Transcription
Okay, we are here in Washington, D.C., in front of the White House, having spent the afternoon with our friend David Saxs, our friend Elon Musk, and others. We are here to learn about the debt, the deficit, what’s going on in D.C., and we have an incredible interview lined up with Scott Bessant, Treasury Secretary of the United States. It was amazing, and it’s been an amazing afternoon, and we’re really looking forward to it. It was amazing. Well, this is the pre- the intro to the video; it will be amazing. It’s not the pre- let’s just… What the… We’re going to pretend it’s the pre. It was amazing. It will be incredible. It was incredible. But how cool is the White House? And here’s a bell. I’m pretty sure… I’m pretty sure the bell… I cannot even describe to you the day we had running around; it’s incredible, running around room to room in the White House. One of the best days of my life. It was one of the best days of my life. It was incredible, incredible. I think this bell is probably pretty important. Can you guys get a shot of this bell? I don’t know what it is, but it’s really important. Yeah, the White House—the people—to a one, super kind, super open, super curious. I mean, did you felt it? You felt accepted. Yeah, I felt… But I got free soda! They have a soda machine where you can make any Coca-Cola flavor you want in the White House. It was pretty cool. I took some uh… hummus. I wrapped it on Creeper’s face. I punched him in… It was a cool afternoon, and uh… this is… what is this? The East Wing of the White House? And we took a walk from the West Wing all the way over to the East Wing, to the portico, and then we… we snuck in… Well, we didn’t sneak in; we walked in. And then we’re walking around the East Wing. We went to all of the private rooms. I got great photos. We’ll… we’ll… we’ll slice them into this video. And then some Secret Service dude comes up and he’s like, “What are you guys… What are you doing here? This is the residence of the president; you have to get the… out.” He’s like, “You need to go downstairs now.” So we got kicked the… out, but it was an incredible um… incredible tour. Super great. Yeah. Anyway, we’re excited for this interview with Scott Bess and hope you enjoy it. All right, besties. I think that was another epic discussion. People love the interviews. I could hear him talk for hours. Absolutely. We crush your questions in a minute. We are giving people ground truth data to underwrite your own opinion. What do you guys think? That was fun, pal.
Well, today’s a really important day. We’re joined by the 79th Secretary of the Treasury, Scott Bessant, and this is an opportunity that we wanted to take as part of a longer-form way of explaining to people not just how the economy works, but in a little bit more detail, where are we in this moment in time? Where are we with deficits, tariffs, the budget, economic, monetary, fiscal policy? How do we make sure that we all understand the plan to make America great again? So Scott, thank you for joining us.
Good. Thanks for having me. I actually want to start with… let’s go back in the way-back machine. So South Carolina, your father was a real estate developer. Tell us where the passion for finance came from.
Uh, well, um… I don’t know where finance in particular came from. As you mentioned, my dad was a real estate developer, and he… he was kind of boom-bust kind of uh… guy. So I think that’s where my passion for risk management came from. But uh… I… I was… I was very fortunate. Went to Yale. Wasn’t sure what I wanted to do. In 1980 when I got there, probably you all can imagine this, but uh… there used to be these things called punch cards, and we just… the Yale computer system just gone from punch cards to screens. I was going to think of being a computer science major, maybe a journalist, because people actually used to read newspapers. So punch cards and newspapers from the way-back machine. Uh, and I… I got an internship at… just for an individual, and he taught me the investment business really well. And I… And who was that? His name is Jim Rogers. He’s famous. He was George Soros’s first partner. Uh, he uh… had just completed an around-the-world motorcycle trip and written a book called Investment Biker, right? And fa- fascinating guy. And um… I did the investment business, and I thought, this is really what I like, because it’s quantitative, so I get to use my quantitative skills, but you’re also constructing a narrative. Um, and it’s also like human emotions. And you were trading equities, bonds, everything, currencies.
Uh, well, I started out with equities, and I… I did that for several years, and then I actually ended up at Soros Fund Management. I worked for a fellow who’s my mentor, Stan Draen Miller, who’s incredible. But I… I think he’s on… he’s more than 40 years now, never a down year. And you know, when you’re sitting next to him, I think, what am I doing all day? And notorious for going all-in several times in his career. All in, all in, all in. And uh… only when he’s… he’s right.
Yes. Well, I… but he… he is the best at changing his mind, that’s right, of anyone I’ve ever seen. So Duck has that famous adage, invest then investigate.
Well, he… he has several. And… and I’m trying to get him to write a book because he has so many of these great things.
Uh, maybe you will press him.
Um, but invest, investigate. It takes courage to be a pig.
Right. Right. So uh… and then I… I was hooked on markets because again, it was everything; it was quantitative, it was qualitative, and it’s real time. You get real-time feedback all the time, and you… you’re could have a long-term view, but then you’re trying to gauge the short term against that. And you know, I… I loved it. And uh… for 35 years I’ve got into… I did what’s called macro investing. So uh… eventually I was trading currencies, bonds, commodities, the equities, uh… some credit. And I got to travel around the world meeting leaders and trying to figure out what the next move was in policy.
I think this is important because I’ve spoken with folks who um… trade in macro, and a big part of the… the role of being a macro investor, macro trader, is really knowing where central bank action is going to be, really knowing how government bonds are going to move, and spending time with economists, not just central, but around the world, and learning a little bit about how capital is flowing all over the world. Is that kind of the right way to describe that role of being a macro investor, just for folks?
Yeah. You know, it’s… it’s a lot of… it’s a lot of that. There’s another great macro investor called Bruce Ker, and he had this saying that he said, you know, “I succeeded because I could imagine a different future and believe it could happen.” So the key is to believe it could happen and then manage the risk. So you know, could you imagine like what would happen if the iron curtain came down? What would happen? I mean, you all do it as venture capitalists, but like, you know, how could the world live in a different state?
Okay. Well, let’s hold that idea and double-click for us to ’92. It’s probably one of the most famous moments where the broader world at large, metro trading, and this is really where you and Duck and Soros basically broke the back of the Bank of England, and it’s really an interesting window into assessing all of these things. So can you give us the conditions on the ground at that moment and what new reality you saw for England? And then it would be great from there, we’ll contrast and compare to America today.
Good. So uh… it… it’s a great historical example, and it also kind of brings in three dimensions. So I… I was the analyst, Stan was the portfolio manager, and then in a way, George was the risk manager. Okay? So I… I was running the… the UK office. I was on the ground in the UK, and I… I had this light bulb go off. And you know, I thought kind of the fulcrum thought or like my differentiated view was that the UK had just had a big housing boom, and UK mortgages at that time, they didn’t have long-term mortgages; they were all floating rates. So if the Bank of England raised rates on a Wednesday, the… your mortgage went up on a Friday. Yeah. Uh… the UK had hooked into something called the exchange rate mechanism; they had to balance versus the Deutsch mark; they had to stay within a band. Um… I noticed that if they raise… or I thought if they raised rates to try to stay in the band and protect the currency, it would be unsustainable because British homeowners would get bankrupted. Uh… Stan’s great uh… feat of analysis was figuring out that gosh, the… these bands set up this incredible asymmetric bet because I can push them up against one side of the band, and their mandate is just to push me back to the other side. So we just lose two and a half percent. And um… you know, Stan tells this great story of like telling George Soros, oh, well, you know, here’s what I want to do, and he says he told him, and George says, “Well, how much do you want to do?” And he said, “Probably 100% of the fund.” And he said Soros gave him this really sour look, and he thought that he had said something wrong. Why wouldn’t you do three times that deal? So uh… but anyway, it was um… we pushed them against the… the ban… the Bank of England… the British government uh… had to buy this unlimited amount of pounds, and they started raising interest rates, and this was September of 1992, and uh… you know, eventually they just weren’t able to sustain the… the pressure from the high rates and came out. And then the asymmetric risk-reward was we made about 20-something percent in a day.
Yeah, right. And back to what was really Stan’s genius is… I don’t know if either of you play backgammon, but in backgammon there’s the move after the move. And so Stan… we’d made all that money, and we were kind of euphoric. Okay, now what? Because there’s going to be the trade after the trade. So we made that much in a day, but then it was actually the trade after the trade, and this isn’t well publicized. I think we made another 20% during the rest of the year.
Wow. So in that moment, what you’re really observing is that the real economy is somewhat dislocated, maybe meaningfully dislocated from the financial economy in your operating, and I think you’ve said this now many times, and you’ve basically used the terminology, the Main Street-Wall Street dichotomy. How do you observe the moment in 2025, the… maybe what rhymes with the early 90s or other periods where you’ve been trading actively?
Well, look, I… I… I think it goes back to something that’s unsustainable is unsustainable. And um… one of the reasons I’m sitting here now is uh… about 18 months ago, I went to see President Trump. I’d known the Trump family for 30 years. I’d never known the president that well, but to tell him that I want to get involved in the campaign because I was so alarmed with what the Biden administration was doing with the defic… debt and deficit, endless stimulus, endless spending, endless spending… but endless spending when we were in like solid economic territory or not in a war, first time… first time ever. And I… I thought it was very cynical because I… I actually thought, well, we’re going to spend, spend, spend, and then there’ll be no choice but to raise taxes. So you’d go into this equilibrium that you could just never get out of, and you become kind of a European-style social… social democracy. You know, the malaise. And you know, I… I also think that we’re very cynical on immigration, right? Because if you take kind of the stated number, 12 million, the president’s number, 22 million… I don’t know what the truth is… kind of lean toward the president, but it was… oh, we’re going to let all these people cross the border; you can’t ever make them… problem’s too big to make them go home. But I like to stay in my finance lane. So the finance lane was… we’re going to just go to the point of no return and kind of inflict these… the progressive financial values on the country; there’ll be no way out. Very meaningful wage suppression in that period, and you had an equity market that was incredibly well bid just because the money supply was just always there.
Well, it was always there, and you had these distributional aspects because back to your question, Wall Street versus Main Street, that it was driving me crazy when Vice President Harris said, “I’m going to fight for the middle class.” And she’d eviscerated the middle class, or… or these policies, inadvertent, intentional, had eviscerated the middle class and really the bottom 50%. So you… we’re… we’re in this uh… because purchasing power goes down, inflation went up… well, per… if you didn’t have assets, right? So uh… that’s really important. I think people don’t understand this, that if you had stocks, if you had assets, your assets inflated, but if you didn’t, the cost of everything inflated, but you didn’t have the ability to purchase because your wages don’t go up.
Yeah, and they… not only did inflation go up, but if you look… Jason Trinard has this thing, I think he calls it the Everyman Index, and um… so CPI went up about 22 during the period, but the Everyman Index was up over 30, 35%, because the… the bottom 25%, the bottom 50% of wage earners have… have a different basket than we do, and it inflated much faster… percent. Used car prices, around… car insurance, car insurance, rent, groceries… and you… like… not only is it unfair, but it’s just unstable, and great civil… civil issues, societal issues. And so… yes. But sorry, as you guys got into looking at this… and I… remembering and talking about this in the summer of ’23, I think it was… or 23… yeah… and what was the point of view on what should have been done at that point in time, and then how much farther did it go? How much longer did it last?
Well, I… I think what happened… the Democrats will tell you that the big spending bills were needed for rescue. Yeah. And I would say in March of ’21, the economy didn’t need rescue; it was already in recovery, right? So these were rescue-size packages, and even Larry Summers… I remember there was a great debate between Larry Summers and Paul Krugman, and Summers, I think, said, “Look, this is at least 900 billion, a trillion, too much.” And the Federal Reserve was… ve… summer of ’23… 22… Federal Reserve was very slow off the mark. And you know, we… we ended up… and you know, again, imagine… top 10% has assets; stock market is flying; you’re in the bottom 50%; you have no assets, but you have debt. Yes. So you… credit cards are up; u… mortgages… impossible to buy a house… house prices had gone through the roof due to COVID. So it really did like end the American dream. And… but we… we’ve been suffering these distributional effects.
Scott, what… what is the American dream today, do you think?
Uh, look, I… I think the American dream is what it… what it’s always been. But after World War II, I think 90% of American families… uh… the… the children made more than the parents. Now… now I think it’s 50/50. But you know, it’s… to… to own a home, it’s financial security; it’s to uh… some… some level of comfort; it’s purpose in your work; it’s the… to be able to support your family; uh… to be able to have choices; to not have to work two… two jobs. I made a remark at the Economic Club of New York last week… two weeks ago, and Mike Pence decided he was going to troll me, because I said the American dream is not built on cheap goods, right? And he said, “Well, yes, it is.” And you know, I… I just say, “Vice President Pence, this… let them eat flat screens economic policy that doesn’t… isn’t what people want; they… they don’t want the bobbles from China; it’s like the old… they want progression; people want progression. I… I mean, I remember reading… there’s a uh… I think Jonathan Height had some work on this a long time ago where happiness is measured by your change in net worth or income per year; it doesn’t matter what your absolute levels are, by all these socioeconomic kind of surveys that they do, that feeling like you’re having some progression in life is what folks are looking for. And I wonder whether solving for that… we created a system… and I… I… I’d love your point… your… your… your read on this that we said everyone should own a home; that’s the American dream. And in order to do that, people put most of their net worth into a home—60%, I think, of middle-class net worth is tied up in their… in a single asset. And then in order to get them to feel like they’re progressing, we’ve created a system of loans and a system of kind of economic and fiscal policy that ultimately drives the value of the home up every year. Now we’re kind of in an unsustainable housing bubble. Can most people… can’t even afford to buy a home. What did we get wrong there, and how does that affect what the American dream should look like going forward?
Well, I… I think a lot of it is scarcity because what… what you’re talking about is like out in San Francisco, super tight zoning laws. So there… there’s scarcity for home… if… if you think like Ivy League education… all of a sudden you gave all these people access to Ivy League educations; you brought in international students, but the… the number of degrees awarded at Harvard, Yale, Princeton probably hasn’t changed very much since the 1950s. So you… you created just this demand for scarce things, which leads to this anxiety. Um… but you… you… you also created, I think, a sense of hopelessness through… cuz if you’re… I can’t access… I will never get… I will never be able to pay down my student loan; I will never be able to afford a home; I can never see my income growing to give me access there. Yeah. A… and um… so is that… is that a dereg… solution? Is that the…
Well, I think the first… the first part of it is it’s a data problem because in order for the government… I mean, the one thing that struck me about… I think this Trump 2.0 administration is… I think you have a better beat on the fact that this data is not as reliable as other administrations would say they were in order to do whatever it is they wanted to do. Anyway, so it’s sort of like, let me just find the data that justifies what my action is. Um… and part of why you can’t, I think, tell this story is… do you trust the GDP numbers? Do you trust non-farm payrolls? Do you think these are reliable enough for you to act on behalf of the United States?
No. Look, that they’re subject to big revisions o… over time. And I thought one of the big mistakes the Biden administration made, and thank goodness they made it, was they refused to… they went with the numbers, not what the American people were feeling. They said, “No, it’s a vibe session, and you really don’t understand how good you have it.” This has happened… this has happened. When… when in reality, I was on Meet the Press yesterday, and there’s something that said, “Well, the American people don’t believe Donald Trump’s doing enough on the economy.” And I told the host, I said, “You know, the one thing I’m not going to answer is that they don’t know what they’re talking about; I have to have respect for how they feel, and then we need to go back and look at what is causing this anxiety.” So you… that’s what… that’s what we’re going to do. So let’s peel the onion back. What do you think is causing this anxiety? Where are the levers that maybe the federal government can control in releasing some of the pressure, and what are more market functions that just need to clear up some of these dis…
Well, look, I… I think there… we… we’re… we’re trying to do three things, and I… I think you may have talked about it last week… week before… the… the three legs on the stool… three legs in the stool… and… and from… from the outside that you intuited that very well. I… I would do just a little refinement on that.
That’s what I was going to ask you. Yeah, just tell me where I was right and wrong. But the… you were adjacent to everything. Okay. So uh… on… on one uh… we are trying to bring down this massive federal debt… cut the spending… but in a controlled way because you can’t do it all at once. I… I don’t like to repeat private conversations with the president, but I’ll repeat this one because I think it’s very… the… it really illustrates where his head was at. First time I went to… SE… into… saw him at Mar-a-Lago, and… walk in the door and said, “Scott, how are we going to get these debt and deficits down without causing a recession?”
Fantastic. And that’s exactly where we are now. How are we going to get the debt and deficits down, not cause a recession? And I said, “Sir, um… when you win… you didn’t get us here; we’re going to set a goal by 2028; we want to get back to the long-term average; we’re going to deflate it slowly; long-term average being about 3% deficit to GDP… about three, three and a half percent deficit to GDP. And you know, like I keep saying, the US… we don’t have a revenue problem; we have a spending problem because we are averaging right about 18% revenue, and I’m talking about federal government… federal government only. We’re at about 18%, and Biden administration blew it out… blew the spending out to 25. Normally it’s about 21, 21 and a half. We have the 2% inflation… nominal GDP… it take… real GDP is 18, so we get nominal GDP 3.8, and it all works out. Yeah. And it was very… I had uh… one of the heads of one of the Singapore sovereign wealth funds here last week. Guess what? Singapore spends the… in terms of spending to GDP… deficit 3%. Uh… they… they have no deficit, but they… they spend 18%. 18%. 18%. And he said, you know… he said, “We have a lot in common with the Trump administration; we like small government; we don’t like immigration, illegal immigration, and we like personal safety,” which I thought was very interesting.
Sorry. So let me just um… understand. So deflating government spending is key, but the big challenge has been that we have now accumulated 30-some odd trillion dollars nearly of debt, and the interest on that debt has started to grow. We now have to pay $1.2 trillion in interest payments per year, so that starts to consume more of the spending budget that we have at the federal level, which means we can spend less on the rest of the federal government’s programs, meaning you have to cut a lot more than you otherwise would have, which is what makes it so difficult and so painful. Is it realistic that you can get Congress to act in the way that Congress needs to act to get to the level that we need to get to given the high interest payments and the high debt level that we have?
Yeah. And w… with this Republican Congress… uh… and look, I… I… I’m… I’m not sure what a deficit hawk is, but I… I think I… I would qualify as one. And uh… a lot of the Republicans… I actually have to coax him… you can’t do this all at once. I… I was with the… one of the congressional budget committees two weeks ago, and you know, they really want to cut this fast, and I said, “You do realize every 300 billion we cut is about a percent of GDP, so you… you could…” So we… we are trying to land the plane, right? Uh… well, and the plan… because that… that’s really what I’d like to talk about today. I think there are three plans here, but plan one… we’re going to delever the government via the spending. Uh… we are also going to shed excess labor from the government. So on that side. And then on the other side, we’re going… we’re going to deregulate the financial system. The regulated financial systems really been what I call a regulatory corset for a long time, and as we deregulate that, then the private sector can relever. So government deleveraging, private sector releveraging, and the employment or the folks who lost their government jobs will be picked up by the more productive… but this… sorry… this is really important, and I think this is the most critical thing. I’m really glad we got the chance to talk today because I hear so much about the conversation on any one of these topics independent of the others, and there’s a relationship between them that I think is critical to understand on how this administration is aiming to drive an economic recovery that is not inflationary, is sustainable, and also will allow people to have the American dream in a way that they can’t have access to today.
Yeah. And the… so part of fixing the affordability crisis is what can… and we… we come back and talk about it if you want, but what… where can we get prices down? You know, like… eggs are easy… or… but the… the other side of getting prices down is getting real wages up. So on getting real wages for working people up, it goes back to the Main Street versus Wall Street, and the… the second plan is to… the reorder the international trading system and bring manufacturing jobs back to the US, and you have… reinvigorate the… the middle class because again, through tariffs… well, to… to use tariffs that we’re needed to bring other countries uh… into line and to create an economic incentive to onshore for some industries and some supply chains.
Well, so there… there’s tariffs. Then I think there are three other things we can do which are the centerpiece of the administration. We can have the low and predictable taxes. We can substantially uh… slash regulations because regulations are the equivalent of… that’ll drive investment dollars… private investment dollars… and predictability in regulations. Uh… and then uh… cheap energy. Right. And… sorry… what… what is the relationship between the tax cuts and um… the getting to 3%, three and a half percent deficit as a percent of GDP, especially because the CR unfortunately gave folks a get-out-of-jail-free card because we kept the… you know, $2 trillion cap for the next… alone.
Uh… yes. Uh… but you got to have… we… I… I been in this building… I think this is my seventh week… President Trump been back at the White House for eight weeks. So you actually do need time. So what… a lot of people who weren’t happy about the CR, but shutting down the government wouldn’t have been productive either politically or economically. So… sorry… does… does um… tax cuts get made up with tariffs or does tax cuts get made up with cutting government spending?
Well, tax cuts will… so tax cuts and deregulation will uh… change the growth traje… uh… if trend line has been 1.8… eight… if you can move the growth to three or above, right, then you really change their trajectory. And if you can um… keep expenses flat or do the unthinkable and cut expenses, then you can really…
So this is important. So sorry… government revenue as a percent of GDP can go lower if you have lower expenses and a faster-growing economy.
Yes. I think that’s like really important for folks to understand that relationship. And so in isolation, tax cuts might reduce revenue, but when done with reduced government spending and deregulation and a reordered international trade model, you theoretically will accelerate economic growth in this country, increase government revenue overall even with a lower tax rate.
That’s kind of a theory, right? And… and you know, I’ll… I’ll tell you… shame on me… I… I was in the investment business 35 years; I… I talk very confidently that CBO scoring says this, and it turns out I… I didn’t know… you know, what about CBO scoring… like when you’re on this side of the wall, you realize how crazy it is. It’s crazy. So…
So just quite a gameable system. It’s a…
Yeah. It… it’s very gameable. And one of the most gameable parts of it is in normal CBO scoring that… so we… we’re calling… we’re saying that we want to renew the tax cuts, right? We’re actually just renewing the current tax regime, right? That… but somehow a… after they expire, then they go back to the…
Old rate spending never changes; like spending, it never has to get renewed. And I think when, when I look and think about a mental model and how does systems work, how do they break down, one of the things that has caused this spending bulge is this idea that you never had to rescore spending. Oh, it's nuts, and the incentive model is: when you have a constituency that you represent as an elected representative that's earning from that spending, they're telling you, "If you want to get reelected, make sure my earnings stay and get me more." And then every year you've got a set of elected representatives whose, you know, primary objective in a democratic system is to go in and get more money for their constituents. How do we solve that fundamental problem? How do you think about that? Well, you got to deal with a second--do you actually think that that's true? Do you think that most politicians are here to just get money for their constituents?
Good question. Yeah, yeah. I mean, it's it's OPM, it's other people's money, but they--Danny DeVito had that movie. Yeah, but but you you would regard that as being a good politician, like you brought home the bacon for for your district, that because the the CR, a lot of people didn't like it, but one of the things that a lot of people didn't like: there were no earmarks in it. Like, how dare they? Totally the Christmas tree bill that kind of shows up at the 11th hour where everyone gets a little bit. Yeah, can you talk about--so we talked about this deregulation as this one very important lever, right? So how do we add 50, 100 basis points of growth back in? We're going to do it through deregulation. How do you undo the financial corset, as you said? What are the what are the sort of three or four big ideas that you'd like to affect?
Yep, so um, we are reexamining all all the bank regulations, and why why are they there? Why why do banks have to--I can't remember, it's five or 7%--to hold treasury bills? What are the regulations? Why do I--I had a whole group of community bankers or small banks here last week, and why do they have to hold the same amount of capital that JP Morgan and Wells Fargo and City hold when they don't have the complexity? They don't have--why do the regulators--one one of these small bankers said, "Well, you know, Bank America does it this way." Well, Bank America has a trillion dollars in deposits. Yeah, this was $183 million. But when you look at the regulatory overhang of some of these things, Basel 1, Basel 2, you have all of these frameworks, and then as a result, all these organizations that are running around trying to help you administer this complexity, all it does is just lower economic activity in the end. Well, and and but it's--I know you all talk about incentives a lot. Back to incentives: what's a regulator's incentive? Just to keep like keep tightening the corset. They don't care about growth; they they don't care about the uh common sense. Turn off turn off every risk; it's their job. If you had to create a metric then to say, okay, here's how we're going to measure this undoing of the financial corset, is it sort of the lending velocity by private lenders so that the private releveraging can occur? Is that a good way to think about it, or is rates a way to think about it?
Well, it it doesn't have to be rates, but if if we do all the things I was just talking about, if we deregulate, if we have cheap energy, the I--if we shed excess labor from the government, if we get government spending down, then rates, inflation should come down, rates should come down. Yeah, uh, but the on the question of how are we going to measure it, I I don't have any problem with private credit. Yeah, like I I actually think it's exciting. The dynamic--it's dynamic; it meets the business where it is. Yeah, I agree. And the the strength of the US financial system is the depth and now the breadth, but you you could see that what's happened: that so much lending is being pushed outside the regulated banking system; that tells you it's overregulated. Yeah, right. So now um, once we--so one test will be how has bank lending, especially small regional, small banks, community banks, that come undone, and you--these small banks, the small banks and community banks, they're 70% of a loans, they're 40% of small business loans, and that that's one of the reasons Main Street's been stifled. So can you talk about then how you will work with the Fed in sort of the change of all of this financial--you need to, and do you need to work with Congress too to make these changes? And also just generally maybe your thoughts on just the Fed in this process of helper foe, like where where do they stand?
Well, the the Fed, I 100% support the Fed's autonomy in monetary policy. Yeah, I don't agree with it all the time, but right, that how it is. It's how it is; it's how it is. And um, so and and I've said I won't comment on perspective policy; I can talk about their mistakes in the past, which have been numerous, but I I think like like with with with any system as as it expands beyond sort of the core uh, I I actually think that some of the things they've done in regulation, some of the things they've done kind of climate and DEI, some of the things maybe even non-standard monetary policy uh threatens their independence, and I want them to stay strong, robust, and independent on monetary policy. On regulation, I I think that they have they have been much too harsh on especially the smaller smaller banks, medium banks. U so there are three main bank regulators: there's the Fed, off office of control of the currency, OC, and the FDIC, and then there other regulators, the SEC, CFTC, but the banking regulators at the federal level are those three. Here at Treasury, we have something called FSOC, and financial stability oversight council, and um, I chair that, and via that, the president's working group uh which is another convening mechanism that I I plan to just keep pushing for, you know, safe, sound, and smart deregulation. Like, why are we doing this? Why are we doing that? And you again that there's a capital charge to banks for buying treasury bills. Totally. So I I actually think there's a chance that if we take--it's it's called the supplementary leverage ratio--if we take that away, it's becomes a binding constraint on banks, we might actually pull Treasury bill yields down by 30 to 70 basis points. Every basis point is a billion dollars a year. Can we talk about that for a second? So I think and I' I've said this for a year probably, but the one of the biggest mistakes that I think Janet Yellen affected was this continued issuance of money on the short end of the curve to finance these deficits, which gives you--you inherit an incredibly difficult challenge. I think over the next nine months, I think there's like nine or 10 trillion that has to get refinanced. Do you want to talk about that?
Yeah, look, I I I thought that it that when rates were low, you're supposed to term out rates, exactly, and in instead the the Treasury for the past few years has pulled rates in, and I think part of that was to keep rates lower that they they changed the issuance schedule when rates move back up towards 5%. I I um have maintained that policy, but I'm maintaining it because let's go back to David's question of when when are you going when are we going to see the results from this, the getting the government spending under control, and I don't think the markets recognize it yet. Like like you know again if we do--they don't they're not sure what to believe. I mean, we hear this commentary a lot like what do you really--what we people--there's just a lot of uncertainty; there's a big spectrum of opinions there. Yeah, like like the the central value tendency--you're right, the central value tendency--like what's the center of it, because the the range of outcomes is so so broad, and you know like we know we know there's a problem there; we know there's waste, fraud, and abuse. Quantify it, quantify it. So I I think as we are more able to quantify it, we will get credit for it. So let me go back. So outside of waste, fraud, and abuse as it's termed, I want to go back to the question I asked earlier: how much do does this administration need Congress to act to get to 3 to 3 1/2% deficit to GDP, and how what's your read on the Congress and how willing and able they are to take the action that's needed here?
Yeah, I I I think there are a lot of headlines, especially after the CR, about the Democrats being in disarray, and media like media likes to write about disarray. I I think the under or untold story here is Republicans have, for a change, actually been very disciplined, that and I think a lot of that--President Trump is kind of shephering the party, shephering the movement, because imagine he said, "Oh, that Mike Johnson will never get reconciliation instructions out of--he's got such a slim majority." Well, he did it; he did it. Yeah, that he'll never be able to pass a clean CR; he did it; he did it. So let's see what happens with the budget. So we need Congress to be our partners on the budget; they're very engaged, the House and the Senate, that everybody recognizes that if we don't get this done, it's going to be the biggest--it's past fail; it's the biggest tax hike in history. Where does Doge come in? Well, Doge, that's the the cost cutting, and it's the first time we've really ever had business people looking at it. The this Clinton Gore Commission that we hear a lot of like or hear a lot about, I I think it was a bunch of business school professors, and but here you've got real CEOs; you got Lutnik, you got Bergam, you got Elon. I mean, this cabinet is stock full of experienced operators that can go in and identify where there's an opportunity for saving the taxpayers money and still getting the results.
Well, it's that, and we we had this crypto council meeting the other day, and I was sitting as looking--it was myself, Secretary Lutnik, and Kelly Laughler. Everybody was a market person, like forget business, like we and but with Doge, that I am completely aligned with what Elon's doing, and everyone says, "Well, do you have to do it so fast? You have to do it." I I like I said, I've only been in in this business for 7 weeks; I've only been in DC for 8 weeks, but the thing I can tell you is if you don't move fast, the vested interest will weigh you down, like the the the quicksand will come up, or the claws get the claw. Yeah, everybody's got lobbyists; everybody's got--I mean, think about it: within a 10 10 mile radius of here, 25% of the GDP of the US pulsates through here, pulsates every day, and everybody wants to just skim a little. I I said to uh Elon, and we were in a meeting, and I said, "You know, people are mad at you 'cause you're moving their cheese." And he goes, "It's not their cheese; it's the American people's cheese." 100%. Every dollar spent goes into someone's pocket, and that person's going to fight tooth and nail to get that dollar to keep flowing into their pocket, and it's a it's a it's a very--there is no winning in Elon's role; there's every single time he takes action, there are people that are going to come after him, that are going to come after the administration; there's no situ--and and obviously gets recast, reclassified in the media as being something different, but there's nothing but downside as you make these changes to individual organizations that participate, and then it takes a while for the flow of that money to find its way or those individuals to find their way back into the productive private economy. That's where I think there's a big gap and a big challenge in the perception of the actions that are going on with the changes right now is everyone sees the cuts, but they don't see the benefits, and that's nine months, 12 months, 15 months down the road, and that's a really hard thing to reconcile for most.
Yeah, and I I'd say there are a couple of things too is one like everyone's hearing cuts, and they think they're government services. That's right; that's right. And they're not. I I keep saying it's the Department of Government efficiency, not government extinction, not government elimination. And can we make it run much better with fewer people, with fewer costs, and you--I don't want to demonize any of these federal employees, 'cause I tell you in this building, I've been so impressed with the quality of the the people. I I would have hired them in my private firm; they are great public servants. I need you to stay for the weekend, and I need a 25-page memo in 72 hours that super high quality. I I actually think what when when all this is done, there there will have been two big savings: one will been on these contractors. Sure, which totally--we were just talking about this; we were with Elon just now with an incredible stat. He said I'm not going to name the firm so that I don't want to, but he said this one organization gets 98% of their revenue from--it was in the newspaper, so we can say it--it's Booz Allen. We were talking about this, and then but then we were going through the numbers on the other firms, and it's just the whole thing--what kind of risk management is that, by the way?
Yeah, yeah. But but it tells you that that they didn't manage the risk. That's right; tells you how entrenched they believe they were and how good it is for them and how good it is--you're absolutely right. And and the way the way the grift works, you can only have six-month contracts, but there are people who have had 40 six-month contracts. Incredible; like they've been in situ for 20 years. Incredible. And it's this whole--I'm so happy there is transparency and visibility into this. If for nothing else, the administration providing this level of insight and data I think is so important for taxpayers and individuals in this country to see, to recognize, and importantly, to understand just how much of this grift is going on. It's frightening, and I'm glad that it's like being addressed, and and the American people can see if they want it. So this is what I was going to ask you: let's just say that some somehow the Borg slows this whole thing down, you know what people say is that the conventionalism. Well, then the only place to look will be things like entitlements. Good question. Yeah, do you do you think that that's true?
Well, I I I think that now that the cat's out of the bag that the American people are are not going to stay with this is that you may maybe again here may maybe in the Northeast Corridor um there's some push back, but when I've seen the polling data and the rest of the country does not want this to stop, and this administration's not gonna stop. Yeah, the courts--they're trying to throw sand in the gears with the courts and how some judge can say, "Oh, all these workers have to come back in." And but I I also think we've moved really quickly now. I think when we start putting out some of the anecdotes and the the messages and talk about what's happening, like I I'll talk about it; I I'll be talking about it soon, but there there's one very large department that everybody deals with on April 15th that their help desk is fully staffed 24/7, 365 days a year. They have the same number of people on Christmas Eve as they have on April 14th. Wow. This is this this, by the way, is something that I've seen being a lightning rod. Theoretically, every dollar you spend on the IRS you get $3 back or whatever it is; that's not necessarily true. Like I just want to be clear that there's you can still get all your tax revenue at the federal level, but you don't need to waste--well, look, I I mean, I'd be the ultimate chump if I said, "Oh, we're going to cut spending," yeah, but I also cut revenues with with the IRS, which Treasury controls. My my three goals are very simple: revenue enhancement, privacy, and customer service. Totally. You know, there's a there's a body of knowledge that says if we just fed in and by the way four or five of these companies can do this now, if we just fed in this entire federal tax code into these AI models, what you can give to Americans is a very guaranteed, resolute ability to file taxes with the assurance that there is no waste, fraud, and abuse, and now all of a sudden you take this incredible weight off of people's shoulders um, you know, sometimes it is said that you get audited for almost political reasons, it seems like, you know, uh people that--not almost--we have a big we we we had a big announcement on Tuesday, and we brought in the 200 Biden whistleblowers who they uh have a lot to say about who gets audited, who doesn't. They're going to be sitting in this building working on IRS the matters and understanding exactly how these audits get triggered, how these political witch hunts happen, and trying to the change the ethos of the building, and again, 99% of the people at the IRS are good people; it's just like all these other agencies where they're they're bad folks. But to your point, this is where technology can create um very reliable guard rails for the American citizen where it's like, okay, well, if this model says I owe $1,000 in tax, this is it; I'm not trying to change anything; I've fed it all the software first, and you just know. Let me go back to entitlements. Um, I talked last week on our podcast about Social Security. Mhm. Social Security has a $2.7 trillion balance, which is just a basically a Treasury bond that's owed that they can't trade out of. Should Social Security have invested in the S&P or invested in equities, and why don't we turn Social Security into a sovereign wealth fund and invest it for the benefit of all Americans going forward?
Yeah, I I I think there there's the optimal, then there's the possible. George W. Bush tried to privatize Social Security, and you--I I saw your your numbers, listened to your numbers going way back--1971, 1971, and with 15, 16 trillion that we'd have--I I don't know what the numbers are since W tried it; they'd be substantial. We we wouldn't be thinking about a problem in a few years, but I think now you got to play the hand you're dealt. I think we are dealt the Social Security uh hand, and I think maybe we could re-engineer it. If we could create the sovereign wealth fund and have that on the other side, there are a lot of philanthropists who are looking at baby bonds, so if you can create a some kind of an investment account for newborns, then that would run on a parallel track to Social Security, so that would be compounding. The other thing would be a safety net, yeah, but it's still sitting in treasuries on the other side, y, and that's where there's an opportunity not just to drive up returns but participate in the American economy and give all Americans today the ability to know that they have some participation in the American economy rather than having their retirement funds being sitting as a loan to the federal government for spending, which I think could be a big dramatic change. I don't know if they need to be independent, but I I I would--I think it's a it's a real opportunity for us. Are you are you excited by the idea of the sovereign wealth fund?
I I am, and I'm excited by the idea--like this is President Trump--everything he does isn't in a straight line, but I guarantee he has a destination in mind, and the idea that he's going to be the first president in generations who is going to--he wants to create assets for the American people, not just debt. Yeah, yeah. So he wants to take the debt down, and then this idea of assets--there was a lot of talk about this economic deal we're going to do with Ukraine that would have gone in the sovereign wealth fund, right? Yeah. Government has big stake in Fannie Mae and Freddie Mac. When it comes out of conservatorship, where does that go? Where where does that go? As you mentioned Doug--Doug Bergam did great work when he was governor of North Dakota. North Dakota has the equivalent of two state sovereign wealth funds, and for I don't know--are they 7, 8, 900,000 people? I think they had $25 billion, right? And Alaska permanent--the Alaska permanent fund, but all all that's from the natural resource money going in. So to the extent we start--the other day when the sovereign wealth fund was announced, President Trump surprised me in the Oval and said, "Could you make a few remarks?" And I said, "Well, we're we're going to we're going to mo we're going to mobilize the asset side of the balance sheet." And all the gold bugs said he's going to re he's going to revalue the gold. I I can say today we're not revaluing the gold, but what we are going to do is Doug Bergam at Interior, every other department head is looking for the assets that we can mobilize. So if if we have energy leases, federal government own--back to the housing shortage, federal government owns a lot of land in downtown urban areas, can we or in suburban adjacent things in in Nevada and Utah, can we use that land?
Yeah, do you see a wave of privatizations as a way to sort of both pay down the deficits and debts and also just to--that that's important to me. Like, why put in a sovereign wealth fund versus pay down the debt? Help help kind of do the finance math for us on--oh, could you think--you get a higher return, right? Well, anything anything that beats our current return, our current interest rate. Yeah, I mean, not not that I'm keeping score, not that I watch it closely, but the 10-year Treasury today is 4.28, 4.28. Yeah, so um, it's responding well. Can can we can can we do better? Yeah, than four? Can we do better than 4.28? And I think with this group and this cabinet and if we can put in--right right now we're working on the the study group for the sovereign wealth fund, and we want to do best practices; we're talking to people around the world; we're talking to investment people uh we're talking to uh a lot of the other big sovereign uh funds, and we're going to do best practices, and we want this to be a legacy event. Totally. Dan Lo made this comment that the Australian superannuation--they've got 30 managers, and they have as much in their on their balance sheet today in their fund than Social Security does, about $3 trillion, and they have 7% of our population. Yeah, no, it's incredible; it's incredible; it's incredible. And I was with one of the Middle Eastern funds, and you know, I said something about oil revenue. We haven't had an an injection into the fund in 20 years. Why was this such a miss for America? What happened in the United States was that we took every excess dollar we had and we invested it in the future; we bought in--we built infrastructure. What happened that kept us out of this model where others were so successful and clearly have now gotten ahead of us and their their people have a greater kind of safety net than we do?
Yeah, I I I think it it was just this idea of it--it was supposed to be a safety net, not some kind of prosperity ramp. The old age and survivors disability insurance fund--that's what it's called, right? Under Social Security. You uh you've mentioned cheap energy as a critical part of this holistic program, I think three times now. Where do we make mistakes in that path where energy gets out of control? What what do we need to do to make sure that energy actually--the the incremental cost of the electron basically goes to zero? Well, I I think the biggest challenge we're having right now is trying to get private sector to lock in for some things that might not have a payoff for 5, 10 years, and how do we avoid student body left, student body right with administrations coming and going? So we're we're trying--we're we're working on--well, this is an incredibly nuanced and I think an important point because we have this very vibrant, as you know, tax equity and transferability market that allows a lot of these organizations to make these five and 10-year investment cases, and you know, for all the issues with the IRA, of which there are many, I think the one narrow aspect that it did was um it calmed the markets about the future of those specific ITC credits and transferability. And it's a critical thing because there was a report--you probably saw it, but you know, FK said 90 plus percent of our incremental electrons as of December were from sources that were leveraging these ITC credits and that transferability. So to your point, we have this very delicate balancing act of making sure we--but but there there's the the tax side, but then the regulatory side with with fossil--it's tougher because it crosses a lot of state lines; there's a lot more permitting, right? A lot less permitting for solar farms, for wind, for geothermal, yeah, and nuclear uh nuclear is going to be a big part of it, but it it's not going to happen tomorrow. We got to fix the supply chain and the regulatory--well, we got to fix the supply chain; we got to fix the regulatory um I we've got to decide which model are we going to go with, and you know, I I'm told that you you two probably know more about nuclear than I do, but he loves it; I hate it. Okay, well, no, I don't hate it; I mean, I I like I like nuclear; I just think it's 10 years away. He's a loser; don't listen to him. Yeah, he doesn't really--it's just not an investable thing for the next--but it's important because the question is when it becomes one; that's when we know we've fixed the problem. But but but to to the point that it's not investable, that's where the government needs to step. Absolutely; I 100% agree with you. Like, we that's where we have to bridge to to the technology; we have to do the time arbitrage, and also I'm told, especially with the smaller plants, that you that you need to cluster them, and you got to find somebody who wants to cluster them, and all that and um, let me ask you one more question as we kind of get to the end, but uh what's been the most surprising thing for you in this role since you've um since you've been in office?
Uh, the national security aspect, that I I would say 40, 50% of my day uh Treasury does a lot of national security work, whe whether it's cifhious in terms of uh foreigners who want to buy US assets, whether it's sanctions, whether it's OFAC, anti-money laundering. We we've just designated the Mexican cartels as foreign terrorist organizations. We--President Trump over the weekend launched a very aggressive strike on missile strike on the Houthi assets. Well, underneath that, we had already been working for several weeks on their bank accounts. I see. So or anyone who is adjacent to them, the Iranians supply the Houthis with the their ecosystem. Previous to my getting here uh Treasury had disrupted the ecosystem so much that uh the Iranians used to hand them cash; now they're just handing them--here, take take this oil tanker and try to sell it, right? So like there there is the ability to to break that down. When you go home and you're talking to your kids, you're talking to your husband, and you're like, "This was so cool." There must be these moments where you're like, "This was so cool." Do you have any anecdotes that you you're comfortable sharing where you're just like, this is like I can't believe I'm doing this job?
Uh, well, uh, there have been several, but a a good example--my family was actually there because after the inauguration, I I asked President Trump, may I bring my family in, say hello, get a photo, and we're we're sitting in the Oval. So it's myself, my 11-year-old daughter, uh my spouse, 15-year-old son, and the President Trump's having a great conversation with them, and and then he said, "Oh, Scott, while you're here, let me call in these other two people, and we need to discuss--
this." So they actually got to see government being done live, so you there there's that um I I you know I I have to say I I think the the moment with um President Trump, Vice President Pence, President Zelensky was kind of a once in a-lifetime thing in the Oval Office. I hope it's once in a lifetime, and they um but you know I I was sitting there kind of in the front row of history. I, I, Vice President, Secretary Rubio, myself on the sofa and watching President Zelensky do what I thought was the the biggest diplomatic own goal in history.
Yeah, yeah. I think you said it very well in in TV afterwards. It really, really was based on and you you said because you were there, you tried to negotiate with him in Kyiv. It was a very escalated I think you use the word escalated or high high-decibel conversation.
High-decibel, yes.
Yeah, so but it kind of my my job for 35 years was to be outside the room, try to put my ear to the door, maybe lift myself over the transom, figure out what the leaders needed to do, were going to do, and then how it would affect the markets. And now it it's fantastic and amazing and stimulating and a little scary being the person in the room who has to what should we do, what can we do, how's it going to affect the markets, how's it going to affect the real economy, that what what's it going to do to working people in America? So how do we fix affordability? Um, we're just going to have to go through and where where's the problem, what's the solution in terms of like are are the insurance markets broken, right? What can we do there? There's been no in I I've been involved in the house building business; there's been no technological change in house building in 50 years, maybe 60. Some of the building codes go all the way back to the Chicago fire. Right? So what can we do? That the way we categorize housing, it's stick-built or modular.
Mhm. Is there something in the middle, prefab? Because the more that comes out of a factory, the more that is standardized, that neighborhoods from DC from DC to Bethesda to Potomac to like you could be in contiguous neighborhoods, and if they're different municipalities, they'd all have different building codes, not zoning, building.
Yeah. And why is that? Like it they're adjacent. Why do the houses have to be so? Is there some kind of window guidance that the federal government can give in terms of the more that comes out of the factory, the cheaper it'll be, the faster we can make it, things like that? Is there pressure that you could apply or influence you can apply? One of the things you mentioned earlier was just, you know, take San Francisco; there's an artificial constraint that's created by the zoning paradigm, and it's not clear how you unlock that. You know, maybe is it up to private citizens to sort of like have regime change at the local level? Um, but how do we sort of unclog that part of it to marry up with this kind of stuff? Because it would be great if you could just build up in many places.
Yeah, well I I I think there are a lot of things where you can look around and find what's interesting that some what's something that's interesting that's being done somewhere. So I I lived in Greenwich, Connecticut for a while, may maybe the richest suburb in America; there's a ton of multifamily there, very expensive, very nice multifamily; there's some affordable housing, but Greenwich is not all 10 acres and a horse farm. The state of Connecticut has put in a I guess it's a law that every municipality has to allocate 10% of vacant land to multifamily, and if the zoning board won't give you a hearing, you as a developer, you as a nonprofit for housing can go over the top and go to Hartford, and then Hartford will give you the authority.
Well, no no town wants the state doing on their behalf, so now the towns negotiate.
Yeah, so like I I think that there are a lot of things that that can be done. Again, on on insurance, is there something that I I've been thinking about? Is there something the federal government could do for California where we come in, everyone's paying homeowners insurance, then there's reinsurance on top of that, then I think the California reinsurance companies called FAIR on top of that, so it's a well it's a separate plan, but
Yeah, yeah.
But but it it's it's a you're stack you're stacking it, so is there something we could do where you put another layer of private money in there, and then the federal government is the fifth risk tranche? Right? But if the federal government comes in, can we mandate down here proper hygiene changes in the building code, well changes in the building code, changes in brush cutting, right, and material choices.
Yeah, right, right. Yeah, makes sense. Great. So I I think there's a lot if we And obviously energy, I mean just getting back to affordability, right? Energy costs come down.
I took the words out of my mouth.
No, no, no, no. But I mean energy costs are energy costs, but then there's also the for food, the transportation cost of getting it to the to the grocery store, everything that that's made out of petroleum products. So I I think we we can do that, and um you know I think there's a lot to do, and it shouldn't be too hard. So we're actually we should probably be announcing it in about 10 days; we're going to have an affordabil affordability czar, but it's going to be someone with a lot of experience in supply chains, figuring out what are a lot of the quick fixes we can do because back to the question, what really has people anxious, inflation for now is actually pretty quiet in and um but the affordability has gotten so away from everyone that how can we bring that down?
Yeah. Good for all our friends at home who talk a lot about the conversation about climate change and carbon-free. I think one of the things that I always point out to people is the cheapest way of driving energy production in this country is that there's a low-carbon or carbon-free alternative that's out there that's actually cheaper than standing up new new plants, um and there's an acceleration. I don't know how much this administration thinks about that relationship, but it seems to me like if we can unlock energy production, costs come down, and this economy transitions well, it transitions. And I think it's also not being dogmatic. Like I I I saw what the Biden administration did with EVs. I I have an EV; I can't wait for it to come off lease, and but also have a hybrid, and I think I fill it up maybe three times a year totally, but this administration had a jihad on hybrids because there it it they didn't pass the purity test, so they were picking winners and losers in a way that a lot of us were left scratching our heads.
Yep. And cheap I think cheap energy solves a lot of problems. I I I think it'll a and uh cheap energy is energy security too.
100%, cuz that that's why Europe's kind of over a barrel, literally, and it's a it's why the Russian war machine hasn't again literally run out of gas. And to the extent that we believe we're in an existential arms race for technical supremacy, it's really on one dimension, which is AI, and that is so needy of energy. So if we don't pull all of these issues together and realize that we need to basically take the incremental cost to zero, whatever we do, we need to create the incentives and package it all together. I mean, we can't we can't compete manufacturing as without energy without we certainly can't compete without energy.
Yep.
Yeah, I mean we're we're we're not going to crush labor like China and some other countries have done, so we got to crush the energy price.
Right, exactly right. And when you're in the Oval, what are the truths and misconceptions of the president, meaning on the outside and what people know or don't know?
Oh, how about this? I we we had a lot of um foreign leaders come in, and I I knew someone in in the in one of their entourages; I won't tell you which one, but afterwards he comes up to me, he goes "Holy crap." He goes "He's really smart." President Trump has perfect recollection because he was talking about something that had happened in that country 30 years ago, and he said and he really So the President Trump listens, he is judicious, he is just taking it all in, he likes to see how people react, um it it's just incredible executive skills. Uh, yeah, and the other thing too that he he's tough, but I went in and I showed him we were talking about something the other day, and I said "Well, you know this is going to cause some layoffs." He goes "Well, let let's try to fix it."
Yeah, yeah. Let's try to fix it. So I I always say he really regards himself as the mayor of America, right? 330 million people, he wants to be personable to everyone, and he cares deeply about all of them, and he doesn't care whether you're Elon Musk or the the guy cutting the rose garden, but you're his constituent.
Great. Well, Scott, thank you so much for taking the time. This has been a wonderful a pleasure, and we really appreciate the insight.
Yeah, and thanks for the service and thanks for doing the role.
Good, thanks. Appreciate it. Thanks. [Music] Thanks. I'm going all in.