Janet Yellen: The U.S. Government’s Worst DEI Hire

~~ Andrew Packer, Grey Swan Investment Fraternity

It’s just about Joe-ver. We’re days away from the Biden administration driving off into the sunset, or whatever direction the 46th President’s hospice care is relative to the White House.

As we reflect on Biden’s years of inflation, fueled in part by spending bills named the “Inflation Reduction Act,” it’s important to note that the U.S. government has been rigged for a crisis not long after Donald Trump returns to office.

Why? Janet Yellen, the departing Treasury Secretary, is the reason.

She’s deliberately booby-trapped the economy over the past year. And if things don’t go well, this sucker could blow.

Make no mistake: This is deliberate. Yellen is smart. She got her BA at Brown, her MA at Yale, and taught at Harvard and U.C. Berkley before moving into the bureaucracy of the Federal Reserve.

President Obama tapped her to lead the Fed after Ben Bernanke. In that role, Yellen showed tremendous caution, taking her time to gradually raise interest rates a quarter point at a time.

But it’s her recent actions at Treasury Secretary that pose a huge problem. Yellen took over in 2021. Interest rates were still at zero. Investors, particularly institutional investors, were still risk-averse.

The Treasury had a fantastic opportunity to issue 50-year bonds at a relatively low rate. But Yellen didn’t follow through and make a tough choice.

Instead of charting a new course, Yellen has focused the Treasury on meeting its funding needs with short-term bills.

Interest rates have been trending higher, which is a problem. For most of 2023 and 2024, the real issue is that short-term bills, thanks to the inverted yield curve, carried a higher cost than longer-dated securities.

By focusing on issuing short-term bills, the U.S. government has an increasing cash flow problem. Larger and larger amounts of money are coming due each month. A stronger mix of longer-dated securities would alleviate this rollover problem.

What’s truly bizarre is that Yellen made these moves when Biden was still running for re-election. And Yellen didn’t change course after Kamala Harris stepped in following Biden’s withdrawal. That’s why this appears to be genuine incompetence and not just a political maneuver to harm the incoming Trump administration.

Meanwhile, as we enter 2025, five-year bonds from the pandemic low yields of 2020 are now starting to roll over at rates close to 4.5%, compared to 0.1% when they were initially bought. That’s a massive jump in borrowing costs for Uncle Sam.

Adding in the high costs of issuing short-term debt during an inverted yield curve and refinancing pandemic-era low yields, it’s clear that Yellen’s short-term focus is costing the U.S. billions of dollars in extra interest it wouldn’t have to pay otherwise each year.

It’s no wonder that there are now estimates that Uncle Sam will have to shell out $2 trillion in interest payments on the debt soon after hitting $1 trillion in annual payments for the first time.

Like many other members of Biden’s cabinet, Yellen was likely chosen for her party loyalty and for ticking the right diversity boxes.

As corporate America and the incoming Trump administration look to scale back from DEI—diversity, equity, and inclusion—standards and move back to the American historical trend of meritocracy, Yellen will go down in history books for her incompetence in overpaying to fund the government.

Future Treasury Secretaries who screw up likely won’t be able to screw up on the scale as Yellen has in just four short years (although they’ll probably try).

It didn’t have to be this way.

Time will tell how Donald Trump’s Secretary of the Treasury pick, Scott Bessent, will fare. But he’ll likely be dealing with a crisis sooner rather than later. And a debt crisis can quickly spiral out of control in unforeseen ways.

Given the rising mix of short-term debt, it could truly create a real crisis. After all, finance textbooks and theories state that U.S. T-bills are the only truly risk-free asset.

Sadly, that thought may face a real test in 2025, and become the top Grey Swan event of the year. ~~ Andrew Packer, Grey Swan Investment Fraternity