Bessent's Yen Gamble: A Warning Sign of Volatility Ahead

US Treasury Secretary Scott Bessent has become a Big Player in currency markets, moving exchange rates with his words and actions. This behavior is characteristic of Big Players, who are insensitive to profit and loss, discretionary, and bound by no rules.

Bessent's recent intervention in the yen market, along with Japan's Ministry of Finance, resulted in a strengthening of the yen. However, this may be a temporary 'dead cat bounce,' as Bessent's actions can create more volatility than stability.

In 1887, Ivan Vyshnegradsky, Imperial Russia's finance minister, manipulated the ruble's exchange rate against the gold-based German mark, increasing volatility and creating market chaos. His successor, Sergei Witte, committed the ruble to the gold standard in 1897, achieving a calm that followed from adherence to a rules-based system.

Contrary to Bessent's assertions, Big Player interventions in currency markets create more volatility, not less. This is predicted by economic theory, which shows that discretionary interventions can have unpredictable outcomes and lead to market perplexity.