Howard Marks’ latest memo: Forcing down long-term interest rates is like putting an ice pack on a feverish patient! The real problem in the United States has not been solved…

On September 22, Oaktree Capital co-founder Howard Marks released his latest investment memo, "Are We Going to Abolish Economic Laws? (III)".

In the past two years, Marks has discussed "economic laws" three times under the same title. The first article, published in September 2024, focused on governmental intervention in market prices and economic activities; in June 2025, he wrote the second piece. This time, he shifts from discussing government interventions in long-term bond rates to the ever-increasing U.S. debt issue.

U.S. federal debt has already reached $40 trillion, and this year, net interest expenses alone are expected to exceed $1 trillion.

Recently, the U.S. Treasury has begun to expand long-term Treasury buybacks, aiming to provide liquidity to the market and, to some extent, ease the pressure of rising long-term interest rates.

Marks is not particularly convinced by this approach. He uses a vivid analogy: it's like applying an ice pack to a patient with a fever. The temperature may temporarily drop, but the root cause is not effectively treated.

Speaking of the Federal Reserve, he notes that he prefers a central bank that is "less proactive in intervention" and is not a fan of excessive forward guidance. Interest rates, after all, are supposed to be set by the bargaining between borrowers and lenders; if the central bank keeps telling the market what it will do next, over time, it might actually become a case of the "tail wagging the dog".

This time, he applies the same logic to U.S. Treasuries.

Why are long-term interest rates rising? Inflation remains high, the government continuously runs deficits, and debt is mounting; meanwhile, AI infrastructure is swallowing trillions more in capital expenditure. The demand for money keeps growing—so naturally, the price of money will rise.

Therefore, Marks specifically quotes Stanley Druckenmiller: "If the 30-year Treasury must yield 5.5% just to be sold, that’s not a crisis—that’s a bill."

The bill will ultimately have to be paid.

Of course, Marks does not believe the U.S. debt problem is unsolvable. Increasing fiscal revenue, controlling growth in expenditures, and ensuring economic and productivity growth outpace debt are not mysterious solutions—the difficulty is in how to build consensus and take action.

Meanwhile, before Washington finds an answer, investors have their own dilemmas.

If you worry about U.S. debt and sell U.S. stocks, is that the answer? Marks thinks it's not. Because switching to dollar-denominated bonds, bank deposits, or money market funds, you are still holding U.S. dollars; turning to Europe, emerging markets, gold, real estate, or even cryptocurrencies, introduces other risks.

At this point, one finds that Howard Marks once again returns to a recurring theme: investing is never about finding a place without risk.

Most of the time, it’s about seeing clearly where the risks are and deciding which ones you are willing to bear.

From this perspective, it seems easier to understand why he says the current uncertainty and complexity of investing are unprecedented.

Are We Going to Abolish Economic Laws? (III)

By Howard Marks

In September 2024 and June 2025, I wrote two memos criticizing government attempts to override economic laws. My fundamental judgment is: such attempts are likely to be both ineffective and potentially harmful.

Economics is, in itself, an organic system that operates naturally. Attempting artificial manipulation distorts this operation—and usually leads to worse overall outcomes.

Sometimes, such intervention is indeed necessary to avoid socially unacceptable results such as mass poverty or unemployment. But this intervention should be selective and must be exercised with great caution.

The best analogy is nature.

In the movie "The Lion King," there is a song called "Circle of Life." The life cycle is brutal in some respects, as it functions through mechanisms like "survival of the fittest," but it’s precisely because of such mechanisms that balance is maintained in the ecosystem.

Humans may try to suppress predators to protect prey, but such intervention can have secondary effects, leading other species to breed uncontrollably and eventually breaking the ecological balance.

One species preying on another may seem cruel, but human attempts to improve overall outcomes often bring unforeseen consequences.

This brings me to the issue of humans dictating how markets should operate.

The latest attempt was a response to the ongoing rise in long-term interest rates.

On August 17, the yield on 30-year U.S. Treasuries closed above 5.3%, hitting a 19-year high at that time.

The government or central bank may naturally want to prevent such increases and drive down long-term rates, because higher long-term rates tend to dampen economic growth, reduce the affordability of goods like cars and homes (which rely on borrowing), increase the federal debt’s cost of servicing, and signal decreasing confidence among market participants.

The Federal Reserve cannot directly set long-term rates the way the FOMC sets a target range for the federal funds rate. The U.S. Treasury also doesn’t "set" long-term rates, but it can influence them through bond issuance and buybacks.

On August 19, the Treasury announced it would at least double the maximum size of long-term Treasury buybacks, from $2 billion to $4 billion per operation. According to the Treasury, this move aims to provide greater liquidity support for longer-term securities.

The next day, U.S. Treasury Secretary Scott Besant expressed willingness to take further action, which is close to an "all-out" commitment.

All else being equal, increased buying should push up bond prices, and higher prices mean lower yields.

Following the announcement, long-term rates dropped immediately, but rebounded the next day.

Can This Solve the Problem?

In my view, this approach attempts to improve the interest rate environment only on the surface. It might alleviate the effects of rising rates, but it cannot be said to address the underlying root causes.

First, any effect may only be temporary. All else held equal, buying something will push its price up; selling will push it down. But the impact of your intervention can be fleeting. Once you stop intervening, the market may well return to where it would have gone absent your actions.

The image I have in mind is a jet of water shooting upward in the ocean. As long as the water keeps spurting, it can hold a ball above the surface. Once the water stops, the ball falls.

On August 24, investor Stanley Druckenmiller published an op-ed in The Wall Street Journal responding to Besant’s statement above.

Every attempt to artificially lower yields by 1 basis point is just a subsidy for delay. Whatever cost savings this operation achieves in the short term will eventually be offset many times over in the long run due to the delay.

The government’s attempts to make prices defy fundamentals will always fail in the end. The only variable is how much they will spend before conceding defeat.

Second, this approach does not directly address the root causes driving up rates. The Treasury’s aversion to higher rates is not something that has occurred randomly or without reason.

Potential reasons include:

1. Inflation has remained stubbornly above the ideal level. July’s PCE inflation rate was 3.7%, while the Fed’s long-term target is 2%. Since inflation erodes the purchasing power of money over time, investors demand inflation compensation as part of the yields on long-term instruments.

2. The U.S. has shown a complete lack of fiscal discipline. The dollar, as the world’s reserve currency, affords the U.S. a “golden credit card”—there is no credit limit, the bill never comes due, and the interest rate has been extremely low. The U.S. has not used this card wisely.

Today, the U.S. is running huge deficits even during economic prosperity, and there is barely any discussion of balancing the budget.

Large-scale deficits themselves can drive up inflation, especially when the economy is already running near full capacity. Additional liquidity stimulates aggregate demand and boosts economic growth, but also adds to inflationary pressures.

Currently, the U.S. budget deficit is about 6% of GDP. For an economy with only 4% unemployment, this is an exceptionally high level.

This year, net interest payments are expected to exceed $1 trillion, higher than the defense budget.

3. The Treasury’s buyback funds come from its general account, which in the end must be replenished by further debt issuance. If the Treasury increases long-term buybacks and at the same time increases short-term issuance, the net impact is just to shorten the average maturity of its debt, without reducing the overall level of liabilities.

4. The demand for funding huge federal deficits is layered on top of normal capital needs from economic growth, and now there is the added burden of multi-trillion-dollar investment in AI.

These factors combined result in strong demand for both debt and equity capital. One of the simplest economic laws is: as demand for something rises, so does its price.

Ever-increasing demand for capital drives up the “price of money,” i.e., interest rates.

Building AI infrastructure could cost trillions. McKinsey estimates that by 2030, direct data center investments related to AI worldwide will exceed $5 trillion.

The bulk of Treasury’s new issuance just rolls over maturing debt, but the roughly $2 trillion of net new issuance each year still increases the supply that investors must absorb, adding upward pressure to yields.

This makes it even less likely that rates will fall over the short term.

In my view, the yields on long-term U.S. Treasuries are reflecting these fundamentals.

Third, I believe statements from the Treasury and the Fed are often more about psychological impacts. But over time, that effect may weaken, especially if the underlying problems go unaddressed.

The goal shouldn’t be to force down rates, but to solve the factors driving them up.

Trying to push rates lower by buying bonds is like applying an ice pack to a fever patient. Maybe the ice pack can reduce the temperature, but until the root cause is treated, the patient will not truly recover.

Is Debt an Issue?

Many ask me this question, and it’s truly hard to answer clearly.

On one hand, it seems obvious that the U.S. cannot forever spend more than it collects.

As economist Herbert Stein once said: "If something cannot go on forever, it will stop."

But on the other hand, it’s hard to pinpoint exactly what will make it impossible for the U.S. to continue financing deficits through borrowing.

I do not believe there is a high probability the U.S. will genuinely be unable to honor its debts. After all, our debt is denominated in our own currency.

As long as the dollar remains the world’s primary reserve currency, the U.S. is likely to retain the ability to finance deficits using its own money.

The world needs a safe, liquid reserve currency for storing FX reserves and conducting international trade. If the dollar stops being the top reserve, there would have to be another—or a group of others—playing an even bigger role.

The euro is still the world’s No. 2 reserve currency, but has made little headway closing the gap with the dollar. The renminbi only accounts for about 2% of allocated FX reserves, and capital controls and global tensions make a sharp rise in its role unlikely soon.

Gold is not widely used for transactions. Finally, the role of cryptocurrencies in reserve assets remains tiny.

Thus, for now, the world probably still can’t do without the dollar.

All else equal, massively creating more of any currency diminishes its value relative to goods and other currencies.

Now, those pondering how the U.S. will handle its debt are talking about so-called "currency debasement trades"—methods of repaying debt with dollars that have less purchasing power.

In other words: settling the debts with fewer goats.

This approach may backfire by making people worry about the future purchasing power of the dollars repaid to them—so they’ll require higher rates on new dollar debt.

And today’s large-scale deficit financing is used to pay for the fiscal deficits we ourselves created, and it is happening during prosperous times, which may further boost overall demand and inflationary pressures.

Is There a Solution?

The challenge we face is not a mystery: it’s just arithmetic.

We spend more than we take in; our debt as a share of GDP keeps rising; and our interest bill is also climbing rapidly.

This problem has been around a long time; people have raised alarms about it for years, and now it seems to be finally having actual effects.

It will not resolve itself, and so far, no one has truly stepped up to fix it.

An acute crisis seems unlikely, but a chronic cost is already present, and we are starting to pay it.

We either pay the bill—no matter how big it gets—or address the root of the problem.

If a person, or a country, overspends for a long time, there is only one real and lasting solution: change behavior. The only hope lies in doing the following:

• Forget about slogans like "reduce the debt" or "pay off the debt";
• Accept the reality that our debt will likely never be lower than it is today;
• Restore fiscal responsibility and start caring about the budget and its implications;
• “Flatten the curve”;
• Increase fiscal revenue as a share of GDP—by raising income tax rates and eliminating tax preferences;
• Keep spending growth below GDP growth, and accept the basic discipline that resources are limited.

Boosting GDP growth increases tax revenue and lowers total spending as a share of GDP. The best way to achieve this is by raising productivity.

Productivity gains can come from healthy economic growth, wider adoption of AI, pro-business policies, and reducing unnecessary, inefficient regulation.

But, ultimately, there is a crucial precondition: the additional fiscal revenues must not be spent again.

If we can do these things, the ratio of annual deficits to GDP should decline, yearly debt increases will abate, and the debt/GDP ratio might go down.

In my view, that is the best we can reasonably hope for.

What Should We Do Until the Problem Is Fixed?

While we wait for Washington to deal with the problem, what should become of our investment portfolios?

"Should I sell my equities?"

I told him: that’s not the answer.

What we face is not a problem with the U.S. stock market or corporate sector. It’s a problem of U.S. fiscal management, and ultimately, it may affect the dollar.

If you sell U.S. equities, then where do you put your money? Banks? Money market funds? Bonds? If these assets are still denominated in dollars, you still have the risks discussed here.

If you truly want to address these risks, you may have to turn to assets denominated in other currencies, gold or non-U.S. real estate, or non-U.S. companies and cryptocurrencies. But switching away from dollar assets or U.S. investments brings its own risks.

Pulling money out of the U.S. means taking on new risks, and such a move often proves unwise—especially if done to avoid a problem that may not erupt for a long time.

This does not mean I am opposed to all non-dollar diversification. For investors with future non-dollar spending needs, goals, or plans, reducing some dollar-denominated holdings may be reasonable.

But for these reasons, I don’t believe in doing so on a large scale.

Final Thoughts

Ultimately, you can’t ignore economic laws and expect to win in the end.

I do not believe America can spend more than it earns forever while expecting its credit to remain unquestioned or its “IOUs”—the dollar and Treasuries—to stay in demand.

This is not an investment problem. This is a political problem—but it creates challenges for investors.

Selling dollar assets may not be the answer. No one can truly sell enough dollar assets to eliminate this issue.

There is only one real solution.

Will we face the problem—and act?

September 22, 2026