The sheer amount of outstanding US Government Debt is staggering. And with current and projected fiscal deficits, the pile is growing by the year. It has certainly caught our research team’s attention and we believe is a worthy topic to explore over the coming months. As part of this research path, we’re going to spend some time on a potential regulatory change currently under consideration which could have significant second order impacts on inflation and eventually bond yields.
We invite you to follow the path from well-intentioned action to unintended consequences, in part due to the reaction function driven by the real time need to refinance current debt and finance our fiscal deficits. We’ll be writing more on this topic – US Government Debt and Deficits – over the next several months I’m sure, as the topic increases in importance to asset allocators and wealth advisors.
Banks Create Money — and the Treasury Secretary may be Fueling that Engine
More than any other time in our investment careers, inflation is top of mind. While most attention falls on interest rates and the Federal Reserve, a quieter force is taking shape behind the scenes: bank regulation. Specifically, US Treasury Secretary Scott Bessent is advancing a plan that could significantly increase banks' ability to buy US government bonds. While that may sound like technical plumbing, the implications are very real: more bank-created money in the system — and more inflation risk.
Here’s how it works:
1. Banks Create Money when they Buy Assets
Most people think the Federal Reserve is the primary driver of money creation, but in reality, commercial banks create the majority of money in the US economy. When a bank issues a loan or buys a financial asset like a US Treasury bond, it typically creates a new deposit in the seller’s or borrower’s account. That deposit becomes money circulating in the economy.
This process is known as credit money creation, and it powers everything from mortgages to business investment to consumer spending.
2. Secretary Bessent is Actively Promoting Bank Purchases of Treasuries
US Treasury Secretary Scott Bessent has repeatedly and publicly advocated for easing capital regulations—specifically the Supplementary Leverage Ratio (SLR)—to make it easier for commercial banks to hold US government debt.
In a May 2025 interview with Bloomberg, Secretary Bessent stated that regulators are "very close to moving" on relaxing the SLR, a rule that limits how much leverage banks can use, even for holdings of safe assets like Treasuries.1 He argued that such changes could reduce yields by “tens of basis points” and create a “new buyer” for government debt among US banks.2
Further reporting from the Financial Times confirms this direction, with Secretary Bessent supporting exemptions for short-term Treasuries from capital requirements and citing the potential fiscal benefit of lower borrowing costs through increased bank participation.3
By removing these constraints, Secretary Bessent is aiming to expand the banking sector’s ability to buy Treasuries, effectively enabling more money creation via deposit generation across the financial system.
3. More Deposits = More Money in the Economy
When banks buy Treasuries from non-bank entities—pension funds, corporations, mutual funds—they credit the seller’s account with newly created deposits. Those deposits don’t just sit idle:
The result is simple: more deposits = more liquidity = more money circulating in the economy.
4. Government Spending has Already Happened — and It’s Inflationary
It’s important to note; when the government issues bonds, it’s typically to fund spending that’s already occurred or is legally committed—like Social Security, defense or infrastructure, so the money has already been deployed into the economy.
By incentivizing banks to fund that borrowing more easily, Bessent is not creating new spending—but he is making it easier to sustain deficit spending without pushing up interest rates. The net result is more money supply growth and, eventually, greater inflation pressure.
5. The Bottom Line: A Subtle Shift with Big Implications
Bessent’s strategy doesn’t involve cutting interest rates or launching a new stimulus program. It’s a regulatory shift—but one with potentially far-reaching consequences. By making it easier for banks to buy Treasuries, the US government may be enabling more credit creation, more liquidity and more inflation.
More money creation generally leads to stronger economic growth. And even as current headline inflation moderates, behind-the-scenes policies could reignite the very dynamics that drove it up in the first place. Which in turn may push rates higher, the unintended consequence of a well-intentioned action. We believe this is an important consideration for asset allocators when making decisions about client portfolios, and one of many potential consequences for markets brought on by the increased investor focus on our large and growing pile of Government Debt.
Important Disclosures & Definitions
1 Anstey, C. (May 23, 2025). Bessent Sees Easing Capital Rule on Treasuries This Summer. Market News, Bloomberg.
2 Bloomberg. (May 23, 2025). Treasury Secretary Bessent on Trade, Bond Market, Harvard, Tax Bill [Video]. Wall Street Week, Bloomberg Television. YouTube.
3 Bair, S. (April 22, 2025). Easing Leverage Limits on Banks Could Backfire. Financial Times.
Basis Point (bps): a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
Supplementary Leverage Ratio (SLR): a regulatory measure used in the US to ensure large banks hold enough capital to absorb potential losses, especially during times of stress. It's a non-risk-weighted capital requirement, meaning it doesn't differentiate between assets based on their risk level.
AAI000953 06/17/2026