Paul Krugman Warns Scott Bessent: Treasury ‘Talking Big’ Won’t Control Bond Markets

In a Substack post, the economist stated that global forces, rather than U.S. policy alone, are helping drive long-term interest rates higher.

• Krugman specifically took issue with Bessent’s recent “I am the house now” comment.
• He wrote that the Treasury secretary was “talking big” and warned that the government cannot simply dictate market outcomes through intervention.
• Stanley Druckenmiller, Paul Donovan and Michael Burry have also questioned or criticized aspects of Bessent’s approach to markets.

Economist and Nobel laureate Paul Krugman on Wednesday warned Treasury Secretary Scott Bessent against overestimating his ability to control financial markets, stating that global forces are playing a larger role in the recent rise in long-term interest rates.

In a Substack post, Krugman took aim at Bessent’s declaration that “I am the house now” after the Treasury Secretary said traders could bet against him if they disagreed with U.S. efforts to support the Japanese yen. Bessent has also expanded the Treasury’s bond-buyback program to ease pressure in the long-term Treasury market.

“Talking big” cannot reverse those broader market forces, Krugman wrote, calling Bessent’s attempt to push rates lower with Treasury intervention “foolish.”

U.S. stock futures were mixed in early morning trade on Thursday after a pullback in the previous session, driven by Middle East tensions that pushed Brent crude past $101 per barrel and the 10-year Treasury yield to multi-year highs near 4.85%.

The SPDR S&P 500 ETF (SPY) edged 0.06% higher, while the SPDR Dow Jones Industrial Average ETF (DIA) agained 0.2% and the tech-heavy Invesco QQQ Trust (QQQ) slipped as much as 0.3%. On Stocktwits, retail sentiment around SPY ticked fell to ‘neutral’ territory from 'bullish' territory over the past day. 

Krugman Warns Bessent About The Limits Of Market Power

Krugman stated that policymakers should be careful about making sweeping claims of control over markets because doing so can damage their credibility if investors ultimately call their bluff.

He pointed to the 1992 collapse of Britain’s attempt to defend the pound, when the country was forced to abandon its currency peg after coming under intense pressure from financial markets.

Bessent was working for billionaire investor George Soros at the time. Soros famously bet against the pound during the episode, helping cement his reputation after the trade generated substantial profits.

“So Bessent should know the risks of talking big when you might not have the means to deliver.”

– Paul Krugman, Distinguished Professor of Economics, CUNY Graduate Center 

AI Investment Could Be Driving Long-Term Rates Higher

Krugman said his argument does not mean he believes the Trump administration is solely responsible for the increase in U.S. borrowing costs.

Instead, he noted that long-term interest rates have been rising across major economies. According to the economist, one potential explanation is the surge in investment tied to artificial intelligence.

Krugman pointed to the scale of current spending on information technology, arguing that the investment boom could ultimately exceed the technology investment surge of the late 1990s. He noted that long-term interest rates were also relatively elevated during that period, even though inflation was low and the U.S. government was running a budget surplus.

Markets Test Treasury’s Ability To Hold Down Yields

The Treasury’s expanded $6 billion buyback program has not prevented the 10-year Treasury yield from climbing toward 4.85%, while the 30-year yield moved above 5.2%.

Bessent’s comments have also drawn scrutiny from Wall Street. Billionaire investor Stanley Druckenmiller, Bessent’s former mentor, has questioned Treasury efforts to influence long-term yields. UBS economist Paul Donovan has also compared the yen intervention with Britain’s failed 1992 defense of the pound.

Michael Burry weighed in on X, responding sarcastically to Bessent’s remarks with “Hmm, OK?” and sharing a video titled “I Am The Law.” In another post, Burry said he could imagine hedge funds “clearing some room in the portfolio to take him on.”

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