Strategic Economic Policy: Deficit Reduction, Trade, and Fed Recalibration - Episode Hero Image

Strategic Economic Policy: Deficit Reduction, Trade, and Fed Recalibration

All-In with Chamath, Jason, Sacks & Friedberg · · Listen to Original Episode →
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TL;DR

  • Tariffs are presented as a national security tool and a mechanism for negotiating trade deals, not solely for revenue generation, with the goal of rebalancing trade and reshoring manufacturing.
  • The Federal Reserve's quantitative easing policies since the 2008 financial crisis are identified as a primary driver of economic inequality by disproportionately benefiting asset holders.
  • The administration aims to stabilize and reduce the budget deficit to below 3% of GDP by fiscal year 2026, contrasting with previous administrations' spending patterns.
  • The Federal Reserve's mandate is to control inflation and ensure full employment, not to exacerbate economic inequality, with a target inflation rate of 2%.
  • The administration is loosening regulations on small and community banks, which historically provide significant lending for agriculture, real estate, and small businesses, to increase credit availability.
  • Strategic industries are being prioritized for indigenous production or North American adjacency, viewing current global supply chains as vulnerable and potentially unsafe, akin to a World War II mobilization.
  • Tax cuts for American businesses, including immediate expensing for equipment, are expected to accelerate capital expenditures and employment, while specific tax exemptions for working Americans aim to increase real wages.
  • "Trump accounts" are proposed as a game-changer to increase financial literacy and market participation by giving every child $1,000 at birth, fostering equity ownership and closing the wealth gap.

Deep Dive

Treasury Secretary Scott Bessent outlines a multi-pronged strategy to revitalize the U.S. economy, focusing on fiscal discipline, strategic trade policy, and a redefined role for the Federal Reserve, aiming to shift from a period of economic recovery in 2025 to robust growth and affordability in 2026. The core argument is that by proactively managing the deficit, leveraging tariffs for national security and trade balance, and recalibrating monetary policy, the administration can foster a more equitable and prosperous environment for both Main Street and Wall Street.

The administration's fiscal approach prioritizes deficit reduction, with a target to bring the deficit below 3% of GDP. While 2025 saw initial progress with a slight fiscal contraction, calendar year 2026 is projected to bring a significant reduction, moving the deficit-to-GDP ratio into the mid-fives and aiming for a figure starting with a "three" by the end of President Trump's term. This fiscal prudence is seen as a disinflationary force, counteracting spending-driven inflation. Tariffs are presented not merely as a revenue source but as a critical tool for national security and trade negotiation, having successfully brought negotiating partners to the table on issues like fentanyl and rare earth minerals. Studies, including one from the San Francisco Fed, are cited to support the claim that tariffs do not inherently cause inflation and can, in fact, be disinflationary, challenging prevailing economic orthodoxy. The administration views tariffs as a mechanism to rebalance trade and encourage reshoring of manufacturing, which in turn boosts domestic tax receipts from job creation.

The Federal Reserve's role is critically re-examined, with Bessent arguing that its past policies, particularly quantitative easing (QE), have exacerbated economic inequality by inflating asset prices and creating a two-tier economy. The Fed's transition from a straightforward rate-setting mechanism to a complex "three-headed beast" involving rate policy, balance sheet operations, and regulatory functions is seen as overly involved and lacking transparency. Bessent advocates for a return to a more traditional, predictable Fed that focuses on its core mandates without actively exacerbating inequality. He suggests that the Fed's significant balance sheet operations, including the purchase of corporate debt, should be limited, with a preference for buying government bonds and a more cautious approach to market interventions. The notion of a fixed 2% inflation target is questioned, with a suggestion that a range might be more appropriate once the target is achieved, acknowledging the "biological" nature of markets rather than precise mathematical certainty. Candidates for future Fed leadership are seen as aligning with a vision for a smaller, more predictable institution.

The administration's vision for Main Street centers on affordability and increased economic participation. Bessent argues that inflation, particularly in essential goods and housing, is beginning to recede, aided by a stabilization in energy prices and a potential decrease in rents due to changes in immigration policy. He asserts that real incomes are accelerating, and the administration's policies are designed to benefit working Americans through tax cuts on tips, overtime, and Social Security, as well as the deductibility of auto loans for American-made cars. A significant initiative is the proposed "Trump accounts," providing every child with $1,000 at birth to foster financial literacy and equity ownership, aiming to merge Main Street with Wall Street by making more Americans market participants. Furthermore, the administration is working to loosen financial regulations for small and community banks, increasing their lending capacity and profitability to support Main Street lending in areas like agriculture, real estate, and small businesses. The broader strategic vision involves a more active government role in specific industries deemed critical for national security, such as semiconductors, pharmaceuticals, and shipbuilding, reflecting a shift towards "state capitalism" in response to global imbalances and a recognition that efficient supply chains are not always the safest or most robust.

The overarching takeaway is that the administration is actively seeking to reshape economic policy through a combination of fiscal restraint, strategic trade and industrial policy, and a recalibration of monetary policy. The goal is to foster a more balanced economy where national security is integrated with trade, Main Street benefits from increased affordability and financial inclusion, and the Federal Reserve operates with greater predictability and less exacerbation of inequality. The success of these initiatives, particularly the fiscal and affordability components, is expected to become more apparent in 2026.

Action Items

  • Audit Fed's balance sheet policy: Analyze 3-5 years of large-scale asset purchase data to identify potential exacerbation of economic inequality.
  • Create tariff impact assessment framework: Define metrics to measure disinflationary effects and trade balance shifts from tariff implementation.
  • Draft runbook for strategic industry investment: Outline criteria for identifying and evaluating government equity stakes in 5-8 critical sectors.
  • Measure correlation between fiscal deficit and inflation: Analyze MIT study data to quantify the impact of budget deficits on price levels.
  • Evaluate Fed Chair candidates: Assess 3-4 candidates on their stated plans to reduce the Fed's footprint and increase predictability.

Related Episodes

Key Quotes

"I would categorize 2025 we had some important victories some important policy announcements some important movement but I as I've described it 2025 was setting the table and especially on the economy I think the feast and the banquets going to be in 2026."

Secretary Bessent frames 2025 as a preparatory year for economic progress, with the main benefits expected in 2026. This suggests a strategic, long-term approach to economic policy implementation rather than immediate widespread impact. He indicates that the groundwork laid in 2025 is crucial for the anticipated economic improvements in the following year.

"I said the other day President Trump cured cancer but it caused dandruff then people would say well you know President Trump has caused a dandruff epidemic and look there's a lot of orthodoxy that hasn't worked if we look back early 2000s letting China into the global trading system that they would become more like us and there was a point and I'm somewhat sympathetic to the people who believed that but by 2013 when Xi Jinping came in and great writers like Elizabeth Economy who had been of that view reversed and said he's a different kind of cat it's no longer going to be Chinese policies with capitalist tendencies it's just going to go back to hard communism Leninism and I I just think that it was a failure of imagination."

Secretary Bessent uses an analogy to illustrate how policies associated with President Trump can be perceived negatively even if they achieve positive outcomes. He argues that a rigid adherence to established economic orthodoxy, particularly regarding China's integration into the global trading system, failed to anticipate shifts in Chinese policy under Xi Jinping. Bessent attributes this failure to a lack of imagination in understanding geopolitical and economic changes.

"The Fed was created in 1913 as a response to the panic of 1907 which people most people don't know about it made the crash of '29 look like a day at the beach Nicklebacker crisis yeah the Nicklebacker crisis and just the domino effect within the financial system there was no central bank Bank of England is a very old central bank and had been functioning well J.P. Morgan actually had to personally step in in the crisis and it was deemed that there should be a mechanism for the government to be able to either wind down provide liquidity and have have a greater control in the economy rather than private operators."

Secretary Bessent provides historical context for the creation of the Federal Reserve, highlighting the severity of the 1907 panic. He contrasts the US's lack of a central bank at the time with the Bank of England's established role. Bessent explains that the Fed was established to provide a governmental mechanism for managing financial crises, liquidity, and overall economic control, moving away from reliance on private intervention like that of J.P. Morgan.

"I called the Fed the engine of inequality and someone said to me well do you believe that the Fed is responsible for economic equality in the system and I said absolutely not that is not one of their mandates but they shouldn't be exacerbating it and they were the leading cause of it."

Secretary Bessent asserts that the Federal Reserve, through its policies, has significantly worsened economic inequality. While acknowledging that the Fed's mandate does not include ensuring economic equality, he argues that its actions have actively contributed to the problem. Bessent identifies the Fed as a primary driver of this exacerbation.

"The interventions are all via in those areas Scott as we wrap I'd like to go back to one topic you spoke about at the beginning which is you've had to overcome a lot of Biden era difficulty and a lot of the groundwork as you said will be seen in 2026 and beyond and I just want to give you the final moment to talk about those in two buckets bucket number one is there's a lot of tax cuts that will hit starting January 1st and I think it would be good for people to understand what's coming and then bucket number two there's been this incredible movement and energy around Trump accounts and you even spoke about this yesterday about the value of compounding and teaching people financial literacy to understand what's possible for all these kids."

Secretary Bessent outlines two key policy areas for the future: tax cuts and the "Trump accounts" initiative. He indicates that tax cuts, particularly those benefiting American businesses and individuals, are set to take effect, with some being retroactive. Bessent also highlights the "Trump accounts" as a significant program aimed at increasing financial literacy and equity ownership among children, viewing it as a potentially transformative initiative.

"I began the announcement the other day I said I've talked about parallel prosperity Wall Street and Main Street this is the biggest merger in history because it is merging Main Street and Wall Street and I grew up in a small town in South Carolina the only thing I knew about Wall Street was something bad happened in 1929 and I was fortunate went to Yale and then went to New York but you shouldn't have to have that path that if you want to stay in your hometown but participate in the market and learn a lot about it this is the ultimate program for that."

Secretary Bessent describes the "Trump accounts" initiative as a historic merger of Wall Street and Main Street prosperity. He shares a personal anecdote about his limited understanding of Wall Street growing up, emphasizing that this program aims to democratize market participation. Bessent believes the initiative will enable individuals to engage with financial markets and learn about them, even if they remain in their hometowns.

Resources

External Resources

Books

  • "The Fed: Engine of Inequality" by Karen Petteru - Mentioned as an example of a book that argues the Federal Reserve has exacerbated economic inequality.

Articles & Papers

  • "The Fed's new gain of function monetary policy" (International Economy) - Referenced as an essay written by Secretary Bessent discussing the Federal Reserve's role in inequality.
  • Study from MIT - Cited as evidence that budget deficits caused a significant portion of the great inflation.
  • Study from San Francisco Fed - Referenced as showing that tariffs do not cause inflation and are actually disinflationary.
  • Study from Morton - Cited to show the impact of population increase on rent levels.

People

  • Scott Bessent - Guest on the podcast, Treasury Secretary, author of "The Fed's new gain of function monetary policy."
  • Andrew Jackson - Mentioned as the president who abolished the central bank in the 1700s/1800s.
  • Alan Greenspan - Referenced for his job managing the economy in the 1990s due to his open mind about the internet boom.
  • Xi Jinping - Mentioned as the leader who shifted Chinese policy towards hard communism.
  • Elizabeth Economy - Cited as a writer who reversed her view on China's policies.
  • Ben Bernanke - Quoted regarding the purpose of Quantitative Easing (QE).
  • Karen Petteru - Author of "The Fed: Engine of Inequality."
  • Alan Blinder - Mentioned as a former Vice Chair of the Fed who commented on the economy.
  • Greg Ip - Mentioned as a commentator from the Wall Street Journal.
  • Paul Krugman - Mentioned as a toxic commentator.
  • Vice President Pence - Quoted regarding inheriting a mess.
  • Justice Kagan - Described as an intellect of towering impressiveness during a Supreme Court hearing.
  • Justice O'Connor - Mentioned in relation to Justice Scalia.
  • Justice Scalia - Described as smart and bombastic during a Supreme Court hearing.
  • Justice Barrett - Quoted regarding the potential mess if a ruling was undone.
  • Kevin Hassett - Mentioned as discussing BLS numbers.
  • Stephen Myron - Fed Governor who delivered a speech at Columbia on inflation measurement.
  • Newt Gingrich - Mentioned for his policies in the late 1990s.
  • President Trump - Discussed extensively regarding tariffs, economic policy, and tax cuts.
  • Vice President Harris - Mentioned in relation to the Biden administration's spending.
  • J.P. Morgan - Mentioned as having to personally step in during a financial crisis.
  • Kevin Warsh - Mentioned as a potential candidate for Fed Chair.
  • Chris Waller - Mentioned as a potential candidate for Fed Chair.
  • Rick Reed - Mentioned as a potential candidate for Fed Chair.

Organizations & Institutions

  • Federal Reserve (Fed) - Discussed extensively regarding monetary policy, QE, and its role in inequality.
  • Treasury - Mentioned in relation to fiscal policy and Secretary Bessent's role.
  • Bank of England - Referenced as an old and functioning central bank.
  • Financial Stability Oversight Council - Mentioned in relation to Secretary Bessent's regulatory agenda.
  • Yale - Mentioned as where Secretary Bessent studied and taught.
  • Bundesbank - Cited as an example of a central bank with credibility that worked with the government.
  • MIT - Mentioned for a study on inflation and budget deficits.
  • Columbia - Mentioned as the location of a speech by Fed Governor Stephen Myron.
  • IRS - Mentioned in relation to Secretary Bessent's past role as Commissioner.
  • Boeing - Mentioned as an employer in Charleston, South Carolina, increasing its plant size due to trade deals and tax deals.
  • New York Times - Mentioned as the publication where Paul Krugman is now relegated to Substack.
  • Substack - Mentioned as where Paul Krugman is now publishing.
  • Wall Street Journal - Mentioned as the publication where Greg Ip works.
  • Pro Football Focus (PFF) - Mentioned as a data source.

Websites & Online Resources

  • x.com/SecScottBessent - Secretary Bessent's X (formerly Twitter) account.
  • x.com/chamath - Chamath Palihapitiya's X (formerly Twitter) account.
  • x.com/Jason - Jason Calacanis's X (formerly Twitter) account.
  • x.com/DavidSacks - David Sacks's X (formerly Twitter) account.
  • x.com/friedberg - David Friedberg's X (formerly Twitter) account.
  • x.com/theallinpod - The All-In Podcast's X (formerly Twitter) account.
  • instagram.com/theallinpod - The All-In Podcast's Instagram account.
  • tiktok.com/@theallinpod - The All-In Podcast's TikTok account.
  • linkedin.com/company/allinpod - The All-In Podcast's LinkedIn account.
  • rb.gy/tppkzl - Link for intro music credit.
  • x.com/yung_spielburg - X (formerly Twitter) account for intro music credit.
  • x.com/TheZachEffect - X (formerly Twitter) account for intro video credit.
  • international-economy.com/TIE_Sp25_Bessent.pdf - PDF of an article by Scott Bessent.

Other Resources

  • Tariffs - Discussed as a tool for national security, trade negotiation, and reducing the tax burden.
  • Budget Deficit - Discussed in relation to fiscal policy and its impact on inflation.
  • Inflation - A key economic indicator discussed throughout the episode.
  • Interest Rates - Discussed in relation to the Fed's policy and affordability.
  • Quantitative Easing (QE) - Discussed as a Federal Reserve policy with significant economic impacts.
  • Modern Monetary Theory (MMT) - Mentioned in relation to the Fed's practices.
  • Modern Monetary Practice (MMP) - A term coined to describe the Fed's current approach.
  • Fiscal Contraction - Discussed in relation to the US government's budget.
  • Asset Bubble - Mentioned in relation to the Fed's policies.
  • Productivity Bonanza - Referenced in relation to the 1990s economy.
  • Trade Deals - Discussed as a result of tariff policy.
  • Fentanyl Tariffs - Mentioned as a national security measure.
  • Rare Earths - Discussed in relation to Chinese export licenses and tariffs.
  • National Security - A key justification for tariff policy.
  • Supply Chains - Discussed in relation to efficiency versus safety and robustness.
  • State Capitalism - A term used to describe government investments in private industry.
  • Ricardian Equivalence - A concept in economics related to trade.
  • Economic War - A metaphor used to describe current global economic conditions.
  • Pharmaceuticals - Mentioned as a strategic industry requiring indigenous production.
  • Semiconductors - Identified as a critical industry with manufacturing concentrated in Taiwan.
  • Tax Cuts - Discussed as a policy to stimulate the economy.
  • Trump Accounts - A proposed program to give every child $1,000 at birth for investment.
  • Financial Literacy - Emphasized as important for market participation.
  • Capitalism - Discussed in relation to young people's views.
  • Socialism - Discussed in relation to young people's views.
  • Small Banks - Discussed in relation to regulatory burdens.
  • Community Banks - Discussed in relation to regulatory burdens.
  • Real Wages - Discussed in relation to economic well-being.
  • Working Wages - Discussed in relation to economic policy.
  • Dot Plot - Mentioned as a tool used by the Fed that some candidates want to eliminate.
  • Summary of Economic Projections - Mentioned as a tool used by the Fed that some candidates want to eliminate.
  • Regional Banks - Discussed in relation to their role and potential specialization within the Fed.
  • Center of Excellence - A concept for regional banks.
  • 13(3) Facility - A facility negotiated between the Fed and Treasury for bailouts.
  • IPA (International Procurement Act) - Mentioned in relation to presidential authority.
  • 301s, 232s, 122s - Authorities related to trade and revenue.
  • Common Man Index - A metric used by Strategas Research.
  • Cumulative CPI - A measure of inflation.
  • Owner Occupied Rent - A component of inflation measurement.
  • Fiscal Balance - Discussed in relation to central bank credibility.
  • Rate Setting Policy - One of the Fed's tools.
  • Balance Sheet Policy - One of the Fed's tools.
  • Regulatory Policy - One of the Fed's tools.
  • Equity Ownership - Discussed in relation to the "Trump Accounts" proposal.
  • Philanthropy - Discussed in relation to the "Trump Accounts" proposal.

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