euro reserve currency

Howard Marks, co-founder of Oaktree Capital Management, has published the third installment of his series on governments trying to override markets, dated September 22, 2026. Shall We Repeal the Laws of Economics? Part III takes aim at Treasury Secretary Scott Bessent’s decision to double, then triple, the size of the Treasury’s long-dated bond buybacks after the 30-year Treasury yield closed above 5.3%, a 19-year high. Marks argues that buying bonds to push yields down treats the symptom rather than the disease, walks through why US rates are rising in the first place, asks whether the $40 trillion national debt is really a problem, lays out the only fix he believes exists, and answers the question every investor is asking: should I sell my stocks? You can find the memo in Oaktree’s memo archive.

TLDR

After the 30-year Treasury yield hit 5.3% on August 17, the Treasury raised its maximum long-dated buyback from $2 billion to $4 billion per operation (and later $6 billion), with Bessent hinting at a “whatever-it-takes” posture. Marks calls this a cosmetic fix. Market support fades when the buying stops (his image is a ball held up by a column of pumped water), it ignores the root causes, and its effect is mostly psychological, which is why yields bounced back within a day and rose again after the September expansion. The real drivers are sticky inflation (PCE at 3.7% versus a 2% target, with Iran-war oil prices on top), deficits near 6% of GDP during full employment, net interest above $1 trillion and larger than the defense budget, buybacks funded by T-bills that shorten the debt’s maturity, roughly $2 trillion in new net Treasury issuance, and a $5 trillion-plus AI data center buildout competing for the same pool of capital. Marks doesn’t expect default, because the US borrows in a currency it prints and the dollar has no real rival as a reserve currency, but he warns the risk shows up as debasement instead. His only solution is behavioral: forget paying down the debt, raise revenue (including higher top marginal tax rates and fewer tax preferences), hold spending growth below GDP growth, and lean on AI-driven productivity, provided the new revenue isn’t spent. For investors, he argues that selling US stocks doesn’t escape a dollar problem and that fleeing the US carries risks of its own.

Thoughts

The sharpest line in the memo is the direct rebuttal of Bessent. The Treasury Secretary claimed that “yields don’t reflect the underlying fundamentals.” Marks answers, in effect, that they reflect them perfectly well, and then lists the fundamentals. That flips the usual framing of the bond market as a panicky crowd that needs calming. In Marks’s telling, the 30-year at 5.3% is a well-informed price for lending to a government that runs 6% deficits at 4% unemployment, while inflation sits nearly double its target and the Fed has just raised rates. Seen that way, the buyback program is an argument with the thermometer, and his ice-pack-on-a-fever analogy lands because it’s so plain. Lower the reading and the patient still isn’t well.

The underappreciated point, and the one most relevant to anyone following the AI trade, is buried in the fourth bullet on rising rates. The AI buildout isn’t just an equity story. McKinsey’s estimate of more than $5 trillion in AI data center spending through 2030 is a claim on the same finite pool of savings the Treasury must tap to roll its debt and fund about $2 trillion in new net issuance. Marks notes that even equity-funded capex draws from total available capital. That makes AI capex, fiscal deficits, and ordinary economic growth three large borrowers bidding for the same money, and the “simplest rule of economics” says the price of money goes up. Few commentators connect the hyperscaler capex boom to the long end of the Treasury curve, but the link is direct. It’s also a reason to doubt that rates fall meaningfully anytime soon.

Marks is admirably honest about his own track record on debasement. In 2008 he worried in public that the Fed’s balance sheet expansion would weaken the dollar and fuel inflation, and neither happened. Rather than use that as a reason for complacency now, he explains why the situations differ. The 2008 liquidity largely replaced money and credit that the crisis had destroyed. Today’s deficits are self-inflicted and being run during prosperity, when extra spending adds straight to aggregate demand. That distinction, between emergency liquidity that offsets a contraction and structural deficits that stack on top of a hot economy, is the right lens for anyone who tuned out debasement warnings because the last round of them proved wrong.

The framing that should stick is Druckenmiller’s line, which Marks adopts: a 30-year at 5.5% “isn’t a crisis. It is an invoice.” Much of the fiscal-doom genre waits for a dramatic moment, like a failed auction or a buyers’ strike, and Marks calls that improbable. The real cost is chronic and already arriving through higher servicing costs, which widen the deficit, which pushes rates higher. His prescription is notable for coming from a billionaire investor: raise revenue as a share of GDP, including higher income tax rates at the top, where he says the top federal marginal rate is low by postwar standards, and eliminate tax preferences. He pairs that with holding spending growth below GDP growth and an AI productivity dividend, with the crucial caveat that the added revenue can’t simply be spent. It’s the least ideological way to put it. A country that won’t cut spending has to look at revenue.

The closing section on portfolios is where Marks is most useful, because it refuses the obvious trade. If the risk is a weaker dollar, then selling US stocks and holding cash, money market funds, or Treasurys keeps you exposed to exactly that risk. The only real hedges are non-dollar assets, hard assets such as gold, non-US companies, or crypto. Each brings its own problems: slower-growing and more heavily regulated companies abroad, uncertain emerging markets, and other currencies that are being debased too. His conclusion is that this is a political problem that happens to affect investors, not an investment problem, and that trading on a reckoning of unknown timing “could easily look like a big mistake for a very long time.” Buffett’s “two years or 20 years” is the key uncertainty, and the memo is built around it.

Key Takeaways

This is the third memo in a series that began in September 2024 and continued in June 2025, all critical of governments trying to override the laws of economics.
Marks views economies as naturally functioning organisms. Steering them usually distorts how they work and worsens the overall result, so intervention should be selective and cautious.
His analogy is the “Circle of Life” from The Lion King: suppressing a predator to protect prey can send other species out of control and throw the whole ecosystem out of balance.
On August 17 the 30-year US Treasury yield closed above 5.3%, a 19-year high.
Higher long-term rates depress growth, make cars and houses less affordable, raise the cost of servicing a federal debt that has reached $40 trillion, and signal lost market confidence.
The Fed can’t directly set long-term rates the way the FOMC sets the federal funds rate. The Treasury can influence them through issuance and buybacks.
On August 19 the Treasury said it would at least double its maximum long-dated buyback, from $2 billion to $4 billion per operation, and Bessent signaled something close to a “whatever-it-takes” commitment.
Long rates fell right after the announcement and bounced back the next day.
Marks calls the move a cosmetic fix that responds to the effects of rising rates without solving the underlying problem.
Objection one: any effect is likely temporary. Once the buying stops, the market tends to return to where it would have gone anyway, like a ball that falls when the column of water pushing it up is shut off.
Stanley Druckenmiller, who ran Soros’s Quantum Fund during the 1992 bet against the Bank of England’s defense of the pound, wrote in the WSJ that governments defending prices against fundamentals always lose.
Objection two: the buybacks ignore the root causes of the rate rise, which isn’t random.
Root cause: inflation is stubborn, with PCE at 3.7% in July against the Fed’s 2% target. The Fed raised its benchmark rate last week, and elevated oil prices from the war with Iran threaten to keep inflation high.
Long-term lenders demand an inflation-protection component in yields to preserve the purchasing power of the money they get back.
Root cause: a total lack of fiscal discipline. The dollar’s reserve status gives the US a “golden credit card” with no limit, no bill, and a low rate, and the US is using it unwisely.
Keynes advocated deficits during slowdowns, repaid in good times. The US is running massive deficits during prosperity, with no talk of balanced budgets.
The deficit is about 6% of GDP with unemployment at 4%. Net interest outlays are projected above $1 trillion this year, more than the defense budget.
Large deficits near full capacity are inflationary, because government adds more liquidity through spending than it removes through taxes, which feeds back into higher rates.
If the credit card is limited, rates rise, servicing costs grow, and the deficit widens further, a negative spiral.
Root cause: buybacks are ultimately funded by new issuance. If long bonds are retired with T-bills, total debt doesn’t change, but its maturity shortens and it has to be refinanced more often at whatever rates prevail.
Root cause: demand for capital is surging from deficits, normal economic growth, and the AI buildout, and higher demand raises the price of money.
McKinsey estimates more than $5 trillion will be spent worldwide on AI-related data centers through 2030. Even the equity-funded share draws on the total supply of capital.
The Treasury must roll an enormous volume of maturing debt while adding roughly $2 trillion in new net issuance.
Bessent said yields don’t reflect fundamentals. Marks says they reflect them exactly.
Objection three: Treasury and Fed announcements work mostly through psychology, and that effect fades if root causes are ignored. After the Treasury tripled the maximum buyback to $6 billion on September 9, Evercore ISI noted that markets looked underwhelmed as yields moved higher.
The goal shouldn’t be lower rates. It should be addressing whatever is pushing rates up.
Marks sees no serious probability of a US default, because the debt is denominated in dollars the US issues.
The dollar was involved in 89% of FX transactions in 2025 and made up 57% of allocated official reserves in Q1 2026. The euro hasn’t closed the gap, the renminbi is about 2% of reserves, and crypto’s reserve role is negligible.
According to MUFG Bank, gold recently passed the dollar as the leading central bank reserve asset, though it isn’t used much in transactions.
The real risk is to exchange rates and purchasing power: the “debasement trade,” or paying debts back with dollars that buy fewer goats.
Distorting markets to cap borrowing costs can backfire, because creditors worried about debasement demand higher yields on new dollar debt.
Marks admits his 2008 fears of dollar debasement didn’t come true. He argues the Fed’s balance sheet expansion then offset destroyed credit, while today’s deficits are self-made and come during prosperity.
Warren Buffett at the 2025 Berkshire meeting: the fiscal deficit is unsustainable, but nobody knows whether the reckoning is two years or 20 years away.
A failed auction or buyers’ strike is improbable. The cost is chronic and already being paid, an “invoice” rather than a crisis.
The only real solution is changed behavior: stop talking about paying off the debt, accept that it will never be smaller, care about budgets, and “flatten the curve.”
Marks backs raising revenue as a share of GDP through higher income tax rates, especially at the top, and eliminating tax preferences.
Spending growth should stay below GDP growth, which means treating resources as finite.
Faster GDP growth through productivity (solid growth, AI adoption, and less unneeded regulation) would help, as long as the added revenue isn’t spent.
Selling US stocks isn’t the answer. The problem is fiscal management and potentially the dollar, not US companies, and cash, money market funds, and dollar bonds keep the same exposure.
Real hedges mean non-dollar assets, gold or non-US real estate, non-US companies, or crypto, each with its own risks.
US advantages remain intact: free markets, innovation, rule of law, moderate regulation, strong universities, and deep capital markets. Other countries run deficits too.
Modest diversification away from the dollar makes sense for investors with non-dollar needs, but not on a large scale.

Detailed Summary

The Circle of Life and the Case Against Steering Markets

Marks opens by restating the thesis of his September 2024 and June 2025 memos: economies are naturally functioning organisms, and attempts to override the laws of economics are likely to be ineffective and potentially harmful. He allows that intervention is sometimes necessary to prevent outcomes society won’t accept, such as widespread poverty or unemployment, but says it should be selective and cautious. His analogy is nature’s “Circle of Life.” Survival of the fittest has its harsh side, but it keeps the system in balance, and well-meaning human efforts such as suppressing a predator can have second-order effects that send other species out of control.

Bessent’s Bigger Buybacks

The trigger for Part III is the Treasury’s response to rising long rates. The 30-year yield closed above 5.3% on August 17, a 19-year high. Higher long rates slow growth, make loan-financed purchases like houses and cars less affordable, raise the cost of servicing a $40 trillion federal debt, and suggest falling confidence. The Fed can’t set long rates directly, but the Treasury can nudge them. On August 19 it announced it would at least double its maximum long-dated buyback to $4 billion per operation, framing the move as liquidity support. The next day Bessent signaled willingness to go further. Rates fell and then rebounded a day later.

Three Reasons It Won’t Work

First, the effect is temporary. You can lift a price by buying, but when you stop, the market goes back to what it would have done anyway. Marks pictures a ball held above the ocean by a pumped column of water. He quotes Druckenmiller’s WSJ piece, which calls yield suppression “a subsidy to procrastination,” and notes Druckenmiller’s credentials: he ran the Quantum Fund day to day in 1992 when it bet successfully against the Bank of England’s defense of the pound and reportedly made about $1 billion.

Second, buybacks don’t address why rates are rising. Marks lists four causes. Inflation is stubborn, with PCE at 3.7%, which is why the Fed just raised rates, and Iran-war oil prices threaten to keep it there. There is no fiscal discipline: the US has a “golden credit card” thanks to the dollar’s reserve status, runs deficits of about 6% of GDP at 4% unemployment, and faces net interest above $1 trillion, more than defense. The buybacks themselves are funded by issuance, so swapping long bonds for T-bills shortens the debt’s maturity and increases refinancing risk. And demand for capital is booming from deficits, normal growth, and AI, with McKinsey projecting more than $5 trillion of AI data center spending through 2030 while the Treasury adds about $2 trillion in net new supply. Marks rejects Bessent’s claim that yields don’t reflect fundamentals.

Third, the impact is mostly psychological and fades without follow-through on root causes. When the Treasury tripled the maximum operation to $6 billion on September 9, Evercore ISI reported that markets looked underwhelmed and yields rose. Marks’s conclusion is that the goal should be to respond to the forces pushing rates up, not to push rates down. Buying bonds to lower yields is an ice pack on a fever.

Is the Debt Actually a Problem?

Marks takes both sides. Herbert Stein’s rule applies: if it can’t go on forever, it will stop. But it’s hard to identify what would actually stop the US from financing deficits. He sees no serious default risk, since the debt is in dollars the US issues. He recalls a Weimar 1,000 mark note overprinted “One Million Marks” as a reminder of where money-financed deficits can lead. The dollar still dominates, with 89% of FX transactions and 57% of allocated official reserves. The euro has stalled in second place, the renminbi is held back by capital controls at about 2%, there’s some talk of a China, Russia, and Iran alternative, gold has reportedly passed the dollar as the leading central bank reserve asset, and crypto barely registers. The world is probably stuck with the dollar for now.

So the risk isn’t nominal default. It’s debasement. Printing more currency can lower its value against goods and other currencies, a point Marks made in his 2008 memo The Limits to Negativism with the goat that a million-mark note still buys. He quotes the Financial Times on the US being willing to distort markets and let its currency fall rather than tame spending, and notes that such moves can be self-defeating by raising the yields creditors demand. He admits that his 2008 worries about the dollar and inflation didn’t come true, and explains that the Fed’s crisis-era expansion offset destroyed credit, while today’s deficits are self-inflicted and inflationary because they arrive during prosperity. He gives Warren Buffett the last word: the fiscal deficit is unsustainable, over a timeframe nobody can know.

The Only Solution: Change Behavior

Marks calls the problem “just math”: spending exceeds revenue, debt is rising relative to GDP, and interest costs are climbing. It won’t fix itself and nobody has stepped up. A sudden crisis is improbable, but the chronic cost is already arriving, Druckenmiller’s “invoice.” His prescription is to stop talking about paying off the debt, accept that it won’t shrink, adopt real budgeting, flatten the curve, raise revenue as a share of GDP through higher income tax rates (especially at the top) and fewer tax preferences, and keep spending growth below GDP growth. Productivity growth from solid economic expansion, AI adoption, and pro-business deregulation would help, provided the extra revenue isn’t spent. Done together, these could shrink deficits relative to GDP and possibly lower the debt-to-GDP ratio, which Marks calls the best we can hope for.

What Investors Should Do in the Meantime

A nationally known entrepreneur asked Marks whether he should sell his stocks. Marks said no. The problem lies with US fiscal management and potentially the dollar, not US companies, and moving into cash, money market funds, or bonds that are still in dollars doesn’t escape it. A real hedge means non-dollar assets, non-financial assets like gold or foreign real estate, or non-US companies and crypto. Those bring other risks: slower growth and less scale among many developed-market companies, heavier regulation, uncertain emerging markets, and the fact that other countries’ currencies face debasement too. The reasons behind US outperformance remain largely intact. Modest diversification makes sense for investors with non-dollar needs, but not at large scale. His bottom line: this is a political problem that poses risks for investors, selling dollar assets probably won’t solve it and could look wrong for a long time, and the one real question is whether the US will face the problem and act.

Notable Quotes

“Every basis point of artificial yield suppression is a subsidy to procrastination.”
Stanley Druckenmiller, in the Wall Street Journal responding to Bessent’s buyback announcement, quoted by Marks

“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding.”
Stanley Druckenmiller, drawing on the 1992 trade against the Bank of England

“Forcing rates down by buying bonds is like a doctor applying an ice pack to a patient with a fever.”
Howard Marks, on why the goal should be the causes of rising rates, not the rates themselves

“Today, the U.S. is incurring massive deficits during prosperity, and we hear no talk of balanced budgets (and really of budgets at all).”
Howard Marks, contrasting current policy with what Keynes actually prescribed

“You can easily turn a 1,000 mark note into a 1,000,000 mark note, but it’s likely to still buy just one goat.”
Howard Marks, revisiting his 2008 memo The Limits to Negativism to explain debasement

“We don’t know whether that means two years or 20 years, because there’s never been a country like the United States.”
Warren Buffett at the May 2025 Berkshire Hathaway annual meeting, quoted by Marks on the unsustainable fiscal deficit

“If the 30-year must trade at 5.5% to clear, that isn’t a crisis. It is an invoice.”
Stanley Druckenmiller, the line Marks uses to frame the cost of the debt as chronic rather than acute

“The problem we face isn’t a problem with the U.S. stock market or with U.S. companies. It’s a problem with U.S. fiscal management, and ultimately a potential problem with the U.S. dollar.”
Howard Marks, answering a friend who asked whether to sell his stocks

“This isn’t an investment problem. It’s a political problem, but it poses a problem for investors.”
Howard Marks, in the memo’s bottom line

Read the full memo and the rest of Howard Marks’s archive on Oaktree Capital’s memos page.

Tag: euro reserve currency

Howard Marks, Shall We Repeal the Laws of Economics Part III: Treasury Bond Buybacks, the 5.3% 30-Year Yield, $40 Trillion in Debt, Dollar Debasement, and Why Selling Your Stocks Isn’t the Answer