Scott Bessent: Fixing the Fed, Tariffs for National Security, Solving Affordability in 2026

Bessent reports fiscal contraction of $200-300B for calendar year 2025 (0.7-1% of GDP), down from Biden's $1.8T deficit. Details how Biden administration front-loaded 40% of government spending in Q4 2024 for election purposes. Sets target of sub-3% deficit-to-GDP ratio by end of Trump's term to stabilize debt.

• •Achieved slight fiscal contraction in FY2025 to $1.78T vs $2T estimates, despite government shutdown timing
• •Calendar year 2025 projects $200-300B fiscal contraction with nominal growth near 6%
• •Deficit-to-GDP peaked at 6.8% under Biden, targeting mid-5% for 2025 and sub-3% by 2028
• •Biden administration spent 40% of annual budget in Q4 2024 attempting to boost Harris campaign

Comprehensive explanation of tariff policy as national security tool and negotiating leverage. Discusses fentanyl tariffs forcing China/Mexico/Canada cooperation, Chinese business model based on volume over profit, and Supreme Court case implications. Explains transition from tariff revenue to domestic tax receipts as manufacturing reshores.

• •Tariffs used for national security: fentanyl deaths dropping after tariffs on China/Mexico/Canada
• •Chinese business model based on volume/employment/5-year plans - they keep producing despite tariffs
• •San Francisco Fed study with 150 years of data shows tariffs are disinflationary, not inflationary
• •Supreme Court case framing: President can do 100% embargo but plaintiff argues he cannot impose 1% tariff
• •Long-term goal: tariff revenues decline as trade rebalances and domestic manufacturing increases payroll taxes
• •President has absolute authority through 301s, 232s, and 122s to raise revenue on trade

Addresses Main Street dissatisfaction despite Wall Street gains. Distinguishes between cumulative 21-22% CPI increase and 35% increase in 'common man index' (gas, insurance, cars, rent, staples) under Biden. Details concrete improvements: gasoline down substantially, rents down 5% as mass immigration reverses, real incomes up 1.8%.

• •Strategas 'common man index' (working family essentials) up 35% under Biden vs 21-22% CPI
• •Wharton study: 11% population increase in city leads to 1% rent increase - mass immigration drove rent crisis
• •Rents now down 5% as deportations proceed, gasoline following oil price declines with lag
• •Real incomes up 1.8% since Trump took office, trend accelerating
• •Rejects Biden administration 'vibesession' gaslighting - acknowledges Americans legitimately hurting from price level
• •2026 positioned as 'feast year' after 2025 'table setting' - affordability improvements coming

Defends October 2.7% inflation number against Wall Street criticism of BLS methodology during government shutdown. Points to Fed Governor Stephen Myron's Columbia speech on measurement problems, including financial services component rising with stock market despite actual portfolio management costs declining.

• •All Wall Street Bloomberg predictors were wrong on inflation - then blamed data quality when proven incorrect
• •Rent and energy (two fastest declining components) paradoxically showed gains in measurement period
• •Fed Governor Myron identified financial services inflation measurement flaw: rises with stock market despite falling actual costs
• •Independent team analysis using interpolation confirms Bessent's numbers, sometimes slightly better
• •BLS always has imputed data - this measurement no less robust than historical series

Comprehensive Fed history from 1907 Knickerbocker crisis through QE era. Explains how post-GFC overregulation made Fed 'only game in town,' leading to massive asset purchases that created two-tier economy. Details Fed's $100B annual losses from buying bonds at peak prices, contrasts with Bank of England's superior COVID response model.

• •Fed created 1913 after 1907 panic (worse than 1929 crash) when JPMorgan personally had to stabilize system
• •Post-GFC regulation created paralysis: $500K Florida homes dropped to $150K but new rules prevented bottom-tier lending
• •QE began March 2009, continued through February 2023 - Fed became 'engine of inequality' per Karen Pettifor book
• •Ben Bernanke told everyone 'go buy equities' - but not everyone could, creating asset owner vs non-owner divide
• •Fed now losing $100B/year from buying bonds at high prices (low yields) during extended QE period
• •Bank of England's superior model: 30-60-90 day emergency intervention during COVID, then stopped
• •Fed has three-headed beast: rate policy, balance sheet policy, regulatory policy - nobody fully understands it

Reveals Fed operates like hedge fund with own budget, police force, and no congressional appropriations oversight. MIT study shows 42% of Biden inflation caused by budget deficit, another 17% by inflation expectations. Contrasts with Bundesbank model of central bank-government fiscal coordination for credibility.

• •Fed prints own money for budget, has own police force, massive cost overruns on DC building with no accountability
• •Fed previously remitted 0.3% of GDP back to Treasury, now losing $100B/year on QE positions
• •MIT study: 42% of great inflation from budget deficit, 17% from inflation expectations = 60% fiscal policy driven
• •Bundesbank model: central bank credibility through fiscal coordination - 'you control spending, we'll lower rates'
• •Fed engaged in 'modern monetary practice' (MMP) - bought Biden's debt issuance directly
• •Stabilizing/reducing deficit will contribute to disinflation independent of Fed action

Explains strong appetite for US debt as 'beauty pageant' winner since 2020 due to fiscal progress and tariff revenue credibility. Defends 2% inflation target: can't change mid-air when above target without losing credibility. Proposes range-based targeting (1.5-2.5% or 1-3%) once 2% re-anchored, acknowledging economy is biology not physics.

• •US best performing bond and equity market since 2020 - fiscal progress and tariff revenues shifted sentiment
• •Market went from 'tariffs are doomsday' to 'tariffs taking us to promised land' on fiscal paydown
• •Cannot change 2% target while above it - looks like upward fudging, destroys credibility
• •Once re-anchored at 2%, can discuss range targeting (1.5-2.5% or 1-3%) for more flexibility
• •Economy is biology with nonlinearities, not physics - decimal point certainty is absurd
• •Inflation expectations remain well-anchored despite above-target readings

Reviews 11 Fed chair candidates interviewed (Warsh, Hassett, Waller, Reed among them). All advocate smaller Fed footprint in economy and institution itself. Specific reforms: eliminate dot plot/economic projections, regional bank specialization vs overlapping functions, return to predictable background role.

• •Interviewed 11 candidates including Warsh, Hassett, Waller, Reed - sometimes 5 at once with President
• •Universal goal: smaller Fed footprint in economy and smaller institution budget/scope
• •Fed doesn't rely on appropriations - prints own money, has own police, massive cost overruns
• •Proposed reforms: eliminate 'dot plot' summary of economic projections causing market volatility
• •Regional banks should have specialties/centers of excellence vs current overlapping functions
• •Return Fed to predictable background role - not market/economy hanging on every word
• •Looking for Fed chair with 'open mind' like Greenspan in 1990s who recognized internet productivity boom

Addresses Main Street concerns through Financial Stability Oversight Council regulatory rollback. Half of small/community banks disappeared since GFC due to 'too small to succeed' policies. These banks provide 70% of ag lending, 30-40% of real estate, 40% of small business lending - regulatory relief will increase credit availability.

• •Half of small and community banks disappeared since GFC - regulatory burden made them 'too small to succeed'
• •8 banks 'too big to fail' but thousands too small to succeed under post-GFC rules
• •Community banks provide: 70% ag lending, 30-40% real estate lending, 40% small business lending
• •Treasury/FSOC loosening regulations to unleash lending capability and profitability
• •Increased credit availability for Main Street is concrete deliverable for 2026
• •Bottom 50% households had bigger net worth increase than top 10% in Trump's first term

Defends government equity stakes in strategic industries as national security imperative, not ideological shift. COVID exposed supply chain vulnerabilities: 90% pharmaceutical precursors from China/India, 97% advanced chips from Taiwan. Identifies 5-8 strategic industries requiring endogenous or hemispheric production capacity.

• •COVID revealed 'most efficient' supply chains aren't safest/most robust - China became unreliable supplier
• •90% of pharmaceutical precursor chemicals made in China/India - unacceptable national security risk
• •97% of advanced precision chips made in Taiwan - bigger threat than 1970s Arab oil embargo
• •5-8 strategic industries identified: semiconductors, pharmaceuticals, steel, shipbuilding, rare earths
• •Government taking equity stakes in these sectors similar to WWII industrial policy - 'we are in economic war'
• •Free trade wasn't fair trade - Chinese subsidies, five-year plans created massive distortions
• •Production must be endogenous to US or at least in North American hemisphere for security

Details retroactive tax cuts effective January 1, 2026 for working Americans. No tax on tips, overtime, Social Security; deductibility of auto loans for American-made cars. Predicts $1,000-2,000 refunds in Q1 as withholding wasn't adjusted, followed by automatic real wage increases when schedules change.

• •Bill passed July 4, retroactive to January 1 for individuals, January 20 for corporates
• •No tax on: tips, overtime, Social Security benefits - Trump's non-negotiable campaign promises
• •Auto loan interest deductible for American-made cars only
• •Q1 2026: massive refund year ($1K-2K per household) since withholding not yet adjusted
• •After withholding schedule changes: automatic increase in take-home pay/real wages
• •Immediate expensing for equipment (permanent) and 4-5 year window for factories driving capex boom
• •Boeing Charleston plant expanding 50% for Dreamliners - result of trade deals and tax policy

Announces transformative Trump accounts: $1,000 at birth for every American child, with $5,000 additional contribution capacity from family/employers/philanthropists. Dell family contributing $6.25B, 20 states topping up accounts. Positions this as administration's greatest legacy - merging Wall Street and Main Street by making every American an equity owner.

• •Every American child receives $1,000 at birth in equity account - 38% of Americans currently own no equities
• •Family, employers, philanthropists can add $5,000; Dell family pledging $6.25B; 20 states participating
• •Treasury launching massive financial literacy/education push to schools nationwide
• •Goal: teach every American that 'money can make money for them' through compounding
• •Described as 'biggest merger in history' - merging Main Street and Wall Street
• •Direct philanthropy channel eliminates friction - Americans most generous people in world history
• •Long-term impact: shift young people from socialism toward capitalism through ownership stake
• •Could be remembered as greater legacy than defense or strategic industry achievements