5 Core Principles from Treasury Secretary

Investment Analysis Clubs Macro Economic Trends and Risks
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Since the time when Alexander Hamilton advised George Washington, the Treasury Secretary has been statutorily and historically designed to be the principal architect of the nation’s overall economic and financial strategy.

When the Secretary of the Treasury lays out five core economic principles for guiding U.S. policy it has Macroeconomic impact. These principles are guiding tariff imposition, among other government actions.

https://www.wsj.com/opinion/scott-bessent-hamilton-inspires-trumps-economic-statecraft-4a2786dd?mod=hp_opin_pos_2

First, economic security begins with national capacity. We have rediscovered at great cost what Alexander Hamilton taught us: that every nation “ought to endeavor to possess within itself all the essentials of national supply.” Our strength is derived from what we can build, for the nation that can’t produce what it needs isn’t truly secure. The nation that depends on its adversaries for critical inputs isn’t truly sovereign. And the nation that reduces its economics to consumption isn’t truly prosperous.

As Hamilton put it, we must enlarge “the sphere of our domestic commerce.” Economic security begins with the capacity to build, invent, finance and scale the industries that will define the next century, among them semiconductors, artificial intelligence, quantum computing, advanced manufacturing, shipbuilding, critical minerals and pharmaceuticals. More than economic sectors, these are sources of national power. The U.S. must lead in all of them…[This is aspirational since the U.S. has lost several of these industries and can’t rebuild them with government policy the way China can. - W]…

Second, America’s openness must be reciprocated by its trading partners…

Third, America must write the rules of the next economy. Economic competition is no longer confined to the movement of goods across oceans and ports. It will be shaped by the platforms, systems and protocols through which commerce flows in the 21st century…

Fourth, financial leadership is a central instrument of statecraft. …

Sanctions evasion, terror financing, proliferation financing, cybercrime, narcotics trafficking and corruption all exploit weaknesses in the financial system. Treasury’s job is to protect the financial system by rooting out these abuses.

Fifth, economic statecraft must serve the American people. America’s competitive advantage has never been limited to our natural resources or the depth of our capital markets. It resides most of all in the character and the capacity of our people: the entrepreneur with an idea, the worker who can master new trades and technologies, institutions with the freedom and confidence to flourish…

We are a partner that has regained knowledge of the value that we offer—and the will to defend it. [end quote]

We are all aware of the Trump tariffs since these impact the consumer products we buy.

Other areas impacted by these principles include (from Gemini):

1. Weaponizing Inbound and Outbound Investment (CFIUS 2.0)

The Treasury chairs the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign acquisitions of U.S. companies for national security risks.

  • Tightening Inbound Capital: You would see an expansion of critical sectors requiring automatic blockages. It wouldn’t just be defense tech anymore; it would include biotech, green energy supply chains, and legacy semiconductor manufacturing.

  • Restricting Outbound Capital (“Reverse CFIUS”): A newer, highly strategic policy frontier involves stopping American venture capital and private equity from investing in foreign adversaries. Treasury regulations could outright ban U.S. dollars from funding AI, quantum computing, or advanced microchips in competing nations, cutting off their access to both American capital and expertise.

2. Dual-Use Sanctions & Financial Blacklisting

The Treasury’s Office of Foreign Assets Control (OFAC) manages the U.S. sanctions list. Under these principles, sanctions cease to be just a tool for punishing overt warfare and become an active tool of industrial defense.

  • Secondary Sanctions on Supply Chains: Treasury could penalize foreign banks in neutral third-party countries if they clear transactions for companies supplying critical machine tools, chemicals, or software to U.S. adversaries.

  • Targeting Sanctions Evasion Networks: As mentioned in the fourth principle, Treasury would use its visibility into the SWIFT banking system to freeze assets of shell companies involved in laundering or bypassing technology export controls.

3. Supply Chain “Friend-Shoring” and Tax Code Incentives

To address the real-world friction of rebuilding hollowed-out industries without adopting China’s state-owned model, the Treasury would use the tax code as an industrial steering wheel.

  • Carrot-and-Stick Tax Credits: Future tax policies could mimic and expand the CHIPS Act. For instance, offering massive domestic manufacturing tax credits only if zero percent of the components touch an adversary’s supply chain.

  • Bilateral Tax Treaties: Treasury could negotiate fast-tracked, highly favorable tax and investment treaties exclusively with a tight circle of trusted allies (“friend-shoring”), while implementing punitive withholding taxes on capital flowing to non-reciprocating nations.

4. Technical Protocol Restrictions and Digital Sovereign Controls

The third principle notes that commerce is moving from physical ports to digital platforms. This opens the door to financial regulatory architecture designed to ring-fence the American economy.

  • Restricting Stablecoins and Digital Assets: Treasury could implement strict compliance and Know-Your-Customer (KYC) rules specifically targeting digital assets and stablecoins that facilitate cross-border capital flight or bypass the U.S. banking system.

  • Data Localization Requirements: Implementing rules that require any foreign financial institution operating in the U.S. to store their transactional and algorithmic data on U.S.-hosted, secure servers, effectively forcing a structural decoupling of data systems.

5. Currency Manipulation Countermeasures

While the Federal Reserve operates independently, the Treasury officially manages the Exchange Stabilization Fund and designates foreign countries as currency manipulators.

  • Rather than waiting for broad trade agreements, the Treasury could implement countervailing duties or financial penalties directly tied to real-time currency valuations, effectively neutralizing any attempt by a foreign nation to weaken its currency to blunt the impact of U.S. tariffs.

[end Gemini quote]

In the long term, accomplishing these strategic goals could be beneficial for U.S. national security and prosperity. In the short term, anything that interferes with the free market introduces friction and reduces profit.

Re-establishing American manufacturing and imposing controls on foreign investment will be inflationary.

Falling profits = falling stock prices. Rising inflation = rising interest rates.

The markets may experience a one-two punch from Treasury Secretary Bessent in addition to Federal Reserve Chair Warsh. They are both ideologically driven. They may be right in the long term but the markets are priced for perfection. The short term may be painful.

Wendy

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We all very much look forward to the actual implementation of specific policies that support those principles.

When does that happen? Especially #5.

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Alexander Hamilton must be spinning in his grave. He was a strong advocate for a robust financial sector to provide capital for productive investment. He’d probably be aghast at how our economy is allowing for vast amounts of wealth hoarding.

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It’s Thomas Jefferson who would be spinning in his grave. Alexander Hamilton protected the wealth hoarding of the rich because they were the ones he needed to buy the nascent country’s war debts. (Yes, I read more than one book about these guys.)
Wendy

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I don’t wanna argue with you. I’d certainly lose.

Isn’t there a difference between tying the wealthy to the success of the US government and what we’re seeing nowadays? I could be wrong, but I don’t think Hamilton would be cool with elites hoarding wealth, without the investment back into the economy/country.

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I think I posted, Bessent’s views on tariff even before the elections. Tariffs are his core idea, and it basically the idea, its implementation is failure so far in my view. Yet, within the administration, conservative circle, it is viewed as a success, only “unhinged communist judges” are the thorn in administration policy.

Luckily the administration is saved by the courts.

Bessent argued in the podcast the runaway inflation that will be caused by the tariff is not a bug but a feature. The inflation will force people to cut down consumption and the price will fall due to falling consumption. However, the rich will benefit from the tariff because the inflation will “inflate” asset prices!!!

It is not that Bessent doesn’t have a view, or what will be the outcome of those views when implemented but who is expected to benefit out of those views are important.

Similarly, it is not that Warsh cannot handle the Fed, or implement his policies. But who is going to benefit out of it, is the question. The sin’s of Powell, that continuing the easy money even when inflation is moving to very high level, is now weaponized. The new fed will argue, the fed is prisoner of the dot plot and constrained by it. The result is they will eliminate the guidance. Now, who benefits from it? Those who have access to the Fed’s thinking.

Removing transparency and communication is not the solution for acting slowly. But, we will be sold that as the solution.

Find an asset manager who has the direct line to Fed may very well become a winning strategy, or new “factor”.

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The colonial era was very different from today. The industrial revolution was just starting in the 1770s. Wealth in the colonies was mostly agricultural (Washington, Jefferson and Madison were all slave-owning big landowners). Apart from Native American and African slaves, the European indentured servants had virtually no rights and were harshly exploited.

Jefferson’s model of an ideal U.S. was agrarian. He supported the individual farmer as the foundation of America and hated the idea of money gained by trade and manufacturing (which was nascent at the time).

Hamilton was a fierce opponent of Jefferson from the start. Hamilton believed in what we would call capitalism – manufacturing and trade – although it was relatively small scale in America at the time. As Secretary of the Treasury, Hamilton argued for unifying the debt from the American Revolution (held by the separate states) into a single debt backed by a strong Federal government. It wasn’t until after the Constitution was written in 1789 that Congress was allowed to levy taxes. In order to pay interest on the debt, Hamilton cooked up a series of schemes aimed at the wealthiest Americans and also Europeans. As a result, the U.S. has never defaulted on its debt.

As for hoarding wealth…the scale of wealth we see today would be inconceivable to the Founders. (In America – European royalty was a different story. They had immense wealth but only a few countries, such as England and the Low Countries, had manufacturing.)

Since there was no stock market or U.S. currency (other than worthless paper “Continentals”), let alone fiat money, in the colonial days, the wealth was invested in land, business, trade, loans and hard currency (such as gold and silver issued by Spain).

What we recognize as U.S. currency didn’t exist until the Civil War. Banks issued their own paper currency which wasn’t often accepted by other banks.

The first U.S. income tax was established in 1861 to fund the Civil War. Signed by President Abraham Lincoln, the Revenue Act of 1861 levied a 3% flat tax on incomes over $800. It was repealed 11 years later in 1872. The modern, permanent federal income tax as we know it began on February 3, 1913, following the ratification of the 16th Amendment. This granted Congress the constitutional authority to levy taxes on income without apportionment.

The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. At the time, great industrialists (“robber barons”) such as Rockefeller, Vanderbilt, Carnegie and Ford, flaunted their wealth proudly. Someday, tour the Vanderbilt Mansion in upstate NY. It has hand-embroidered silk “wallpaper” in the bedrooms.

Elites have always hoarded wealth. From the beginning of time. Also from the beginning of the U.S. Hamilton was perfectly cool with that – it was the hoarded wealth he tapped into for the loans to the U.S.

If you want, I can give you a reading list of early America, the founders, the colonial economy and the development of capitalism and the monetary system.
Wendy

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No doubt. The opportunities for the wealthy to invest their money looked very different. The burgeoning manufacturing and trade markets championed by Hamilton provided concrete investment opportunities for the wealthy. Their investments created jobs, produced goods, and provided infrastructure. There weren’t derivative investment schemes that only produced more wealth for the elites, without concrete benefits to the society.

I get that. I’m not suggesting Hamilton was opposed to elites having wealth. I think he recognized his economic policies would likely lead to greater wealth inequality. My understanding is that he wanted to tie the elites wealth to the success of the country. Getting them to scoop up newly created federal securities was a great way to do that. The absence of other, more lucrative, investment options probably helped.

I’d love a reading list, thanks!

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Capitalism has always been based on optimism and investment which has always led to over-optimism, over-investment and outright schemes to make money without a product or service.

Here’s a reading list:
“Alexander Hamilton,” by Ron Chernow (2004). I read this last year. The definitive, magisterial biography. While it covers his whole life, Chernow goes into immense, satisfying detail about Hamilton’s time as the first Secretary of the Treasury, his creation of the Bank of the United States, the funding of the national debt, and his clash with Thomas Jefferson over the economic future of the country.

“The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy,” by Thomas K. McCraw (2012)

“Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War,” by Roger Lowenstein (2022)

I haven’t read this one yet but it sounds good.
“Americana: A 400-Year History of American Capitalism,” by Bhu Srinivasan (2017). A highly readable, chronological exploration of how democracy and capitalism grew together in the U.S. It starts in the colonial era with the corporate structure of the Virginia Company and moves through the economics of tobacco, cotton, steam, rail, and banking.

There have been many bubbles through the centuries which sold the idea of getting rich rather than a product or service. Ponzi is only one of many.

“Manias, Panics, and Crashes: A History of Financial Crises,” By Charles P. Kindleberger (First published in 1978, before the dot-com bubble)

“This Time Is Different: Eight Centuries of Financial Folly,” By Carmen M. Reinhart and Kenneth S. Rogoff (2009)

These last are a must-read for today’s AI bubble.

Have fun reading!
Wendy

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