Skipping tough economic choices now will only make them harder later

How the building can take over the personLast week I wrote about the possibility of a financial crisis in the United States. Given that the three indicators I identified were grounded in fact rather than speculation, I felt it was reasonable to sound the warning. Since then, interest rates have continued their upward trajectory, both at the short end and across the longer end of the yield curve. Fed chairman Kevin Warsh’s speech the previous Friday appeared designed to reassure markets that his primary concern remains bringing inflation under control. Many interpreted this as signalling that the Fed may raise its funds rate at its September 16 meeting. That is by no means a foregone conclusion. The decision will depend on how inflation develops over the next couple of weeks. But the possibility of higher rates is clearly worrying the US administration. Treasury Secretary Scott Bessent, speaking at the annual G20 finance ministers’ meeting this week, sought to cast doubt on the need for higher rates, despite the upward pressure on prices that the recent trade war with Canada could create. His position is hardly surprising. A continued rise in interest rates would place the US government’s finances, already under considerable strain, under even greater pressure. And this is precisely the conflict that lies behind the independence of central banks. They were given independence so that decisions on interest rates, and monetary policy more generally, could be made primarily on the basis of economic conditions and the need to control inflation – rather than the financing needs of the government of the day. If Bessent’s views can be seen as inevitably coloured by his responsibilities as treasury secretary, what are we to make of those of former Council of Economic Advisers chairman Steven Miran, who also served on the Federal Reserve Board? Miran argued in the Financial Times last week, as well as in various podcasts, that all is well with the US economy. Inflation, he suggested, had been wrongly estimated and would come down after a change in the calculation methodology due to be implemented next month. The rise in interest rates, meanwhile, was not a sign of weakness but evidence of continued economic growth – something, in his view, we should all be cheering. Now, never being able to agree on an economics question is something the profession is famous for. But the degree to which economic arguments can become coloured by the positions of those making them seems to have reached new heights. It reminded me of a comment I heard Scott Bessent made in July 2025, in an interview with Laura Ingraham on Fox News. Speaking about why then Fed chairman Jerome Powell was not lowering interest rates despite President Trump’s insistence that he should, Bessent argued that when someone takes over a position of authority, “the building takes over the person”. It was a striking observation. What he meant was that decisions are often based not on what the individual knows, at heart, to be correct, but rather on what would benefit the office in which he now finds himself. The institution itself begins to shape the person. Bessent added that he did not think this had happened to him. Well, it seems that his own insight may now have come back to haunt him. His recent attempts to influence the direction of long-term interest rates have attracted criticism from sections of Wall Street. Among the most prominent critics was the highly respected billionaire investor Stanley Druckenmiller, a mentor to both Bessent and Kevin Warsh, who was scathing in an opinion piece in the Wall Street Journal. What is Bessent trying to achieve? His efforts to shore up the bond market are not simply about alleviating the government’s enormous interest-payment burden. He also wants to ensure that the foreign capital flowing into American stocks and bonds remains there, continuing to provide an important source of financing for the US economy. Whether he will succeed is an open question. But trying to engineer lower long-term borrowing costs while the underlying fiscal problem remains unresolved is unlikely to provide a lasting solution. Markets ultimately respond to fundamentals, however inconvenient those fundamentals may be. The Financial Times, in an editorial on Wednesday, essentially advised Bessent to stop trying to fight the market and instead listen to the warnings it is sending. A friend recently reminded me of an old observation, attributed to Keynes, that “markets can remain irrational longer than you can remain solvent”. Betting against markets can be an expensive business if the fundamentals eventually catch up with you. Unfortunately, our own former President Demetris Christofias was not a great student of this particular lesson. In the years leading up to Cyprus’ 2013 financial crisis, the warnings from the markets became increasingly difficult to ignore. Yet difficult decisions were repeatedly postponed. When the crisis finally arrived, the choices available were considerably more painful than they would have been had action been taken earlier. The lesson for Bessent is therefore a simple one. He should not make the same mistake. Getting to grips with the US government’s enormous fiscal deficit is fundamental to the country’s long-term prosperity. There are no clever shortcuts that can permanently substitute for dealing with the underlying problem. Betting on the productivity gains from AI to come to the rescue is equally uncertain. Even if those gains eventually prove enormous, they are too uncertain and too far in the future to solve the immediate problems facing the US government. The temptation, of course, is to believe that the right person in the right building can somehow overcome the arithmetic. But arithmetic has a stubborn habit of eventually winning. Bessent was wrong about Powell. Powell showed remarkable resilience and adhered to the lessons learned from decades of central-bank experience, displaying the independence of mind required of him. Will Bessent rise to the occasion? Or will he succumb to the very phenomenon he so neatly described – serving the interests of the building in which he now finds himself? The difficult choices avoided today do not disappear. They simply become more painful tomorrow.