Source: The Intelligent Investor
On September 22, Howard Marks, co-founder of Oaktree Capital, released his latest investment memo, "Are We Going to Abolish the Laws of Economics? (Part III)."
Over the past two years, Max has addressed "economic laws" three times, each time under the same title.
In the first article of September 2024, he discussed government intervention in market prices and economic activity; by June 2025, he published a second piece, this time focusing on how government intervention in long-term bond yields ties to the issue of America's ever‑expanding national debt.
The U.S. federal debt has already reached $40 trillion, and this year alone, net interest payments are expected to exceed $1 trillion.
Recently, the U.S. Treasury has begun expanding its repurchase operations for long-term Treasury securities, aiming to inject liquidity into the market and somewhat ease upward pressure on long-term interest rates.
Max doesn't really believe in this approach.
He used a very vivid analogy: it's like applying an ice pack to a patient with a fever. The temperature may drop temporarily, but the illness remains untreated at its root.
Just two days before this memo was released, we had just compiled Max's live interview with Bloomberg in New York.
Speaking of the Federal Reserve, he said he prefers a central bank that is "less aggressively interventionist" and disapproves of excessive forward guidance. Interest rates should naturally emerge from the bargaining between borrowers and lenders; if the central bank keeps signaling to the market what it plans to do next, over time this could end up turning into the tail wagging the dog.
This time, he applied the same logic to U.S. Treasury bonds.
Why are long-term interest rates rising?
Inflation remains elevated, the government continues to run budget deficits, and debt is mounting; meanwhile, AI infrastructure is consuming trillions of dollars in capital spending. As the demand for capital grows ever stronger, the cost of capital—interest rates—will naturally rise.
So, Mark deliberately quoted Stanley Druckenmiller: "If a 30-year Treasury bond has to yield 5.5% just to sell, that's not a crisis—it's a bill."
This bill will have to be paid in the end.
Of course, Max does not believe that the U.S. debt problem is intractable. Raising fiscal revenues, curbing the growth of expenditures, and ensuring that the economy and productivity expand faster than the debt…
The solution is not mysterious; the real challenge lies in how all parties can forge a consensus and translate it into action.
And until Washington provides an answer, investors face their own challenges.
If you're worried about U.S. debt, should you sell your U.S. stocks? According to Max, that's not the answer. After all, switching to U.S. Treasury bonds, bank deposits, or money market funds still leaves you holding dollars; and shifting into European assets, emerging markets, gold, real estate, or even cryptocurrencies would expose you to entirely different risks.
At this point, one will notice that Howard Marks ultimately returns to a theme he has repeatedly emphasized over the years: investing is never about finding a risk-free haven.
More often, it's about identifying where the risks lie and then deciding which ones you're willing to take on.
From this perspective, it becomes clearer why he says that the uncertainty and difficulty of investing today are greater than ever before.
The Smart Investor has compiled the full text of the memorandum and is sharing it with everyone.
Should We Abolish Economic Laws? (III)
By Howard Marks
In September 2024 and June 2025, I penned two memoranda criticizing the government's attempts to override economic principles. My fundamental assessment is that such efforts are likely both ineffective and potentially harmful.
The economy is, in itself, a naturally functioning organism. Attempts to manipulate it artificially will distort its operating mechanisms and typically worsen the overall outcome.
Sometimes, in order to avert outcomes that society deems unacceptable—such as widespread poverty or unemployment—it is indeed necessary to intervene. However, such interventions should be targeted and carried out with the utmost caution.
The best analogy is nature.
In the movie "The Lion King," there's a song called "Circle of Life." The cycle of life has its cruel side, as it operates through mechanisms like "survival of the fittest"; yet precisely because of this, the entire ecosystem can maintain balance.
Humans can take measures to protect prey by suppressing predators, but such interventions may have secondary effects, leading to the uncontrolled proliferation of other species and ultimately disrupting the balance of the entire ecosystem.
One species preying on another may seem cruel, but human efforts to improve the overall outcome can easily lead to unintended consequences.
This, in turn, brings me to the question of how the market ought to be governed by human design.
The most recent attempt was aimed at addressing the recent steady rise in long-term interest rates.
On August 17, the yield on the U.S. 30-year Treasury bond closed above 5.3%, hitting a 19-year high at the time.
Of course, the government or the central bank may seek to curb such increases and bring long-term interest rates down, since higher long-term rates tend to: (a) dampen economic growth; (b) reduce the affordability of goods that typically require borrowing, such as automobiles and housing; (c) raise the cost of servicing the federal debt, which has recently surged to a staggering $40 trillion; and (d) signal waning confidence among market participants.
The Federal Reserve cannot directly set long-term interest rates in the same way that the Federal Open Market Committee sets a target range for the federal funds rate. The federal funds rate, however, exerts a strong influence on other short-term interest rates.
The U.S. Treasury likewise does not "set" long-term interest rates, but it can influence them through bond issuance and repurchases.
Accordingly, on August 19, the Ministry of Finance announced that it would at least double the maximum size of its long-term Treasury repurchase operations, raising it from $2 billion per transaction to $4 billion. The Ministry stated that this measure is intended to provide greater liquidity support for long-term securities.
The next day, U.S. Treasury Secretary Scott Bessent said he was willing to take further action, coming close to a "whatever it takes" commitment.
All else being equal, an increase in buying pressure should push bond prices higher, and higher bond prices translate into lower bond yields.
Following the announcement, long-term interest rates fell immediately but rebounded the next day.
01. Will this solve the problem?
I believe this approach is an attempt to superficially improve the interest-rate environment.
It may help mitigate the effects of the interest-rate hikes listed above, but it cannot be said to address the underlying root causes.
First, any effect may be only temporary.
All else being equal, buying an asset can drive its price higher, while selling it can push the price lower.
However, the effects of your actions may be fleeting. Once you cease intervening, the market is likely to revert to the trajectory it would have followed had you never intervened in the first place.
The image in my mind is a column of water shooting upward from the ocean. As long as the water keeps surging upward, it can keep a ball suspended just above the surface. But the moment the flow stops, the ball will fall.
On August 24, investor Stanley Druckenmiller published a commentary in The Wall Street Journal (click to read:Government bond repurchase is a grave mistake! Stanley Druckenmiller penned an article criticizing the U.S. Treasury Secretary: "Let the bond market speak for itself."), responding to Bessent's aforementioned statement.
Here are a few passages that I particularly like:
Each person, in order to push down yields by one basis point, is effectively subsidizing the delay…
No matter how many basis points of cost this maneuver may save, it will ultimately come at the price of delays that are several times greater…
When the government tries to force prices to defy economic fundamentals, it will ultimately fail. The only variable is how much money it will spend before conceding defeat.
Druckenmiller knows what he's talking about, because the most famous macro trades in history were conceived with his involvement.
In 1992, he oversaw the day-to-day operations of George Soros's Quantum Fund. At the time, they bet that the Bank of England would be unable to defy economic fundamentals and continue propping up the pound, ultimately emerging victorious.
According to reports, that deal earned the fund roughly $1 billion. Of course, that was still a time when $1 billion truly counted as a substantial sum.
Second, this approach fails to directly address the root causes driving interest rates higher.
The rise in interest rates that the Ministry of Finance seeks to avoid is not an unexplained, random occurrence.
Possible causes include:
1. Inflation has stubbornly remained above the target level. For example, in July, the PCE inflation rate stood at 3.7%, while the Federal Reserve's long-term goal is 2%. This was also the primary reason the Fed raised its benchmark interest rate last week. High oil prices linked to the conflict with Iran could keep inflation elevated. Because inflation erodes the purchasing power of money over time, investors demand that yields on long-term financial instruments incorporate a premium to compensate for inflation, thereby safeguarding the real value of their future returns.
2. The United States has demonstrated a complete lack of fiscal discipline. Thanks to the dollar's status as the world's reserve currency, the U.S. has long enjoyed what I call a "golden credit card": no credit limit, bills that never come due, and exceptionally low interest rates. Yet the U.S. has not used this advantage wisely.
A century ago, John Maynard Keynes strongly advocated deficit spending; in fact, deficit spending is virtually inseparable from "Keynesian economics." He argued that during economic downturns, fiscal deficits should be used to stimulate employment, with the resulting debt repaid once the economy has resumed growth.
Today, the United States is running massive deficits even during a period of economic prosperity, yet we hardly hear anyone discussing fiscal balance; in fact, we rarely engage in any meaningful conversation about the budget at all.
It should also be noted that a large fiscal deficit itself may drive up inflation, especially when the economy is already operating near full capacity, because the liquidity injected into the economy through government spending exceeds the liquidity withdrawn via taxation.
This additional liquidity will boost aggregate demand, thereby spurring economic growth, while also raising inflation and further exacerbating the problems mentioned above.
At present, the U.S. fiscal deficit stands at roughly 6% of GDP. For a country enjoying robust economic growth and an unemployment rate of just 4%, this is an exceptionally high level.
This year, net interest payments are expected to exceed $1 trillion—more than the defense budget. If debt continues to grow faster than GDP, interest expenses will rise even more rapidly. (And what if interest rates keep climbing from here?)
Such reckless spending inevitably raises a question: might this credit card be confiscated, or at least subject to some degree of restriction?
The most immediate consequence is a further rise in U.S. interest rates on its debt. This, in turn, will increase debt-servicing costs, further widen the fiscal deficit, and perpetuate the vicious cycle caused by a lack of fiscal discipline.
3. The Ministry of Finance's repurchase funds are drawn from its general cash account, and these funds ultimately still need to be replenished through additional bond issuance.
If, while increasing repurchases of long-term government bonds, we also boost the issuance of short-term Treasury bills, these transactions will not alter our overall debt level; they will merely shorten the average maturity of our debt. This implies that we will need to refinance more frequently at the prevailing market interest rates at the time.
I fail to see how this would bolster public confidence in the U.S. fiscal situation.
4. The need to finance the massive federal budget deficit was already叠加 on top of the capital demand naturally arising from U.S. economic growth; now, it has been further compounded by AI-related investments totaling several trillion dollars.
Taken together, these factors result in robust demand for both debt and equity capital.
The simplest rule in economics is this: when the demand for a good increases, its price rises.
Accordingly, the increasingly robust demand for capital will drive up the "price of money"—that is, interest rates—entirely in line with expectations.
Looking ahead, building AI infrastructure could require investments totaling trillions of dollars. McKinsey estimates that by 2030, global data-center spending directly tied to AI will exceed $5 trillion.
A substantial portion of these funds is likely to come from borrowing. Even the capital raised through equity sales, however, draws resources from the broader pool of available capital, thereby influencing the interest rates that bonds must offer to attract investors.
Meanwhile, the Ministry of Finance must both refinance a massive stock of maturing debt and raise funds to cover the annual fiscal deficit.
Most of the bonds issued by the Treasury are simply rollovers of maturing debt, but the annual net issuance of roughly $2 trillion still adds to the supply that investors must absorb, putting upward pressure on yields.
This also makes it less likely that interest rates will decline in the near term.
According to the Financial Times on August 22, "Bessent said on Thursday that 'yields do not reflect underlying fundamentals,' citing the impact of the war in Iran and the 'very poor' liquidity in the 30-year U.S. Treasury market."
My view is quite the opposite. I believe that U.S. long-term Treasury yields are currently reflecting the fundamental factors outlined above.
Third, I believe that statements from the Treasury Department and the Federal Reserve often have primarily a psychological impact.
Their purpose is to elicit a specific market reaction—just as this time, the market did indeed react for an entire day.
However, over time, this impact may diminish, particularly if the underlying issues remain unaddressed.
In this particular instance, the most important point is that the market appears to be unimpressed.
Below is a commentary released by Evercore ISI on September 9:
At 11 a.m. today, it was time for Treasury Secretary Bessent to officially unveil the first round of repurchase operations under the expanded "Treasury Reversal Operation." On Thursday, the Treasury announced that it would triple the maximum size of each individual repurchase operation from $2 billion to $6 billion, surpassing the August commitment of "at least $4 billion." However, the market appears unmoved; as of this writing, yields are actually rising.
The goal should not be to push interest rates lower; rather, it should be to address the factors that are driving them higher.
Forcing interest rates lower by purchasing bonds is like a doctor applying ice packs to a patient with a fever.
An ice pack may lower the patient's body temperature, but until the underlying cause of the fever is addressed, the patient is unlikely to truly recover.
02. Is debt a problem?
Many people ask me this question, and it's indeed not easy to figure out.
On the one hand, simply put, the United States cannot indefinitely spend more than it earns—this seems self-evident.
As the economist Herbert Stein once said, "If something cannot go on forever, it will stop."
You can't argue with that!
On the other hand, it is nonetheless difficult to determine what would prevent the United States from continuing to finance its fiscal deficit by increasing its debt.
During the 2016 presidential campaign, then-candidate Donald Trump made some vague remarks about U.S. debt, suggesting he might "negotiate a deal" on it.
However, I don't think the likelihood that the United States would genuinely be unable to repay its debts as agreed is very high.
Why can't it be repaid?
After all, our debt is denominated in the U.S. dollar, which is issued by the United States itself.
When I was young, I once owned a 1,000-mark banknote issued in the early 1920s by the Weimar Republic, which later had "1 million marks" overprinted on it.
At the time, Germany was burdened by the massive fiscal strain imposed by its World War I debts and war reparations. By printing money, Germany was able to finance its budget deficits, but this also precipitated the collapse of its currency.
As long as the U.S. dollar remains the world's dominant reserve currency—by 2025, 89% of global foreign-exchange transactions involved the dollar; and in the first quarter of 2026, the dollar accounted for 57% of globally allocated official foreign-exchange reserves.
The United States appears likely to remain able to finance its fiscal deficit using its own currency.
"Ah," you might say, "but won't the U.S. dollar lose its status as the world's reserve currency? If too many dollars are printed, won't people stop wanting to hold them?"
This is a very difficult question to answer.
I believe the world needs a safe, highly liquid reserve currency to hold foreign-exchange reserves and facilitate international transactions.
If the U.S. dollar is no longer the dominant reserve currency, then another currency—or a basket of currencies—must assume a greater role.
Fifteen years ago, some people believed the euro could achieve this. To this day, the euro remains the world's second-largest reserve currency, but it has yet to close the gap with the U.S. dollar.
Later, China's economic development at one point gave rise to the expectation that the renminbi might attain a more prominent status as an international reserve currency.
However, the renminbi currently accounts for only about 2% of global allocated official foreign-exchange reserves, and capital controls coupled with global geopolitical tensions make it unlikely that the currency will rapidly gain prominence in the near term.
Gold is not widely used for transactions, and for obvious reasons, it likely will not be in the future. However, according to a report released last week by MUFG Bank, gold has recently surpassed the U.S. dollar to become the largest reserve asset held by central banks worldwide.
Finally, the role of cryptocurrencies in reserve assets remains negligible.
So, by and large, the world today is still unlikely to do without the U.S. dollar.
Accordingly, the United States will likely remain able to continue making nominal payments in U.S. dollars and fulfilling its debt obligations.
The next question is: What will happen to the exchange rate?
All else being equal, the large-scale creation of a currency will reduce its value relative to goods and other currencies.
Of course, you could easily turn a 1,000‑mark banknote into a 1,000,000‑mark note, but in the end it might still only buy you a goat. (I already used this example in my 2008 memorandum, "The Limits to Negativism.")
In fact, those who are now pondering how the United States will address its debt problem have already begun discussing the so‑called "currency devaluation trade," whereby certain measures would allow us to repay our debts using dollars whose purchasing power has declined.
In other words, it means handing over fewer goats.
As the Financial Times wrote on August 22:
The Treasury's latest effort to push down bond yields sends a clear signal: rather than rein in spending, the United States appears willing to distort markets to cap borrowing costs, even at the expense of currency depreciation. This, in turn, has raised further questions about the dollar's status as a safe-haven asset.
This approach may backfire.
Because it would raise concerns about the future purchasing power of the dollars they are repaid, they would demand higher interest rates on newly issued dollar‑denominated debt.
It is worth noting that in 2008 I referred to that Weimar banknote bearing an overprinted denomination because, at the time, there was concern that central banks were injecting vast amounts of liquidity in an effort to pull us out of the global financial crisis.
Many people, including myself, worry that this could lead to a depreciation of the U.S. dollar relative to other currencies or accelerate inflation.
But later, the U.S. dollar did not experience a sustained depreciation against major currencies, nor was there a corresponding persistent high inflation.
In 2008, the Federal Reserve expanded its balance sheet to avert what appeared to be an impending collapse of the global financial system. This was a necessary and prudent measure.
In fact, it did not devalue the U.S. dollar. In my view, it largely merely offset the monetary and credit destruction wrought by the global financial crisis.
Meanwhile, today's large-scale deficit financing is effectively paying for the fiscal deficits we ourselves have created. Moreover, it is occurring during a period of economic prosperity, which could further boost aggregate demand and intensify inflationary pressures.
Many times, it's best to leave the final word to Warren Buffett.
So, for this section, I'd like to conclude with a passage from his remarks at Berkshire Hathaway's annual shareholders' meeting in May 2025:
What truly concerns me about the United States is its fiscal policy… The fiscal deficits we are currently running are unsustainable over the very long term… We don't know whether this will take two years or twenty, because throughout history there has never been a country quite like the United States.
03. Is there a solution?
The problem we are facing now is not something that requires guesswork—it is simply a mathematical one.
Our expenditures exceed our revenues; our debt as a share of GDP continues to rise; and our interest payments are also increasing rapidly.
This issue has been around for a long time; people recognized it early on and have been sounding the alarm for years. Now, it finally seems to be having a tangible impact.
It won't go away on its own, and so far, no one has truly stepped forward to address it.
An acute crisis, such as a failed U.S. Treasury bond auction or a mass sell-off by buyers, seems unlikely.
But the costs of chronic conditions are already here, and we have already begun to bear them.
As Druckenmiller wrote in The Wall Street Journal: "If a 30-year Treasury bond has to offer a 5.5% yield just to sell, that's not a crisis—it's a bill."
We must either pay this bill—no matter how much it eventually grows—or address the root causes behind it.
If an individual or a country consistently spends more than it earns, there is only one truly sustainable solution: change their behavior. The only hope lies in achieving the following:
Forget phrases like "reduce debt" or "pay off debt";
Accept one reality: our debt will probably never be lower than it is today.
Restore fiscal responsibility and begin to genuinely prioritize the budget and its implications.
"Flattening the curve" (borrowing a term from the COVID-19 pandemic);
By raising income tax rates, particularly for the highest‑income bracket, and by eliminating tax preferences, the share of fiscal revenue in GDP can be increased. Compared with most postwar periods, the current federal top marginal income tax rate in the United States is relatively low;
Keep the growth rate of expenditures below the GDP growth rate, and to achieve this, we must embrace a fundamental principle: resources are finite.
There is one more factor that can help. All else being equal, boosting GDP growth can both increase tax revenues and reduce the share of total expenditures in GDP. The most effective way to achieve this is by raising productivity.
Increases in productivity can result from the combined effects of: (a) robust economic growth; (b) the increasingly widespread adoption of AI, given that AI's defining characteristic is its role as a productivity-enhancing tool; and (c) the implementation of business-friendly policies that reduce unnecessary regulations that impede efficiency.
However, there remains one crucial condition: the additional fiscal revenue must not be spent.
If we can achieve these goals, the annual fiscal deficit as a share of GDP should decline, the amount of new debt issued each year will decrease, and the debt-to-GDP ratio may also fall.
I believe this is probably the best outcome we can hope for.
Of course, the measures I've outlined above cannot possibly satisfy everyone. For instance, no one likes paying higher taxes.
However, a country that is unwilling to cut spending must find ways to boost revenue.
I genuinely wonder whether there are any other solutions.
04. What should we do before the problem is resolved?
While we wait for Washington to resolve this issue, what should we do with our investment portfolio?
Last month, a friend of mine asked me this question. He's not an investment professional—rather, he's a nationally renowned entrepreneur. "Should I sell my stocks?"
I told him, "That's not the answer."
What we are facing now is neither a problem of the U.S. stock market nor a problem of U.S. corporations. It is a problem of U.S. fiscal management, and ultimately, it could become a problem for the U.S. dollar.
If you sell your U.S. stocks, where do you plan to put the proceeds? In a bank? In a money market fund? In bonds?
If these assets are still denominated in U.S. dollars, then you have not escaped the risks we've been discussing here.
If America's bad habits eventually begin to take their toll and investors grow increasingly dissatisfied with U.S. Treasury bonds, that dissatisfaction will likely manifest itself in a decline in the dollar's valuation.
If you truly wish to take action against this risk, you may need to turn to: (a) assets denominated in currencies other than the U.S. dollar; (b) non‑financial assets such as gold or real estate outside the United States; or (c) companies based outside the United States or cryptocurrencies.
However, shifting to non‑dollar assets or assets outside the United States entails other risks.
Compared with leading U.S. companies, many firms in other developed countries face weaker growth prospects and are smaller in scale, resulting in fewer economies of scale; moreover, many of these companies operate in jurisdictions with stricter regulations that are less business‑friendly.
Emerging-market companies often appear to have strong growth potential, but whether that potential ultimately materializes is far less certain.
To date, most institutional investors have allocated a substantial portion of their portfolios to the United States, with remarkable success.
The underlying factors—namely, a free-market system, a business-friendly environment, economic dynamism, a spirit of innovation and adaptability, technological and managerial expertise, the rule of law, proportionate regulation, high-quality higher education, and robust capital markets—largely remain in place.
In my view, no other country can simultaneously possess these qualities to the same extent.
Withdrawing capital from the United States inherently entails taking on new risks, and such an approach is all too likely to prove unsuccessful—especially when it is undertaken to sidestep a problem that may not truly materialize until the very distant future.
(Moreover, I don't want to give the impression that fiscal deficits are unique to the United States. If you withdraw from dollar‑denominated assets and convert your funds into another currency that likewise faces depreciation risks, what exactly have you solved?)
This is not to say that I am categorically opposed to diversifying holdings beyond the U.S. dollar.
For investors who anticipate non‑dollar‑denominated expenditures, objectives, or plans in the future, reducing their holdings of dollar‑denominated assets may be prudent.
However, for the reasons outlined above, I don't think this should be implemented on a large scale.
05. A Final Note
Ultimately, you can't ignore economic principles and still expect to come out ahead.
I don't believe the United States can indefinitely spend more than it earns while expecting its creditworthiness to remain unchallenged and its "IOUs"—the U.S. dollar and U.S. Treasury securities—to go unshunned.
This is not an investment issue.
This is a political issue, but it poses challenges for investors.
Selling U.S. dollar assets may not be the answer.
No one could possibly sell enough U.S. dollar‑denominated assets to eliminate this problem entirely. Moreover, such a move would easily appear to be a grave mistake for a prolonged period, since no one knows whether the issue will ever materialize—or when it might.
There is only one truly viable solution.
Will we face this issue head-on and take action?
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Editor/rice