The Crisis Washington Is Waiting For

A crisis is coming. But don’t expect Washington to stop it. Because Washington needs this crisis—no matter the cost to you.

Here’s the path, in one (long) sentence: America’s debt is now so large that the federal government cannot afford the interest on it, and the only way that changes is a crisis big enough to give the Federal Reserve the cover it needs to do what it can’t do right now—slam rates lower, fast, and keep them there long enough for the Treasury to refinance the mess that decades of presidents and Congresses have bequeathed to us.

As I explained in a dispatch last week, America has hit the point where the Federal Reserve cannot raise interest rates to fight inflation—because doing so detonates an interest-payments bomb inside the Treasury Department.

Which is exactly why Fed Chairman Kevin Warsh keeps talking tough on inflation… while refusing to actually raise rates to attack it.

To manage America’s spending needs, Treasury these days has no choice but to issue short-term T-bills (short-term debt securities) and roll them over every few months—because it’s the lowest-cost debt that exists right now.

But that’s operationally no different than a family borrowing from Mastercard to pay the interest on the American Express bill this month—then borrowing from American Express to pay the interest on Mastercard next month, and so on and so on…

Except the family knows this ends in bankruptcy.

Everyone involved with America’s debt—from President Trump through Treasury Secretary Scott Bessent and Warsh—knows the US has crossed the Rubicon and all they can do now is act as wind blocks, hoping to keep the house of cards intact.

What they desperately need… is a crisis.

One that lets Warsh’s Fed push interest rates sharply lower so that Bessent’s Treasury Department can refinance a mountain of America’s IOUs with 30-year paper—and finally get off the hamster wheel.

I know that sounds conspiratorial, but here are the actions that have already happened that tell you exactly where we’re headed.

Start with Bessent’s Treasury Dept.

Last week, Bessent laid out how his department will borrow money for the rest of the year. His plan relies on extending the current strategy of selling short-term T-bills for at least the next several quarters (his words, not mine), which is exactly the same tactic Bessent attacked in 2024 when Janet Yellen used it.

Now he’s doing it.

JPMorgan called out the hypocrisy, saying Bessent’s playing, quote, “political dynamics.”

What he’s clearly doing is positioning Treasury to pounce the moment long-term rates crash so he can swap short-term paper and lock in decades of cheaper borrowing costs. So, he needs to keep current borrowing super-short.

That, in turn, requires a Fed under Trump-appointed chairman Kevin Warsh that’s willing to play its part—meaning push interest rates lower.

At the July Fed meeting, three regional Fed presidents publicly voted to hike rates to fight persistently high inflation that has Americans strung out. Yet Warsh, who has been adamant about bringing inflation back down to 2%, voted to keep rates unchanged, which is precisely the opposite of tough talk.

Why?

He’s waiting for the same crisis, a crisis that will give him the cover he needs to slam rates sharply lower without fighting the perception that he’s a Trump toadie.

Then we have Stephen Miran—Trump’s former economic adviser. Miran wrote the intellectual playbook the administration is running. It calls for aggressively weakening the dollar, which is far easier to accomplish inside a crisis.

Finally, Congress. It can’t cut spending without shrinking entitlement programs that would see constituents voting members of Congress out of a cushy job.

Then again, it can’t raise taxes without pissing off the moneyed crowd that keeps these clowns in the circus.

The only escape route left is inflating away the real value of the debt. Which requires a crisis to make that politically possible.

Four actors. Four different problems. One shared solution. And the American people are the ones who pay for it.

So, how does this crisis form?

Three ways… all of which are already in motion.

One: the bond market breaks.

In late-July, interest rates on 10-year Treasury bonds hit their highest level since Warsh took office. One bad inflation print, one Treasury auction where fewer buyers than needed show up to buy Uncle Sam’s debt… and interest rates could very well spike hard enough to force emergency intervention.

Two: employment cracks.

Jobs have been quietly weakening. The most recent jobs report showed a loss of 23,000 jobs (100,000 less than economists expected) and a downward revision of more than 105,000 for the previous two months.

AI is displacing white-collar workers at pace, and a few more bad payroll reports with unemployment shooting above 5%, and Warsh has the cover he needs to start cutting interest rates to save the economy.

Three: a geopolitical shock big enough to break the economy.

Iran has demonstrated what’s possible.

But consider a Taiwan crisis that freezes global trade. Or a larger Middle East war that shuts down the Strait of Hormuz—something on the scale of the 1974 oil embargo, which spiked energy prices and crashed the American economy at the same time.

When the recession that follows is deep enough, the Fed will cut rates because a dying economy trumps stubborn inflation.

Here’s what has convinced me that a crisis is what DC needs.

When Japan’s yen was crashing just recently, Scott Bessent personally intervened in the currency market.

He propped up the yen so that Japan wouldn’t have to dump US Treasuries—a prospect that would have sent US bond yields higher… exactly what Treasury cannot afford.

Bessent also arranged for Japan to borrow dollars from the Federal Reserve through an obscure backdoor mechanism that uses Japan’s Treasury bonds as collateral. That way, Japan could raise the dollars it needed without dumping a single US bond into the market.

Bessent is deathly afraid of bond yields rising so he had to stop that crisis before it could begin. And he’ll stop it again if he has to. Because that kind of crisis threatens to detonate the bomb inside the Treasury Department—the one that sends America into a full-blown fiscal meltdown.

But the bomb that detonates inside your wallet?

Bessent doesn’t care about that crisis—because that’s the crisis he needs. That’s the crisis that lets the Fed act.

So what does all of this mean for you?

Prepare for bad juju coming.

Because at this point, a crisis that impacts your wallet is the only way America can save itself.