potential over the last year, year and a half. Inflation's been resilient. It ran [at] 3.3% core PCE in the first half of this year, and markets have been heading towards all-time highs. So, not only has that not happened, but things have been really great. And so, we started asking ourselves, "Okay, how can we explain this? What's anomalous?" The answer is absolutely multi-causal, right?

Miran: There's a wide variety of things that have converged to allow growth and inflation and markets to be so strong in the face of such aggressive Fed tightening. Deficits play a role. Geopolitics plays a role. AI plays a role, all of this stuff. But are there other policy levers that people haven't studied and thought about? And we started looking at the Treasury's issuance patterns, and it seemed that Treasury had started to deviate from historic norms, and we started to say, "Hey, is there a way in which this is actually significant for markets and the economy?" We're not the first people to talk about this. Folks have been talking about it in markets for a year now. But we said, "Let's take this idea seriously, and let's try and fit it into the models that we have available from monetary policy, from asset pricing,” to try and say, “Hey, what's the effect of this on the markets and the economy?"

Beckworth: And your central claim in the paper is that this Treasury issuance, which is not normal or it's deviated from the norm, has had an impact on the economy. So, it's helped facilitate a soft landing, number one. But number two, I believe that your other central claim is that this has political motivations. Is that fair?

Miran: So, let's take those two separately, right? So, I think that it's a good idea to separate those two subjects. One is, is there a policy channel? Do Treasury's actions have an effect on markets and the economy? Then the second question is, what's the motivation and why are they doing this? The first channel, I think, is a lot less controversial, right? Most people, I think, agree that Treasury issuance patterns [do] affect the market. Thereby, if markets affect the economy, it also affects the economy. And I think that the critical question to ask yourself is, if you woke up tomorrow and Treasury said, "Hey, we're going to sell an additional $1 trillion or $3 trillion or whatever dollar amount of bonds into the market,” by allowing bills to redeem, right?

Beckworth: Yes.

Miran: If Treasury bills are close substitutes for money because they have similar regulatory risk duration and with interest on reserves, return profiles as money now, and if Treasury says that we're going to allow money-like bills to redeem and replace them with an extra batch of bonds— imagine that size is $1 trillion to $3 trillion, however big you want for the thought experiment. Ask yourself the question, what does that do to markets? And I think that everyone would agree that interest rates would move higher, at least for a meaningful period of time— maybe not permanently higher, but higher for a period of time. And if interest rates move higher, then that's going to affect other markets also, right? And so, this is a very similar mechanism to quantitative easing. If Treasury bills and bank reserves are perfect substitutes, then it's pretty much identical to quantitative easing, right?

Miran: Treasury bills and bank reserves are not perfect substitutes, but they're pretty close substitutes. When you swap the two on somebody's balance sheet, it doesn't really materially change their risk exposure, their regulatory exposure, [or] their return exposure. The real economic import of the difference is not huge, right? And so, to the extent that they are substitutes, this channel is working through a very similar economic means as quantitative easing, right? So, once you accept that this channel is economically important or that it's economically possible, then you're just haggling over size. And we run through calculations. We try and tackle this problem with a wide variety of approaches that have been developed in the empirical macroeconomics literature. Empirical macroeconomics is very difficult. It's an extremely difficult field with lots of uncertainty and huge confidence bands.

Miran: So, that's why we try and tackle this from a lot of different angles, and we come at it with a pretty wide range. So, our range of calculations on the term premium, on the 10-year yield, is 14 to 40 basis points. That's a pretty wide range, and we have a central guess at 25 basis points. That central guess is 25, both because that's sort of in the middle of the range, but also because what we consider to be the highest quality studies point to that level, right? So, I think that the existence of the channel itself is not very controversial. 

Miran: Even Treasury accepts that, right? I think that you'd find very few people who would say, "Hey, if Treasury says, tomorrow, that we're going to sell $1 trillion, $2 trillion of bonds—" I think that you'd find very few people that would say that's not going to have any effect on markets at all. Most people would accept that. Then, trying to quantify that is more difficult. And I think that when you get to how you quantify it, there's a lot of uncertainty. There's a lot of competing approaches that you can take. And so, personally, I acknowledge that uncertainty, and that's why we approached it as a range of reasonable estimates rather than trying to be dogmatic about, "This is exactly what it is." And if you came to me and said that you thought the effect was 50% bigger or smaller, I'd probably say, "Hey, that's probably within the confidence bands."

Beckworth: But what you found is that, effectively, monetary policy has been eased by one percentage point, at least on the short end of the yield curve, is that right?

Miran: Yes, so that's the baseline calculation in the study. So, like I said before, we found a range of estimates on term premium that would indicate that the 10-year yield was reduced by 14 to 40 basis points with a central guess at 25 basis points, so a quarter of a percentage point, right? That quarter of a percentage point is equivalent, in terms of the amount of economic stimulus delivered, by a one-point cut to the fed funds rate, to the Fed's primary policy tool, the overnight rate.

Beckworth: Let’s just stick with your baseline numbers, and let's look at it on the short end of the yield curve, just because people think of monetary policy in terms of changes in the fed fund target rate. So, even though you start at the 10-year, let's just come back to where the Fed operates, in its space. So, you're saying, effectively, that monetary policy has been lowered by one full percentage point, which is huge, given that the fed funds rate was pushed up just over five, and, arguably, that the neutral rate is around there, too. So, what you're saying, what your argument is, is that monetary policy's effectively been eased, even though we don't see it directly, and this is being done via the actions of the Treasury.

Miran: Absolutely. So, what the paper does is that it finds this central guess, this central estimate, that Treasury's actions have reduced 10-year yields by a quarter of a point, right?

Beckworth: Yes.

Miran: Then you have to make that useful. That information is not useful for making an economic statement. You have to say, "How much does that matter?" So, you get 25 basis points of 10-year yield, and then you say, "Okay, that's the same as a 100-basis-point cut to the fed funds rate in terms of its economic importance." And so, then you say, "Okay, how much does that matter?" A one-point cut to the fed funds rate is significant, but at the same time, it's one-fifth of the total amount of tightening that the Fed has delivered. So, it's meaningful, but you're not talking about an amount of easing similar to what you do in a—

Beckworth: Sure, but it's meaningful enough to help land the plane, get that soft landing.

Miran: Oh, absolutely.

Beckworth: That's your argument, right?

Miran: Absolutely. And so, if you take that one-point cut, it effectively undoes all of the hikes that the Fed did in 2023, because they hiked by a point in 2023, right?

Beckworth: Yes.

Miran: And so, during the period in which the Fed was doing the last fifth of its tightening cycle, Treasury was basically pushing in the other direction and canceling the actions that the Fed took to try and control inflation and create some slack in the economy. If you combine that with higher estimates of the neutral rate, either from the bond market or from the various models that try and estimate the neutral rate, and you take the real neutral rate as being 1.5% to 2%, and you combine that with inflation and the amount of accommodation provided by ATI, by activist Treasury issuance, you get a combined issuance and monetary stance that's just about at neutral.

Miran: Maybe it's a little bit above neutral. Maybe it's a little bit below neutral, but it's basically at neutral, which basically tells us that Treasury's actions have blocked a significant amount of the Fed's efforts to restrain inflation. Treasury's efforts have stood in-between the Fed and significantly bringing down growth and inflation to a way that inflation would durably return to target. And if you look at growth over the last year, I think that it's consistent with that. We had GDP growth near 3% for, what, two or three quarters? Growth in the second quarter was just 2.8%. Core PCE ran 3.3% in the first half of this year. I think that it's very difficult to argue that the economy has been very weak and that inflation was at target over the last year, and I think that a significant portion of the reason why is ATI and is the effect of Treasury's policies easing financial conditions at the same time that the Fed was trying to tighten financial conditions.

Beckworth: That definitely is one explanation for the resiliency of the economy, despite the tightening of the Fed, despite the forecasts of recession in 2023, and a number of other things that didn't happen. We've established that. That's the argument that you're making. That's the first part of your paper. Let's get to that very provocative second part. So, what's the motivation for it?

Miran: I'd love to know. We have this anomaly, right?

Beckworth: Yes.

Miran: We have this anomaly whereby Treasury has issued far more bills than they historically would have. If you think about debt issuance, it is orthodox debt issuance to use bills to fund a financing spike. So, if you think about it, the government needs to fund a sudden surprise amount of deficit, either because there's a shock to the economy, there's a war, there's a recession, there's a financial crisis, [or] there's something that happens that drives the deficit higher. It's orthodox fiscal policy to fund that by borrowing rather than taxes. This is called "tax smoothing." You don't jack up tax rates and move them around violently to deal with the vagaries of the deficit, right?

Beckworth: Right.

Miran: You fund the deficit through borrowing to smooth taxes out over time. Then, within borrowing, if you have a sudden surprise funding need, you do it with bills and not with coupons. And the reason you do that is because the market can easily absorb bills. The market can less easily absorb coupons. As we said before, if you issue coupons, i.e., intermediate and longer-term debt— bills are debt a year and less, and intermediate and longer-term debt beyond that are called coupon bonds, coupon notes. If you fund the financing spike with bills, the market can absorb it and there's minimal market impact. If you fund it with coupons, [then] you'll push interest rates higher in the way we were discussing earlier, right?

Beckworth: Yes.

Miran: So, it is orthodox fiscal policy. It is orthodox issuance policy and debt management policy to fund a sudden financing spike with bills. That's totally kosher, right? If you look at the last year, we were not in a hot war. We were not in a recession. We were not in a financial crisis. We were not in a period where we've been very concerned about things falling apart if you allowed interest rates to rise modestly. And, again, we're talking about 25 to 40 basis points on the 10-year yield. We're not talking [about] a 300 basis point move.

Miran: None of those conditions were in place. Therefore, it's unusual to finance this type of deficit that we've had over the last year by using bills. It's extremely unusual. Okay, that's the aggressive form of the argument. The less aggressive form of the argument is that— and this is actually what we take in the paper— Treasury, in the wake of the debt limit suspension, had a genuine spike in financing needs. When the debt limit was binding, Treasury had to draw down its savings accounts to continue financing the government operations, because they couldn't borrow in the markets because of the debt limit.

Miran: So, they draw down the general accounts. They borrow from various pots of money that they can borrow from, like a government employee pension fund. The debt limit was suspended in May of last year— The Fiscal Responsibility Act, a bipartisan compromise to suspend the debt limit through the end of this year. When the debt limit is suspended, Treasury can issue again. They can borrow in the markets. They have to borrow not only to fund the day-by-day operations of the government, but to refill the savings accounts that they drew down.

Miran: So, that's an additional $700 billion or so of borrowing that they have to fund to rebuild the savings accounts that they had just drawn down. Treasury argues that this spike in financing needs is similar to the spike in financing needs that you experience in a war or a recession, when the markets are fragile and you're worried about tipping the economy into a really dangerous spot. I don't think that it's quite the same. I don't think that the financing spike from the debt limit being suspended is quite the same thing as a war or a recession when you really are scared about market fragility.

Miran: But if you accept their argument— and we do in the paper, we give them the benefit of the doubt over this in the paper— You say, "Okay, the debt limit is suspended in May. We're going to give you Q2 and Q3 to finance yourself with bills and then start going back to more orthodox policy of terming those bills out." That's why we start our analysis in Q4 of last year instead of right after the debt limit is suspended, because we say, "Let's give you the benefit of the doubt over the financing spike in the wake of suspending the debt limit." I think that that's more than fair.

Beckworth: You’re being generous.

Miran: Yes, I think. And if you add that stuff in, you'd increase the size of all of our estimates by 50%. Let's give them the benefit of the doubt. We start our analysis in Q4 of last year, almost six months after the debt limit is suspended, and that's no longer an operative thing. They don't term out the bills that they've issued, and they continue to run the share of issuance, that is bills that's in short-term debt, anomalously high, much higher than the market needs at a time when term premia are generally very low [and] markets are generally pretty calm, and they continue to do that.

Miran: This behavior is odd because if you compare it to orthodox debt management— I like to think about the COVID example. This was done very well. In the spring of 2020, when the world was falling apart, Treasury borrowed $2.5 trillion in bills to fund the CARES Act, fund the operation of the government. Like I said a moment ago, financing yourself with bills when you have a spike in financing needs— totally normal. Totally normal, right?

Miran: Okay, you get to July. Things are starting to recover. Things are starting to normalize. The market is doing well. There's no more risk of fragility in markets. You're sort of over the hump of worrying that this is going to become a financial crisis and a Great Depression. Net bills issuance goes negative in July of 2020 and then stays there pretty much until October of 2021. So, for five quarters, over a year, net bills issuance goes negative while Treasury is terming out the bills that it issued to fund the CARES Act from the spring of 2020, [and] Q2 also.

Miran: So, that's orthodox debt management behavior. There's a financing spike. You fund it with bills. When the market fragility episode has passed, you term out those bills into longer-term coupons, so that the composition of the debt doesn't change too much. In this episode, there was a financing spike after the debt limit [was] suspended. Treasury has got to refill the general account. They've got to refill all of their savings account, [and] pay back the G fund.

Miran: Okay, that passes. Six months later, nine months later, a year later, it's still going on. What are you doing? So, this is the really anomalous thing. This is absolutely anomalous behavior, and so the ultimate question is, why are they doing it? If there were a plausible alternative explanation, I would think, okay, it's not intended to affect markets. It's not intended to suppress volatility in markets. It's not intended to suppress term premia and prevent them from rising for fear of what that would do to other markets like the stock market.

Miran: But there's no alternative explanation and no explanation has been given, and the paper's been out now for, what, a couple of weeks? And lots of people have commented on it. Lots of people have discussed it. Treasury has given their own comments on it, which we can discuss if you want. But in no case has there been an explanation for why, a year after the debt limit was suspended, Treasury hasn't been taking more aggressive steps to term out the bills that they issued to refund the general account after the debt limit was suspended.

Beckworth: So, you're saying that the TGA, the Treasury General Account, which is the Treasury's checking account at the Fed, cannot be the explanation. Yes, they needed to fill it back up after the debt ceiling issue, but they've continued to have this large amount of Treasury bill issuance out there, which isn't consistent with what happened in 2020 and debt management orthodoxy in general.

Miran: Yes, I think if you take the most lenient interpretation for Treasury, then it would have been fine to fund refilling the Treasury General Account with bills for a few months after the debt limit was suspended. But by the time you get to October, is there really concern that markets are too fragile, and that they can't absorb this? Term premia are zero or negative. Everything is awesome. Growth is way too high. Inflation is way too high. Stocks are going to all-time highs. There's zero plausible concern about market fragility, and Treasury just keeps on doing the same thing because they just seem pretty determined to avoid a rise in long yields, which would undermine some other markets.

Beckworth: Let's come back to the pushback that you've received in a minute. Let's just drill down— What is the motivation? What is the implication here that you're getting at?

Miran: So, the implication, because there's no other plausible alternative, is that they're just trying to keep markets strong and the economy strong, because it's a political advantage for them to do so.

Beckworth: So, there's a political motivation here, and that's the second core argument, or at least the big implication that flows out of your analysis. So, let's talk about the pushback. Janet Yellen was asked about this. So, again, amazing feedback on your paper to get comments from the Treasury Secretary, as well as a number of folks, a number of commentators out there. She said, "No, this isn't the case." She told the TGA story, which, you just provided a rebuttal to that already. Another pushback that I've read is that your and Nouriel's case is based on circumstantial evidence. There's no smoking gun in terms of, where is the directive, where is the official decree or instructions from Janet Yellen to the Assistant Secretary for Financial Markets? How do you respond to that?

Responding to Criticism from Janet Yellen and Others

Miran: I'd agree that there's no smoking gun. There's no smoking gun. There's no letter or email saying that this is done to--

Beckworth: Would we expect there to be one, though? I guess that's the--

Miran: No, I wouldn't, but I would expect there to be some sort of explanation and there's just hasn't been--

Beckworth: So, it's missing. There's something missing.

Miran: There's something missing, and I'm very much open to alternative explanations, but no one's preferred one yet. So, what there has been has been an attempt to de-emphasize the 15% to 20% guidance for Treasury bills. There's been attempts to de-emphasize that, and I think that there's a couple of implications of de-emphasizing that. One is an attempt to just say, "Hey, it doesn't matter." But in this case, I think that the problem doesn't go away. Because if it doesn't matter, then what's stopping you from terming out the bills? If none of this really matters, your behavior is still that 70% of debt over the last year was issued in bills. That's anomalous, right? If it doesn't matter, then okay, you're back where we are where the Treasury Secretary can do whatever's convenient.

Beckworth: If it doesn't matter, then your argument that it's just simply the best financing doesn't make sense either, is what you're saying.

Miran: Yes, if it’s—

Beckworth: If it's simply a question of trying to get the best deal for the taxpayer, then it shouldn't matter at all, including in this case. Alright, let me present another argument that's been raised in response to your piece, from Jon Hartley, [who] is a friend of both of ours here. He argues that the announcement effect really wasn't that big. So, maybe they were just trying to get the best financing deal. He looked at a time-event study. He didn't see a big difference in financing costs. How do you respond to that?

Miran: So, I don't think that the full effects of these things get priced in within a 30-minute window. It's complicated, and we've only recently come to understand what this means, and the idea that the market was going to fully internalize these ideas and rationally price them in a 30-minute window— I think that's just not how markets work. If you go back to the October-November QRA, the quarterly refunding announcement— QRA always takes place in two parts.

Miran: On the Monday of that week, they tell you how much they're going to borrow, and on Wednesday of that week, they tell you what they're going to borrow, what maturities. And that one, the Monday one, was in October and the Wednesday one was in November. If you go back to that QRA, that was considered to be a big dovish event for the markets, because the Treasury told you, "Hey, we're not going to increase the size of our coupon auctions, materially. We're going to keep the bill share roughly where it is. We're not going to reduce the amount of bills that we're borrowing."

Miran: That was a big surprise to the market. The market went into that with a huge short position, because it expected coupons to continue increasing. And so, investors went in very, very short Treasuries, expecting that Treasury was going to have to sell additional bonds and that the market would then be able to cover those shorts by buying from Treasury. Then it turned out that Treasury said, "Hey, not happening. We're not going to increase the amount of bonds that we're going to sell."

Miran: So, the market then had to go out and cover those shorts by buying from other investors, which drove prices up, because the additional supply didn't materialize. And so, everyone who was short had to cover, and then that drove prices up, and it was a giant short squeeze that lasted a month-plus. Those types of flows, that type of behavior, takes a while to materialize. It takes a while to percolate through markets. It's just not the case that I would really expect something like this to be priced within a 30-minute window. I just don't think that's how these things work, and I think that if you also look at studies of quantitative easing, I don't think that most people think that it's priced within a single 30-minute window.

Beckworth: Okay, so we've been talking about responses to your article. What have been responses on the other side? Have there been folks who are like, "Wow, this is incredible. We should look into this more”? Have, for example, Republicans on Capitol Hill shown interest in this or other commentators on Wall Street?

Miran: Yes, I think that there's been an enormous amount of interest. As I said before, Nouriel and I are hardly the first people to study this question. The suggestion that this has been a form of easing has been made by many people, both in markets. My friend Andy Constan has been making it in markets for a long time. Scott Bessent from Key Square has been making this claim. Senators Hagerty and Kennedy have confronted Secretary Yellen over the issue during Senate hearings.

Miran: We're hardly the first people to think about this idea. The contribution of the paper is to try and think about it a little bit more rigorously, [and] to try and put it into the monetary policy and asset pricing frameworks that would allow you to be quantitative about it and would allow you to say, "Hey, can we get a handle on roughly how big this effect is, and can we get a handle on whether it matters?" And before, I was saying that I think there's a lot of uncertainty in empirical macroeconomics, and that's true. Nevertheless, you could tell from the range of plausible estimates that it matters. It's enough to move the needle. And so, that's really what our contribution is, and I think that lots of people have appreciated that and been interested in it, and lots of people have been angered by the suggestion as well.

Beckworth: So, the story is not over, that this conversation will continue, maybe on Capitol Hill, maybe at hearings. Maybe it will take some form in the presidential debate. It will be interesting to see how [all of this] is manifested. Again, the title of the article is, *Activist Treasury Issuance and the Tug-of-War Over Monetary Policy.* We'll have a link to it in our show notes. Now, since we're talking about political implications and things like that, let's switch gears and talk about the presidential election coming up. I've seen some of your comments on Twitter. You provide a different perspective than other folks, and so, I think that you're a great person here to help me think through some of these issues, [and] particularly, what would a second Trump Administration mean for financial markets, for the Fed, for dollar policy? So, I'm going to just go through a list of items, and we've talked about these already—

Miran: Sure. Can I just say, first of all, that I'm not affiliated with the campaign in any possible sense. I did work in Treasury during the last administration. And so, I have an idea about economic policy, and I have my own views about what would be good and bad economic policy. So, I can speak to those, but there's no sense in which I represent any official voice or anything like that.

Beckworth: But I think it's good to have your voice on, because I do think that you understand where some of these proposals are coming from, unlike other commentators who don't always have that perspective. So, let's first talk about President Trump's call for a weaker dollar, and His VP pick, JD Vance, has also suggested this as well. So, this has gotten some play. I'm looking here at a Bloomberg article titled, *Trump Wants a Weaker Dollar, but Wall Street Doubts He'll Get One.* What are your thoughts on this push for a weaker dollar? What is he aiming for, and is it even practical and feasible?

Addressing Trump’s Push for a Weaker Dollar

Miran: Sure, so I 100% understand the desire for a weaker dollar. I think that it's very well-grounded in economics. I think that the economic relationship between the United States and China and the security relationship between the United States and China are the central questions of the 21st century. And there's absolutely no question that China has cheated and stolen and broken every rule of free and fair and open international trade that exists. If you look at models of currencies, there's, I think, two main ways of thinking about it. One is from trade, right?

Miran: The currency should move over time to equilibrate trade flows, and if a country has persistent trade deficits, the currency should weaken so that its exports become more attractive and imports become less attractive, and that should improve the trade balance over time and balance trade. The other way of thinking about currencies is as a financial asset. What are the investing opportunities? Are the investing opportunities attractive or not, and will capital flow into or out of a country? The problem is that, in China, these two things point in different directions.

Miran: And so, China runs persistent massive trade surpluses all on the backs of a multi-trillion dollar currency reserve accumulation portfolio designed to keep their currency artificially weak to support those trade surpluses. At the same time, on top of this extremely mercantilist export-driven model, they've appended some fascinatingly bizarre industrial policies and debt policies. And so, they will incur all sorts of debt to build cities that wind up being empty, but they created jobs for construction workers in the building of the empty cities, or factories that are only competitive in the world market at heavily government-subsidized prices. They have various reasons for doing these things, but the financial equilibrium in China is just like a total bizarro world.

Miran: And so, what you wind up getting is these financial models indicating that the currency can be too strong, but then these trade models show that they'd be insanely way too weak. And the dollar, of course, is the flip side of this on the trade side, because that's the important relationship, is the US-China relationship in this conversation about the dollar and trade flows. So, I understand completely why there's a desire to have a weaker dollar to redress the wrongs that China has imposed upon the US manufacturing and export sectors. That makes complete sense to me. Personally, I worry that, in a time of record-high deficits and persistently high inflation and concerns over how much US debt is running around, that if you embark on a policy of purposively weakening the dollar at this moment in time, right now, that you're effectively telling international investors, "Hey, don't hold dollar assets,” at a time when we're just creating record amounts of them, because we're running 8% deficits or 7% deficits.

Miran: And so, I worry that if you tell everyone that you're going to lose 15-20% on the currency side of all of your Treasury holdings, at a time that we're just jamming a lot of Treasury assets into markets because of the size of the deficits— and during our ATI discussion, this amount is less than it would be because ATI has reduced the amount of coupon issuance. But nevertheless, the absolute size of coupon issuance, not as a ratio but as just a dollar amount, is still quite large. It would be even larger without ATI. And so, I worry that you're telling investors, "Don't hold these dollar assets," at a time when we're just making a ton of them. That instantly sets the long end of the yield curve up 300 basis points, which, of course, would have significantly harmful economic effects. 

Miran: So, personally, I would worry that if you instituted a soft dollar policy right now, that it could be counterproductive. Now, that's not to say that it would always be the case, right? If you can succeed in reducing the deficit and reducing inflation— and those two are linked, because if you can reduce inflation sustainably, the Fed will cut, which will mechanically lower the deficit because of the lower interest expenses, and it will improve growth as well. So, if you can lower the deficit and you can lower inflation and assuage any concerns about the bond market at all, then I think you potentially have some scope for one of these policies, but it does require coordination. It does require coordination.

Beckworth: So, Stephen, how would we successfully coordinate with the rest of the world? Any ideas out there on how to do it?

Miran: Yes, so, like I said a moment ago, I think that you need some leverage to get them to agree to weaken the dollar, right? They're not going to agree sort of spontaneously, right? So, I think that that leverage probably comes through tariffs. But then once you start to weaken the dollar, you worry a little bit about the effects on the yield curve. Now, one idea that's been discussed, in a note from Zoltan Pozsar, is the idea that part of a coordinated accord to weaken the dollar could be reserve holders, other countries, terming out the reserve holdings at the same time. And so, if your worry is that telling people to sell dollar assets is going to push the yield curve higher, and that that's going to weigh on the economy, [then] you want to see if you can do this in a way that doesn't push the yield curve higher.

Miran: Well, how do you do that? At the same time that they're selling some dollar assets to intervene and weaken the dollar, if they term out their remaining reserve holdings by extending the duration of their reserve portfolios— so, hold less short-term debt and more long-term debt in their reserve portfolios— you can keep the yield curve relatively constrained at the same time that you're weakening the dollar a bit, right? Now, what that'll do is allow you to have the benefits of a weaker dollar without worrying that what's going on in the bond market, as a result of outflows out of dollar assets, is going to really crush the economy and result in bad outcomes. And so, that idea that Zoltan discussed, I think, is super interesting, and is super interesting as a possibility for how things might shake out. It does require coordination, though, so it does require bringing our trading partners on board with this.

Beckworth: Well, that's the tricky part, and what these articles bring up when they discuss this proposal is, is it even feasible now? Would Trump's other policies be consistent with this? If he's going to run budget deficits— even if the tariff that he's talked about goes up and raises prices, if interest rates have to go up to fight inflation that we have, currently, at home, it may not be feasible to actually devalue it. And some have talked about, "Well, we could use the Exchange Stabilization Fund," but is that really big enough to really move markets?

Beckworth: So, there is the feasibility question, and then there's the consistency one. Really, what this speaks to my mind is the fundamental problem [of]— the first part of our program, as well as this part— deficits, right? That's the key problem. When you solve that, some of these things become more tractable. I guess my question to you [is], since I think you're closer to the Trump world than I am, are people taking this seriously or is this just some reporters trying to get some clicks? Is this a policy that you think that they really want to pursue?

Miran: I do think that it's a policy that some people are very serious about, but you can't always have everything you want all at once. You have to wait until the moment is opportune. So, I would be surprised if they pursued it immediately, because I think that that would be problematic for the reasons that I just described. Now, that said, once you get deficits and inflation down, I could see them pursuing it. It also requires coordination with allies, with other people who hold large dollar holdings, to convince them to reduce the dollar value of their holdings. That cooperation is not going to be easy to procure. Now, one thing about President Trump is that the use of tariffs are negotiating leverage, right? Tariffs brought the Chinese to the table. Tariffs produced the Phase One trade agreement, which was then promptly forgotten during COVID. We had our hands full with other stuff. We were a little busy during COVID.

Miran: Then, the Biden administration just decided to not really care about it too much and to not enforce it. But the Phase One agreement was a trade deal that China agreed to, and they agreed to it only because the tariffs were so unpleasant to them. So, tariffs are a tool for procuring agreement on international policies that can improve the international trading system and the economy of the United States. So, while I would be surprised if the soft dollar policy were the first resort on day one of a potential second Trump Administration, it wouldn't surprise me if it were a policy that were pursued later in an administration after tariffs had produced the sufficient negotiating leverage, so that you were able to achieve the policy in a way that wouldn't be too disruptive to markets in a way that would be harmful for the economy.

Beckworth: Alright, so, that's interesting, that the tariffs, if anything, may be just a card on the negotiating table that the Trump administration may use to get other things accomplished, including this dollar policy.

Miran: They're a very effective negotiating tool. Other countries don't like it. We have the--

Beckworth: We're the biggest domestic market, so.

Miran: We're the biggest market. The US consumer is the end source of demand for the global economy. There are very few other countries that have robust domestic consumption sectors, and those that do, like France and the UK, they're just not the same size. So, we have leverage.

Beckworth: Let me speak to the other side of this proposal to lower the value of the dollar by the Trump Administration, and that is another proposal that's been reported. Again, I have an article in Bloomberg News that the Trump Administration— at least Trump advisors, this article says— want to discuss penalties for nations that move away from the dollar. So, on one hand, there's calls for the dollar to go down in value. On the other hand, they want to make sure that countries continue to use the dollar. Do you think that is a real story, a real belief within the Trump Administration? And two, can they have their cake and eat it too? Can they push for a weaker dollar and also keep people using the dollar?

Can We Weaken the Dollar While Still Ensuring Its Use?

Miran: Yes, absolutely. So, look, I really think that you have to ground this discussion in a much fuller and broader context of international geopolitics and security. The U.S. underwrites global security and global peace. We do so at enormous expense to the US taxpayer. The Triffin Dilemma, which is one of my favorite things in international economics, states that a country that's producing a reserve asset is going to run a persistent current account deficit.

Miran: The reason a reserve country runs a persistent current account deficit is because we export reserve assets, not for purposes of international trade, but for the purpose of being a savings vehicle for the rest of the world and to facilitate trade among third countries, separate third countries. The problem with running persistent current account deficits as the reserve asset is that that's easy when you're big relative to the rest of the world, but if your share of global GDP shrinks because the rest of the world grows and catches up to where you are, the size of the current account deficit that you have to run to finance global trade grows bigger and bigger and bigger, right?

Miran: So, the financial burden of underwriting global security grows as the rest of the world grows relative to the US, right? So, the US taxpayer isn't in a position where he can finance security for a perennially increasing global economy while we are shrinking as a portion of it. So, if the rest of the world can't produce alternative reserve assets, it's only fair to ask others to take up some of that slack too and share that with the US taxpayer. Now, being the reserve asset does come with this overvalued currency, which does have the effects on the tradable and manufacturing and export sector we discussed a moment ago, but it also provides the ability to implement security aims through the financial system, right? So, by using the sanctions and the sanction system that we control through our role as the global reserve asset and global reserve currency, we can achieve national security aims without mobilizing a single soldier, right? That's an enormous advantage.

Miran: So, we don't want to lose that, right? It's a huge foreign policy tool, huge national security tool to be able to use the reserve status of the United States assets and currency to accomplish national security goals, right? So, there is a bit of a tradeoff, and we need to find a way that will simultaneously help other countries share the financial burden of underwriting global security, because we just can't do it on our own as a shrinking share of global GDP. So, we need help. That help can come in the form of revenue from tariffs. That help can come in the form of a weaker dollar, making the U.S. economy stronger and improving the strength of the US economy relative to the rest of the world that way. If other countries try to avoid shouldering their share of that burden, [then] it's not going to be taken kindly. So, I would expect that there would be steps taken to try and prevent other countries from shifting away from the dollar.

Miran: I suspect that those would not be economic steps. I don't think that you'd sanction a country because it wanted to reduce the dollar share of its reserve holdings or something, right? I suspect that it would be done through tradeoffs in the provision of the U.S. security umbrella to the rest of the world. And I'm just an economist. So, I'm not some grand geopolitical strategist. I can't tell you exactly what that looks like or who's favored, but I suspect it would end up going that way. And, again, these are just my personal expectations for how things would go. I'm not any sort of official voice or anything.

Beckworth: But your point is— which may be shared by some people in the Trump administration— is that we want to have the world share in the cost of being this provider of security and safety to the world, but also be able to use our incredible dollar network around the world to impose financial sanctions. I think, on that latter point, it's going to be really hard to displace the dollar, [since there are] huge network effects already in place, but you want to have a balancing act, is what I'm hearing. 

Beckworth: So, Stephen, let's go to another area, then, that has been brought up, and I did see you respond to this, critically. So, back in April, there was a Wall Street Journal article, and the title of it is, *Trump Allies Draw Up Plans to Blunt Fed's independence.* So, basically, let's make Trump an ex officio member of the Fed, effectively, or have him review every decision of interest rates. And I believe that your response on Twitter was one of skepticism. “You’ve got to go take this story with a grain of salt.” So, help us understand it.

What a Second Trump Term Would Mean for Fed Independence and Crypto

Miran: Yes, I mean, look, I don't view that story that credibly. When something is supposedly so top secret that even the folks closest to the presidential candidate haven't even heard of that proposal, that, I think, sort of tells you something about the quality of the proposal and how far it made it through the policy process. So, I have no idea where that proposal came from or who sourced it or what its origin was, but I think that President Trump has been pretty emphatic in sort of saying that the plans suggested in that article were not seriously entertained by him or anyone else. I see no reason to question that. I don't think that it makes sense to make the president a member of the Federal Open Market Committee. I've put forward my own set of proposed Fed governance proposals, which we talked about a few months ago—

Beckworth: We did.

Miran: --With my co-author Dan Katz. That was not one of them, and if I ever come up with another proposal in the future, I don't anticipate that that will be one of them either.

Beckworth: Okay, Stephen, let's move on to another area that has garnered some excitement, and that is President Trump's endorsement or excitement around crypto. In fact, he has called himself the crypto president, if he gets elected again. And he was at a conference in Nashville promoting crypto. The crowds loved him. He seemed to warm up to the idea of a Bitcoin strategic reserve. That was a proposal from the senator from Wyoming, Cynthia Lummis.

Beckworth: But there's been a lot of talk about what this might mean, and here's my understanding of it. I'm not sure anyone really knows for sure how this would play out, but the idea, as I understand it— proposed by the senator from Wyoming— is that the US Treasury would take the gold that it owns, which is vastly undervalued at current market prices— issue some gold certificates based on the market value of the gold, so there would be appreciation, [and then] take those gold certificates to the Fed, and the Fed would then put dollars into the TGA, which we've talked about.

Beckworth: Then, the Treasury could go out and buy Bitcoin. I believe that it's 64 or $66 billion worth of Bitcoin spread over five years, so it's a gradual but consistent purchase, and it'd have to hold it for 20 years. The hope is that this would really light the fire in Bitcoin. It would send a signal to other markets. It would make Bitcoin this international form of money. As we know, Bitcoin really isn't money right now. It's more of a speculative asset, although the intention was to be an alternative form of money. And so, people are really excited about this, and President Trump seems to be excited about this.

Beckworth: My own hot take on this is that once the Treasury buys Bitcoin, that TGA balance is going to turn into reserves on the liability side of the Fed's balance sheet, which is going to be interest earning, and we're going to see more bleeding on the Fed's balance sheet, because those pay interest, but put that to the side. I guess, my question to you is, do you actually expect the Trump administration to proceed and push itself if, it were to get elected, as a crypto administration?

Miran: So, I'm not a crypto expert, and I don't listen to a lot of it, so a lot of what you just described is totally new to me and very interesting. From what I do know about it, I do know that it's not really the most liquid asset in the world and that I don't know, if you were trying to trade crypto, how much you'd end up moving the price level, to the extent that you really couldn't buy the sizes that you wanted. I don't know exactly how that works. I will note that the US government is sitting on a pretty sizable reserve of Bitcoin already because of all of the seizures that they've done in criminal activities, right? And so, arguably, we already have one. We already have a crypto reserve, right? The DOJ has one.

Miran: I don't know how big that is off the top of my head and how big you ultimately need a crypto reserve fund to be. But we already sort of, essentially, have a germ of one there. The aside that you said about Treasury reserves at the Fed is actually a super fascinating one. One point that was made to me by Andy Levin at Dartmouth is that, because the Fed does not pay interest on the Treasury General Account the way it does on reserves at the Fed, Treasury deposits at the Fed essentially constitute an opaque transfer from taxpayers to the Fed.

Miran: The taxpayer is issuing debt to fund the general account and is paying interest on that debt, and then those reserves are being placed interest-free at the Fed, which is then not paying interest on those reserves to help recapitalize itself after its losses it's experienced since doing, probably, too much QE. Let's be honest, right? If you change that, so that Treasury starts getting interest payments on its savings at the Fed, there's all sorts of interesting fiscal monetary interplay on this subject.

Beckworth: Absolutely. Yes, Andy Levin is really good on this. So, the point you're raising is that even though the TGA is not paying interest on Treasury's funds, there's still an implicit cost to it, and I guess my point is more the, if Treasury were to go buy Bitcoin from you and me, then it would turn into the bank money, which would then turn into reserves, and then the costs would become explicit, we would see. So, I'm sure that the Fed is not excited about this proposal, because the Fed is the fiscal agent, the bank for the Treasury. It has to do whatever the Treasury asks it to do, as long as it's legal, and this would be legal, so, very fascinating. It would be interesting to see what actually happens with it.

Miran: One other interesting point on this subject, to tie it back to ATI, is that the higher the bills issuance is, the bigger the general account needs to be, because [of] the greater the cash flow needs in the short term, because you have more short-term debt maturing.

Beckworth: Good point.

Miran: And so, as you tilt the duration profile of issuance towards the front end of the yield curve, you've got to keep the general account bigger in overall size, which then increases the size of these opaque transfers to the Fed on behalf of the taxpayer.

Beckworth: Okay.

Miran: Just to tie it all together.

Beckworth: Alright, well, Stephen, this has been a great conversation, and thank you for joining us today. Again, your paper’s title is, *Activist Treasury Issuance and the Tug-of-War over Monetary Policy.* We'll have that listed in our show notes. Thanks for joining us.

Miran: Thanks so much for having me. It’s been a pleasure.