The News
The “confluence” of a political crisis and out-of-control government spending by the U.S. could expose risks hidden in the financial system, Goldman Sachs President John Waldron said at Semafor’s World Economic Summit on Thursday.
“The thing that I worry about is the confluence of a political crisis and a lot of leverage in the Treasury system,” Waldron said. “The more leverage we have, the riskier we make it. So I wish Washington would get its spending under control.”
Waldron pointed to the 2022 U.K. bond market crisis as a cautionary tale. The tinder was an investment strategy popular among pension funds, but poorly understood, that relied heavily on U.K. government bonds. The spark was then-Prime Minister Liz Truss’ “mini” budget plan of tax cuts, which jolted the gilts market and forced pension funds into a vicious selling cycle. The government stepped in to calm markets, and Truss was ultimately ousted from office.
“That was really precipitated by a political crisis,” Waldron said. “It was a Truss budget at that moment that didn’t have a lot of credibility. We uncovered in the run on gilts that there was [leverage embedded].”
He said that Washington is taking a “pretty big bet” assuming that there will be unlimited demand for its debt and that the dollar’s reign will continue. (Carlyle co-founder David Rubenstein noted in an interview that the Dutch guilder was once the world’s reserve currency.) Recent auctions of Treasury bonds have gone poorly, as once-reliable buyers, particularly the Chinese government, have stepped back.
Waldron said Treasury is counting on U.S. consumers to pick up the slack, but warned that might not last.
