when interest rates fall markets rally and when interest rates rise markets fall and this is especially true for long-term interest rates which are mainly determined by yields on long-term government debt in case you missed the news the Trump Administration wants to lower the yields on long-term us treasuries if Trump and his team manage to do this the result could be a massive rally in the markets and that's why today we're going to do a deep dive into how the Trump Administration plans on bringing down long-term interest rates whether this plan will succeed and just how
much the markets could pump my name is Nick and this is a video you do not want to miss when you think of us interest rates you might think of Federal Reserve chairman Jerome pal since Trump has taken office however all eyes have been on the treasury secretary Scott bessent who a to bring down long-term interest rates with his so-called 333 plan but first a bit of background the treasury Department is tasked with managing the US government's spending including collecting taxes and issuing debt in the form of us bonds and for those unfamiliar Scott is
a hedge fund manager who's known for working alongside famous investors like George sorus to be exact a Scott is known for helping George break the bank of of England in the 1990s wherein they basically crashed the price of the British pound while shorting the currency making an absolute Fortune so it's safe to say that Scott knows how currency and bond markets work and how to affect them and this ties into Scott's 333 strategy in short it involves getting real GDP growth to 3% per year lowering annual budget deficits to 3% of GDP and increasing us
oil production by 3 million barrels per day the fundamental purpose of these policies is to increase the global demand for government bonds and this is where things get a bit technical so listen closely us bond yields are determined by the price of these bonds like all assets the price of US bonds is determined by supply and demand the higher the price of the bond the lower the yield and the lower the price of the bond the higher the yield to lower bond yields and interest rates by extension Scott needs to reduce the supply increase demand
or both in case you forgot Supply comes from the treasury which issues bonds to fund the US government spending the more government spending there is the more that the treasury needs to issue these bonds greater Supply and assuming the same or less demand means that bond prices fall and yields will rise and this is why Scott wants to cut spending less spending means less Bond issuance and lower bond yields as you might have noticed this cost cutting has been coming primarily from the Department of government efficiency or Doge for short which is headed by Elon
Musk again the goal is to cut enough spending so that there is less Bond issuance and lower yields but we'll come back to that a bit later and this relates to the demand side of the equation which is where things get interesting the demand for us bonds can technically come from anywhere including the treasury itself as a fun fact the treasury has been doing Bond Buybacks in the past and some would argue this was a way of influencing interest rates as most of you will know the demand for us bonds has been declining and this
is due to a series of factors including fears of confiscation related to sanctions as well as concerns about government spending and inflation which which risk lowering the value of the bond in real and inflation adjusted terms and this is why Scott wants oil production to increase more oil production means less inflation and more us Bond demand what's fascinating is that Trump's erratic foreign policy fits hand in glove with Scott's 333 plan Trump's efforts to quickly resolve conflicts in the Middle East and Ukraine could reduce geopolitical uncertainty resulting in more Bond buying by by Foreign investors
at the same time Trump's comments around Canada and Greenland could be a crude method to secure more natural resources which of course would lower inflation as for GDP growth a data from the BLS suggests that it's already close to Scotts 3% as it hits 2.8% in 2024 of course GDP is another factor that influences Bond demand the higher a country's GDP the more demand there is for their bonds assuming things like inflation are in check the catch is that a lot of this GDP growth has come from government spending which you'll remember is being clawed
back meanwhile tariffs could risk raising inflation while oil companies may not want to pump more because lower prices would mean lower profits and this is where the real rabbit hole begins but before we go down that rabbit hole if you enjoying this video so far then smash that like button to let us know and don't forget to subscribe and ping the notification Bell as well to make 100% sure you do not miss our next video now before we dig into whether Scott's 333 plan will succeed in lowering interest rates we need to address the elephant
in the room Jerome pal whereas long-term interest rates are determined by bond yields the fed's policy determines shortterm interest rates the caveat is that the FED can influence long-term term interest rates by buying us Bonds in a process known as quantitive easing or QE for short to refresh your memory long-term interest rates are determined by bond yields which are determined by bond prices which are determined by supply and demand according to data from visual capitalist the FED has bought roughly 15% of the government's debt as you've probably heard the FED has been slowly reducing its
Holdings of us Bonds in a process known as quantita of tightening or QT what you may not know though is that QT does not involve selling us bonds rather it involves allowing us bonds to mature and then refusing to buy additional bonds as such the fed's QT has resulted in a decline in demand rather than an increase in Supply and this demand has been declining at a rate of $25 billion per month and it might not sound like much but it's enough to move the needle around the margins as you've probably heard however the minutes
AKA summary of the fed's most recent meeting revealed that it's considering slowing down or even stopping qt in Practical terms this means that the FED would continue buying bonds rather than continue buying gradually fewer bonds and this would result in more demand for bonds raising the price lowering the yield and lowering interest rates by extension and this is where things get a bit technical again so uh listen closely the reason why the FED is considering slowing down or stopping QT is because of the debt sealing or more accurately the effects of the debt sealing as
the term suggests hitting the debt ceiling means that the US government can't fund any additional spending and in case you didn't know the US government hit that ceiling in late January this year in theory this means that the US government cannot spend any more money in practice though it still has money in the treasury general account or TGA which can be simply understood as the US government's bank account at the fed the TGA currently has around $800 billion and the US government can continue operating by spending this money until the debt ceiling is raised by
Congress from the fed's perspective the problem is what happens when the TGA needs to be refilled obviously refilling the TGA would involve issuing bonds but it begs the question of who will buy the bonds the last time the debt celan was raised the answer was investors who had money at the fed's overnight reverse repurchase facility which can be simply understood as a place where investors can keep cash at the FED for context the last time the debt sealing was raised was in June 2023 and as you can see the amount of money in the fed's
overnight reverse repurchase for facility fell off a cliff as investors rotated out of the special facility and into US bonds being issued by the treasury but as you can see it's now empty this means that the money to buy the bonds when the debt seiling is raised will have to come from elsewhere according to Joseph Wang a former Bond Trader at the fed this money would have to come from the Bank Reserves which can be simply understood as a place where Banks keep money at the FED in other words Banks would be the primary buyers
of us bonds when the debt sealing is raised Banks would use their Bank Reserves at the FED to buy these bonds but if the term didn't make it clear enough the purpose of Bank Reserves is to ensure that banks have enough money on hand for their day-to-day operations if Bank Reserves fall too low then it could create systemic risk for the financial system this pertains to a technical term you may have have heard about which is the lowest comfortable level of reserves the lowest comfortable level of the reserves is the lowest that Bank Reserves at
the FED can go before there's a risk to the financial system and Joseph estimates that this level is around 8% of GDP with US GDP at around $30 trillion 8% works out to around $2.4 trillion and the chances are that the FED once reserves to be slightly above that level for reference the Fed latest Reserve report notes that there are around $3.3 trillion of Bank Reserves and this means that Banks can only spend a few hundred billion dollar on us bonds before draining down their balances at the FED to a critical level by reducing or
stopping QT the FED can effectively share some of the burden of buying US bonds and minimize the amount of Bank Reserves this will drain so why does all of this matter because it turns the debt ceiling into a sort of a timer for how long Jerome Scott and the Trump Administration have to optimize the supply demand equation for bonds to ensure that yields and interest rates don't rise and this brings us back to Scott's 333 plan to quickly recap the plan involves keeping real GDP growth around 3% lowering annual budget deficits to 3% of GDP
and increasing oil production by 3 million barrels per day again the purpose of these policies is ultimately to increase the demand for us bonds and that's because it will cause us bond prices to rise yields to fall and long-term interest rates to Fall by extension of the three policies keeping real GDP around 3% will be the easiest to achieve that's because the Trump Administration is rapidly cutting regulations which should increase economic growth the Trump Administration has also been trying to secure large amounts of foreign Investments with at least $600 billion of investment expected from Saudi
Arabia and this will also increase economic growth the only real threat to GDP is the fact that a lot of this has to come from government spending which is also being cut back the thing is that most of the employees being laid off have been given buyout offers meaning that they will continue receiving income even after they've been fired apparently for 7 months more than 75,000 federal employees have reportedly accepted these buyout offers and this is extremely important for two reasons the first is that this could create a scenario where employees who take the buyout
offer are periodically earning two incomes one income from the buyout offer and another income from wherever they find work in the interim the result is that you will have tens possibly even hundreds of thousands of Americans who have doubled the spending power and this is where the second thing comes in and that's that 70% of US GDP is consumption and it goes without saying that people with two income streams will consume more and this will boost GDP not only that but a recent analysis by Moody found that the top 10% of earners account for nearly
half of consumer spending in the US this top 10% of income earners work for and invest in the kinds of company that will benefit the most from things like cuts to regulations and foreign investment increases and this of course means that they're likely to benefit the most because of the Trump admin's GDP Boos in activity lowering annual budget deficits to 3% of GDP will be much harder to put things into perspective the annual budget deficit is a currently around 6.3% of GDP in raw numbers that's almost $2 trillion per year put difference ly the US
government is spending $2 trillion more than it brings in in cash each year resulting in it having to issue over $2 trillion of bonds which of course increases Supply lower in prices and raise in yields etc etc lowering annual budget deficits to 3% of GDP therefore requires reducing government spending by more than one trillion dollar and ideally this will be done before the debt ceiling is raised and that's because if US government spending isn't cut by then then there will be too many bonds being issued relative to the available demand forcing the FED to step
in undermining the US longterm when you realize this you understand why the Trump Administration has been doing everything it can to cut government spending as quickly as possible Trump has been signing executive orders to cut spending to various initiatives and Doge has been finding fraud and inefficiency gencies to cut and reduce costs recently appointed defense secretary Pete heith has also ordered the Pentagon to reduce spending by tens of billions and yet when you add it all up it's just a drop in the bucket Doge has reportedly cut $55 billion in spending so far and Elon
revealed in an interview that a lot of that was just Doge making sure that the spending cuts related to Trump's executive orders are being followed Pete's order to the Pentagon also just totals 50 billion which pales in comparison to the total defense spending of around 850 billion on that note there's been lots of fake news about the Trump Administration wanting to cut back on Medicaid and Medicare when Trump has specified in interviews that the goal is to reduce fraud the problem is that this also wouldn't be enough a recent report by the government accountability office
found that there's only about 233 to 521 billion being lost to fraud in the entire US government and I'll remind you that the Trump Administration needs to reduce spending and cut costs by over $1 trillion even if Doge manages to find every instance of Fraud and inefficiency it still wouldn't be enough and this is precisely why investors like Kevin oier are publicly calling for Elon to do more and why even Trump is starting to put pressure on Elon to cut costs faster remember the clock is ticking speaking of which you'll recall that Trump's erratic foreign
policy fits hand in glove with Scott's 333 plan in this case consider Trump's comments about wanting the US China and Russia to all cut their military spending in half and agreement to calm things down so to speak this is clearly a means of trying to justify cutting us defense spending which I'll reiterate amounts to a staggering $850 billion domestically Trump has reportedly considered assigning an executive order to abolish the Department of Education when you consider that the Department of Education spent almost $270 billion in 2024 it's evident that this would primarily be for cost cutting
reasons Trump has stated in interviews that he believes States could pay for the education themselves and this would lower federal spending and this brings me to another elephant in the room and this is Trump tariffs in case it wasn't clear enough the purpose of Trump's tariffs is to raise as much money as possible by practically taxing other countries naturally this has led to concerns that these tariffs could cause inflation to rise in the US in turn this could lead to a selloff in bonds as investors demand higher yields to compensate for this inflation history suggests
that these tariffs could actually have the opposite effect deflation and this is what happened when Trump last levied tariffs in 2019 and it's something that was highlighted in fed transcripts at the time oddly enough these transcripts were released on the same day as the fed's most recent meeting Oddities aside more recent history suggests that Trump's tariffs have mainly been a negotiating tactic this is evidenced in Trump's initial tariff threats against Canada and Mexico which were retracted after both countries made con around things like border security however there have been other tariffs that seem to be
non-negotiable such as the 10% tariffs on all products imported from China more recently Trump indicated that the tariffs on Canada and Mexico would actually be going ahead as planned and this is where things get more nuanced and where there's a lot of debate it's assumed that these 10% tariffs would result in inflation but it's possible that China could choose to devalue its currency to maintain its export dominance alternatively China could begin exporting from neighboring countries to eliminate these tariffs or the companies importing these products could also choose to swallow some of the costs it's even
possible that this inflation already happened since many companies began buying extra Chinese products in anticipation of these tariffs it's also possible that these tariffs are not as big as these companies anticipated which would mean that they bought more than they actually needed the result could be paradoxical a decline in costs because of excess supply of these Goods but what about retaliatory tariffs I hear you ask this is where things get truly nuanced it's believed that retaliatory tariffs could be the true cause of this inflation however some macro analysts like Andreas steno Larson believe the opposite
most countries actually have higher tariffs on the US than the US has on them and these countries cannot afford to escalate tariffs much further the result could be another Paradox countries keeping their tariffs the same or even lowering them against the US in fears that a trade War would do more damage to their already weak economies and China is evidence of this its retaliatory tariffs against the US were largely symbolic according to multiple reports and this makes sense given that the Chinese economy is struggling it can't afford a trade War it's also easy to forget
another Factor that's similar to tariffs and that's sanctions some of you might recall that the Biden administration had temporarily lifted sanctions on Venezuela which happens to be one of the world's largest oil producers now the Trump Administration is reportedly considering lifting sanctions on Russia as part of a peace deal in Ukraine Russia also happens to be a large oil producer you don't need to be a geopolitical expert to understand why the US is trying to get more oil from other countries presumably because domestic producers are unlikely to pump more unless oil prices are higher and
the Trump admin doesn't want higher oil prices it wants them lower to lower inflation while Scott's 333 plan specifies that the third policy is to increase domestic oil production importing large amounts of dirt cheap oil from countries like Russia has the same effect lowering the cost of energy which will lower inflation across the board if all else fails the Trump Administration would tap the Strategic petroleum reserve the same way that Biden did but that would just kick the can down the road in any case the key takeaway is that Scott's third policy of increasing domestic
oil production by 3 million barrels per day will likely not be done domestically if only because it would require an almost 20% increase in production per the US Energy Information Administration to meet this policy goal the Trump Administration will need to cut corners and cut some questionable deals and that's exactly what's happening and this brings me to the two big questions whether Scott's 333 plan will succeed in bringing down long-term interest rates and what this means for the markets the answer seems to be dependent on what happens with the debt ceiling I'll repeat that the
ongoing TGA draw down is likely acting as a de facto timer raising the debt ceiling will require Congress to agree on a spending bill as always it doesn't look like this is going to happen anytime soon in short the Trump admin wants to pass all its main policies in quote one big beautiful bll that will be tabled by the house by the time you see this video house Speaker Mike Johnson previously noted that they're aiming to have this one big beautiful bill approved by Memorial Day which is May 26th well uh this seems unlikely to
happen and that's because Republicans only hold a small majority in the house and the Senate more importantly there are 31 Republicans in the house and 31 Republicans in the Senate who are part of the so-called Freedom caucus if the name didn't Give It Away the freedom caucus is a group of conservative politicians who believe that government spending should be minimized but by now you'll already know that this isn't really possible the result could be a few members of the freedom caucus voting against the big beautiful Bull with the Democrats who are likely to vote against
it for reasons that I probably don't need to explain the fact that House Republicans are considering passing a separate bill specifically around spending cuts to satisfy these fiscal Hawks underscores the likelihood that they could try and block this big beautiful Bull and this could result in a dead sealing debate that drags on for a long time possibly much longer than last time the last time the dead seiling was hit was late January 2023 and the debate around it lasted until the very last minute in early June 2023 when a spending bll was passed in the
final hour as you might have guessed the timing of this final hour was the draw down of the TGA which was close to zero this time around the TGA drain is starting from a much higher level moreover the runway of the TGA will be extended further by larger tax revenues that are likely to come in around April and May the result could be a dead sealing debate that lasts as late as August or even September which would be crazy and yet this is probably what the Trump Administration wants and that's just because the longer the
debt sealing debate goes on the fewer bonds will be issued and the more time that Scott and Co have to finalize the 333 plan and find more buyers for these bonds the FED would also be more likely to stop QT which would be stimulative to the markets and the economy helping with the GDP side of the 333 plan regardless the fact of the matter is that the ongoing implementation of the 33 33 plan could be bullish for the markets just because of the effects this will have on the supply and demand for bonds there will
be less Supply from the treasury due to the debt sealing more demand from the FED due to the reduction or cessation of QT and possibly more demand from domestic and foreign investors as we've learned this restriction in Supply and the increase in demand would cause bond prices to rise lowering their yields and lowering long-term interest rates by extension the most bullish scenario for the markets would be for the plan to succeed before the debt seiling is raised again that's just because once the debt seiling is raised the FED goes back to QT and this would
be bearish for the market the same is true if the debt ceiling was raised before the plan succeeded as it would result in a greater supply of bonds relative to the demand raising yields and so on also bearish the most bearish scenario for the markets though would be if the debt ceiling doesn't get raised before the tge is completely drawn down and this could cause the US government to default and that would have devastating consequences for well everything and you can learn more about that using the link down below now if you enjoy that video
be sure to check out our latest one right over here and if you're not subscribed to the channel yet you can do that right over here that's me for now thank thank you for watching and I'll see you next time
