Shall We Repeal the Laws of Economics – Part III

Howard Marks · Oaktree Capital Management

Treasury's long-dated buybacks are a cosmetic, temporary fix that does not address the root causes of rising yields.

The Treasury doubled, then tripled, the maximum size of its long-dated buybacks to push long yields down. Marks argues that buying bonds only lifts prices while the buying continues. Once it stops, the market reverts to where fundamentals put it, so the effect is fleeting. He compares it to a column of water holding up a ball, which falls when the pumping stops. Long rates fell briefly after the announcement and then bounced back the next day. He also says the intervention ignores the causes of the rise (sticky inflation, deficits, AI capital demand). Officials' announcements are largely psychological and their influence wanes without attention to root causes. Market reaction to the expanded buyback was underwhelming, with yields rising. He calls it like a doctor applying an ice pack to a fever: it may lower the temperature, but the patient won't get well until the underlying cause is treated.

“I view this action as an attempt to improve the interest rate picture cosmetically.”at 3:33

Howard Marks · Oaktree Capital Management

Long-term Treasury yields reflect fundamentals and are unlikely to fall anytime soon.

Marks rejects Treasury Secretary Bessent's claim that yields are detached from fundamentals (blaming the Iran war and thin liquidity in the 30-year market). He argues the fundamentals are what drive them. Those include inflation running above target (PCE 3.7% in July), with investors demanding an inflation premium on long bonds. They also include the need for fresh issuance to fund deficits of about $2 trillion in net new supply, and the capital demand from the multi-trillion-dollar AI build-out, which competes for the same savings. Together these put upward pressure on yields and argue against a meaningful decline in rates anytime soon.

“I think US long term bond yields are reflecting the fundamentals as just described.”at 10:43

Howard Marks · Oaktree Capital Management

US deficits are unsustainable and inflationary at near-full employment, with no serious budget discipline in sight.

The deficit is about 6% of GDP, which Marks calls extraordinarily high for an economy in prosperity with unemployment at 4%. Net interest outlays are projected above $1 trillion this year, more than the defense budget, and they will rise quickly if debt grows faster than GDP. Deficit spending during expansions adds to liquidity and aggregate demand, which feeds inflation, and the government is running large deficits in good times with no talk of balanced budgets. Marks ties this to Keynes, who advocated deficits in slowdowns and repayment during growth. He argues the US is doing the reverse. Buffett's view is also cited, that the deficit is unsustainable over a long period and the cost is already being imposed.

“Today's deficit is in the vicinity of 6% of GDP, an extraordinarily high level for an economy enjoying prosperity with unemployment of only 4%.”at 7:38

Howard Marks · Oaktree Capital Management

A serious probability of US default on its debt is unlikely; the US can keep financing deficits in dollars.

Marks says it is hard to identify what would stop the US from financing deficits by adding to debt. He does not see a serious probability of the US failing to repay as scheduled, because its debt is denominated in a currency it issues. The dollar is the world's main reserve currency, with 89% of FX transactions in 2025 and 57% of allocated official reserves in Q1 2026. He contrasts this with Weimar Germany, whose money creation to finance deficits led to a currency collapse. He concedes that the 'can't go on forever' logic still holds, so the problem is the cost and the eventual need to fix it, not a near-term default.

“I don't think there's a serious probability The US will fail to repay debt as scheduled.”at 12:57

Howard Marks · Oaktree Capital Management

The dollar will remain the world's main reserve currency, since no alternative is ready to replace it.

Marks argues the world needs safe, liquid reserve currencies, and for the dollar to lose its primary role another currency or group would need to take a larger share. The euro remains second but has not closed the gap with the dollar 15 years after it was seen as a possible challenger. The renminbi holds only about 2% of allocated official reserves, and capital controls and geopolitical tensions make a rapid rise unlikely. Talk of a China-Russia-Iran alternative is noted but treated as speculative. Gold has reportedly surpassed the dollar as the leading central bank reserve asset, but it is not used in transactions. Crypto plays a negligible reserve role. Marks concludes the world is probably stuck with the dollar for now, so the US can keep servicing its debt in nominal dollars.

“For the most part, the world is probably stuck with the dollar for now.”at 15:15

Howard Marks · Oaktree Capital Management

Yield suppression and fiscal excess risk dollar debasement, though past dollar debasement fears did not materialise.

Marks sees a real risk that the US pays its debts with dollars of lower purchasing power, the 'debasement trade'. The FT argued that the Treasury's bond-yield suppression signals a willingness to let the currency fall to cap borrowing costs. Marks agrees such moves can be self-defeating. Investors worry about the purchasing power of the dollars they will be repaid in, so they demand higher rates on new dollar debt. He also notes that, after the 2008 Fed balance-sheet expansion, many feared debasement and inflation, but the dollar was not durably debased and sustained high inflation did not follow. So the risk is credible but not inevitable. He also suggests that if the US's habits catch up with it, the likely outcome is a lower opinion of the dollar.

“Such actions can be self defeating because they make people worry about the purchasing power of the dollars with which they'll be repaid, which makes them demand higher interest rates on new dollar debt.”at 16:34

Howard Marks · Oaktree Capital Management

US inflation is stubbornly above target, with PCE at 3.7% versus a 2% goal, keeping pressure on yields.

Marks identifies inflation as one of the key causes of the rise in long rates. PCE inflation was 3.7% in July, versus the Fed's 2% target. He says this is the primary reason the Fed raised its benchmark rate the previous week. Elevated oil prices from the war with Iran threatened to keep inflation high. Because inflation erodes the purchasing power of the currency, investors buying long-term bonds demand yields that include an inflation protection component. The result is higher long-term yields, which is why the Treasury's intervention does not address the underlying issue.

“inflation is stubbornly higher than is desirable. For example, PCE inflation was 3.7% in July versus the Fed's long term target of 2%.”at 5:41

Howard Marks · Oaktree Capital Management

The multi-trillion-dollar AI build-out adds to capital demand and puts upward pressure on interest rates.

Marks argues that US growth plus the government's deficit needs, combined with the AI build-out, create strong demand for debt and equity capital. Simple supply and demand says increased demand for capital raises its price, which is the interest rate. McKinsey estimates over $5 trillion will be spent worldwide on AI-related data centers through 2030. A fair bit will be borrowed, and equity raised for it will draw on the same pool of available capital, which affects what bonds must pay to attract buyers. That adds to the forces keeping long-term rates high.

“and to that is added the multi trillion dollar investment in AI. The result of this combination is strong demand for debt and equity capital.”at 9:07

Howard Marks · Oaktree Capital Management

The US must raise revenue via higher top tax rates and fewer preferences, and hold spending growth below GDP.

Marks prescribes a multi-part fix for the deficit. First, raise revenue as a share of GDP through higher income tax rates, especially at the top, since the top federal marginal rate is low relative to much of the postwar period, and by eliminating tax preferences. Second, hold spending growth below GDP growth. Third, boost productivity and growth. He says a country that won't cut spending has to look at revenue, and he doubts there is another solution. He admits few people will like these measures. The argument rests on the arithmetic of deficits and debt-to-GDP rather than a near-term forecast.

“Increase revenues as a percentage of GDP through higher income tax rates, especially at the upper end, where the top federal marginal rate is quite low relative to much of the postwar period”at 19:55

Howard Marks · Oaktree Capital Management

AI is more than anything else a productivity tool, and faster productivity growth would help shrink deficits relative to GDP.

Marks argues that faster GDP growth would both raise tax revenue and cut spending relative to GDP, which is the best way to reduce the deficit. The strongest route to that is productivity gains. He names increased use of AI as one driver, since AI is more than anything else a productivity tool. This is part of a broader argument, alongside solid economic growth and reduced regulation. The point is brief and not supported by quantified evidence, so it is a hedged, qualitative view.

“The best way to accomplish this would be through increased productivity, ... increasing use of AI, which more than anything else is a productivity tool”at 20:32

Howard Marks · Oaktree Capital Management

The US equity problem is fiscal and dollar risk, not US companies, so selling US stocks is not the answer.

Asked whether to sell US stocks because of deficits, Marks says no. The problem is one of US fiscal management and, potentially, the dollar, not of US companies or the US stock market. Moving out of US stocks into bank deposits, money market funds or bonds would not escape the risk, because those are dollar-denominated. If US bad habits catch up with it and investors lose faith in Treasuries, the likely channel is a lower opinion of the dollar. Those who want to hedge would have to move into non-dollar assets, which carry their own risks. He does not oppose diversification for investors with non-dollar needs. He opposes a large-scale shift out of dollar assets, and says selling dollar assets may not be the answer.

“The problem we face isn't a problem with The US stock market or with US companies. It's a problem with US fiscal management and ultimately a potential problem with the US dollar.”at 21:56

Howard Marks · Oaktree Capital Management

Non-US developed and emerging companies have weaker growth, less scale and tougher regulation than leading US firms.

Marks considers whether investors should diversify away from US dollar assets and concludes that moving into non-US companies brings other risks. Many developed-market companies have poorer growth prospects than leading US firms, less scale and fewer economies of scale, and operate in more highly regulated, less business-friendly jurisdictions. Emerging-market firms often look like they have good growth potential, but realising it is much more uncertain. He cites the US's advantages as the reason most institutions have been heavily allocated there: free markets, a pro-business climate, innovation, rule of law, moderate regulation, higher education and deep capital markets, which he says no other country matches. So he sees limited case for a large non-US shift.

“Many companies elsewhere in the developed world have poorer growth prospects than leading US companies, and less scale,”at 22:58