The appointment of Scott Bessent raised the spirits of Wall Street and the global financial world. However, some were not very happy, such as the case of Treasury veteran Mark Sobel. Because?
On Wall Street and in most of the references of the international financial establishment such as the Institute of International Finance (IIF), celebrate the arrival of Scott Bessent to the US Treasury. However, a veteran of the Treasury and international financial diplomacy like Mark Sobel He doesn’t seem very happy and is the one who warns Bessent that perhaps with his nomination as US Treasury Secretary they may be giving him “a poisoned chalice”.
Sobel wrote that when Bessent leaves office he may regret the day he became the 79th Secretary of the Treasury, as The inconsistencies and ill-conceived approach to President-elect Donald Trump’s economic policies generate enormous repercussions that affect the United States and the reputation and tenure of the nominated secretary. The person who says this is neither more nor less than a prestigious and influential former official of the Treasury, of the International Monetary Fund (IMF), with great participation in the G7 and G20 for decades. Without a doubt an authoritative word.
Mission: promote Trump 2.0 policies
Sobel remembers what the role of the Secretary of the Treasury is: he is the government’s main economic spokesperson and represents the US globally in economic and financial matters in forums such as the G7, the G20, the IMF and the World Bank. As such, Bessent will play a key role in promoting Trump 2.0 policies on Capitol Hill and internationally. “The problems will not appear immediately, but the challenges over time could become overwhelming”Sobel anticipates. What is it referring to?
- Fiscal waste: First, Bessent will have to confront Trump’s fiscal legacy. US debt already represents 100% of GDP and the fiscal trajectory is unsustainable (deficits are already projected to exceed 6% of GDP over the next decade). “Therefore, their first fiscal tasks will be to address the debt ceiling and then extend the 2017 Trump tax cuts.”considers Sobel who recalls that the Committee for a Responsible Federal Budget estimates that, if Trump achieves his objectives, his fiscal plans could add another $8 trillion to the US debt in the next decade, approximately 2.5% of GDP. In this sense, it poses the risk that this amount of emissions could cause serious episodes of indigestion in the markets, which would raise the risk premium and slow down growth.” Of course, something could break: “Will bond watchdogs savagely impose discipline?”he points out.
Donald Trump Thumbs up
For Sobel, the Trump team will repeat old nonsense such as that tax cuts will boost growth, which will largely pay for themselves; They will reduce spending. “Don’t believe that nonsense. Trump has said he will not touch social rights, the core of mandatory spending and two-thirds of the budget. Discretionary spending goes primarily to defense, and may need to increase. The interest bill is skyrocketing. Spending cuts mean goring someone’s ox. Bessent risks presiding over the height of fiscal waste”.
- The Fed Whisperer: The Secretary of the Treasury usually meets privately and often with the Chairman of the Federal Reserve (Fed). “The media is obsessed with whether or not Trump fires current President Jerome Powell, but they don’t realize it. Trump’s tax plans and tariffs will raise interest rates and inflation, slowing the scope of Fed rate cuts”.
According to Sobel, the Fed may have to temporarily calm the market’s episodic indigestion, but doing so on a lasting basis would be on the verge of succumbing to incipient fiscal dominance. “If this scenario comes to fruition, an independent Fed will fight back. “Trump may attack the Fed again, perhaps pressuring it to adopt some form of quantitative easing or yield curve control, putting Bessent in the crosshairs despite his misguided call for a shadow Fed chair.” , maintains this expert.
- Tariffs and sanctions: The Treasury plays a key role in financial sanctions, but is a secondary player in trade policy, although it has long been a spokesperson for liberal trade. “As for financial sanctions, will Trump 2.0 be unilateralist or multilateralist?”Sobel asks, recalling that when a unilateralist Trump withdrew from the Joint Comprehensive Plan of Action with Iran, Europe responded weakly by trying to create a payments system that would bypass the dollar, the ill-fated Instrument to Support Trade Exchanges. “The mere act demonstrated deep antipathy. President Joe Biden’s administration, especially in its laudable efforts to block the assets of the Russian central bank and oligarchs, acted multilaterally. Greater unilateralism would fuel tensions between the Treasury secretary and his foreign colleagues,” he anticipates. For Sobel, Trump’s proposal to impose tariffs of 10% on all products and 60% on China will intensify American protectionism. “Bessent will have to defend Trump’s trade policies, especially to global financial authorities, but that will not make him popular.”
- The dollar: In recent decades, only the Treasury Secretary talked about the dollar and said as little as possible. “Regardless of whether Bessent thinks the dollar should be floated, Trump officials have called for a devaluation in cacophonous tones. Bessent could end up falling out with Trump’s trade team”. Explains Sobel, the dollar is already strong and it is primarily a “Made in America” story, the dollar’s appreciation since Trump’s victory underscores that fiscal expansion and tariffs are more likely to drive the dollar up, not down, Thus the dollar could soon approach its real trade-weighted peak of 1985, prior to the Plaza Accord, associated with significant protectionist pressure. “The government’s options to devalue the dollar are limited. Neither pressures nor interventions are likely to have a lasting impact, and a Mar-a-Lago deal seems unviable given that an independent Fed targets inflation, not exchange rates, and a weaker dollar could require fiscal consolidation, not expansion. Tariffs, not to mention measures to reduce capital inflows, could curb some US bilateral deficits. But the reserve currency and global financing role of the dollar may weaken, perhaps raising US financing costs. No respectable Treasury secretary should want to be associated with badmouthing the dollar, calling for a devaluation, or undermining its global role.”says Sobel.
The China factor and the dangers that lurk
This veteran of the international financial world also sees the China factor as another challenge for Bessent, who could interrupt the talks started by Janet Yellen. Additionally, fiscal expansion and U.S. tariffs should put downward pressure on the yuan, so China may allow the yuan to fall in response to the tariffs, albeit sparingly, for fear that it could trigger a sell-off in a short period of time. one-way, as happened in 2015-16.
Sobel also believes that Bessent may have to play a role in the attempt to thwart the international tax agreement between the G20 and the Organization for Economic Cooperation and Development (OECD) and help lead the financial market deregulation initiative. “These are just some of the areas that the incoming secretary will occupy. The challenges will be heroic and fraught with danger. It’s hard to imagine what success will look like. Bessent may rue the day he became the 79th Secretary of the Treasury,” said this expert.
Source: Ambito
