Saving the Treasury

The Treasury is rapidly crossing the Monetary Event Horizon. But could Bessent and Lutnick launch a hail mary to save it?

The United States Government is on a path aimed at monetary destruction. The Treasury is currently sitting on a massive $37 trillion of debt, $1.1 trillion of interest expense per year, and $1.9 trillion deficit, all while without directly fighting a major war or dealing with an economic crisis. At the same time, the Fed has run its fastest hiking cycle in its history in order to combat the rising inflation caused by its own monetary easing wave in 2021 and 2022.

So how have the monetary authorities squared this round hole? By hiding their easing behind the scenes.

Generally, when the public hears "QE," they picture headline-grabbing asset purchases: the Fed buying trillions in Treasuries or mortgage-backed securities to keep money flowing through the financial system. These large-scale purchases, first rolled out during the 2008 financial crisis and then revived and expanded during the COVID-19 pandemic, fundamentally altered how central banks support economies. But in the post-COVID era, central banks have turned to quieter, subtler forms of liquidity injections. This is what I (and other analysts) have termed "stealth QE”, and I have written about it in several pieces, like this one here.

Stealth QE enables Powell and others to deliver monetary support and keep financial markets lubricated, all while maintaining the appearance of restraint. Appearance is the key word here- markets can continue to march upwards while the central bankers can go to press conferences and claim that policy is tightening. For those with just a cursory understanding of monetary plumbing, these claims seem to be correct.

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Thank you for supporting my independent macro work! Now, back to the article.

In this piece we’ll discuss how the central planners schemed behind the scenes to save the monetary system in the midst of the hiking cycle. And, we’ll explore how Bessent and Lutnick could pull an unconventional financial sleight-of-hand to try and change the trajectory of the Treasury.

First, we need to grasp the mechanics of how to run Stealth QE- let’s cover some of the main methods they use.

One of the most underappreciated tools for influencing liquidity in the U.S. financial system is the Treasury General Account (TGA). Housed at the Federal Reserve, the TGA is essentially the U.S. government’s checking account. When the Treasury collects taxes or issues debt, the proceeds are deposited into the TGA. When the government spends, whether on Social Security, defense, infrastructure, or stimulus payments, those funds leave the TGA and are deposited into the commercial banking system. This transfer, seemingly mundane, has deep implications for monetary liquidity.

To understand how the TGA acts as a stealth liquidity injection mechanism, consider the monetary plumbing involved. When the Treasury draws down its TGA balance by spending more than it is taking in it injects cash directly into the banking system. This means reserves at commercial banks increase. In turn, these excess reserves support lending, risk-taking, and asset purchases. Effectively, this mimics the liquidity effects of QE, even though the Fed isn't buying any assets.

This means that the TGA is one of the few spigots that can turn financial system liquidity (aka bank reserves or settlement balances) into M2 money supply. This is crucial, because in layman’s terms it means that the Fed can ease without causing inflation as long as the Treasury is not running major deficits. In this case, the reserves will stay trapped in the financial system, since the budget is balanced and the Treasury is matching tax revenues with fiscal outlays, so no new net financing is needed.

I covered this in depth in a piece called The Singularity- please read it if you want more detail.

Historically, the TGA balance hovered at relatively modest levels, most of the time coasting below $100B. But in the aftermath of the 2008 Global Financial Crisis and especially after the COVID-19 pandemic, the Treasury began managing the TGA more actively, often maintaining balances of $1 trillion or more. These elevated balances were justified as “prudence” to manage cash needs, but they also became a macroeconomic lever.

From 2021 to 2023 for instance, the Treasury deliberately drew down its TGA balance from over $1.6 trillion to under $50 billion in just 24 months. This massive outflow represented hundreds of billions of dollars injected back into the banking system. It occurred alongside a lull in QE, which meant the TGA essentially filled the liquidity gap without attracting political scrutiny or stoking inflation fears.

Importantly, this mode of liquidity injection is not controlled by the Federal Reserve, but by the U.S. Treasury. This blurs the line between fiscal and monetary policy, a recurring theme in the modern monetary landscape as pointed out by writers such as Concodanomics. When the Fed is under pressure to pull back from balance sheet expansion, but economic conditions still demand support, the Treasury can quietly use the TGA to cushion the liquidity environment. Bessent has more power than most think.

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Now, again, back to the article!

Conversely, building up the TGA has the opposite effect: it drains liquidity from the system. When the Treasury issues more debt than it spends, essentially parking the proceeds in the TGA, it removes cash (or bank reserves) from circulation. This has happened during debt ceiling standoffs, where the Treasury temporarily halts issuance but later floods the market to rebuild its cash balance, tightening financial conditions in the process.

This dual nature, injecting and withdrawing liquidity, makes the TGA a powerful and stealthy macroeconomic instrument. It can simulate QE without ever touching the Fed’s balance sheet, and it can drain liquidity without raising policy rates.

Another way they can add liquidity is by running Operation Twist 2.0, by running some balance sheet wizardry that the Fed already did back in 2012-2014.