The United States and Fiscal Dominance

Part 1: How Interest Rates, Debt, and Inflation Interact In The United States

Contents

1. Introduction
2. The United States and Monetary Policy
3. The United States and Inflation
4. Concluding Remarks

Bitesize Edition

• Fiscal Dominance in Focus — Fiscal dominance occurs when a government prioritises managing debt over controlling inflation. Last week, we explored early warning signs of this phenomenon globally, touching lightly on the United States. Today, the focus is on the U.S., where fiscal dominance would have extraordinary global consequences.
• The United States and Monetary Policy — In 2022, the Federal Reserve raised interest rates to curb inflation, reducing borrowing and spending. Despite inflation now being lower, central bank independence is under threat as Trump prepares to appoint an ally as Powell’s replacement. Lower rates could stimulate growth, support the stock market, and give Trump fiscal space for tax cuts.
• The United States and Inflation — Inflation currently sits at 3%, meaning real interest rates could become negative if Trump pushes for lower rates. Negative real rates encourage borrowing and investment but risk higher inflation, potentially eroding savings and worsening economic inequality. Fiscal dominance could emerge if inflation is tolerated to reduce the real value of national debt.
• Growth, Debt, and Risk — The U.S. lacks the demographic and productivity tailwinds it once had to grow out of its debt. Future productivity booms, potentially from technology or AI, are uncertain and precarious. Without sufficient growth, the U.S. may rely on foreign investment or let inflation rise, making fiscal dominance a real possibility.

Introduction

Last Monday, we started a discussion on fiscal dominance. This post below sets up the framework.

The History of Fiscal Dominance

Read full story

On Thursday, I discussed general economic indicators that could imply a nation is experiencing some early signs of fiscal dominance. I then explored nations in the world today that possess some of these indicators.

On Thursday, I only discussed the United States loosely. Today, we’ll take a deep dive into fiscal dominance and the United States. As a nation that has huge financial sway in our world, fiscal dominance in the United States would be one of the most consequential cases ever seen.

Is it inevitable that fiscal dominance will arrive in the United States, or can this current economic environment be navigated?

Ultimately, fiscal dominance is a political choice. Will Trump pursue this choice? Let’s break it down below.

Head over to Substack to access the rest of this post behind the paywall via the link below:

https://geopoliticsreport.substack.com/p/the-united-states-and-fiscal-dominance

Concluding Remarks

One worry is that there isn’t enough growth available for the United States to grow its way out of its debt. They did it once before after WWII. But today, the United States doesn’t have incredible demographic growth, nor a productivity boom. It was these tailwinds that supported the United States in growing its way out of its post-war debt.

The question today is, where could this productivity boom come from?

A productivity boom could arise from future technology. After all, the United States is one of the leading technological powers in the world. One area of innovation that people immediately think of is artificial intelligence. But currently, there are risks of an AI bubble through the generated artificial demand surrounding OpenAI and Nvidia. In the last quarter, SoftBank sold its entire Nvidia stake, and Peter Thiel’s fund followed. The AI bubble story is gaining traction.

This AI thesis doesn’t negate other sectors from experiencing productivity booms, and productivity forecasting is unreliable. But today, it’s difficult to locate where such a boom could form.

This time, if the United States is to reduce its debt burden successfully, it seems they will likely rely somewhat on investment from other nations to incite growth. This is a precarious position to be in, especially when confidence in the dollar is declining.

Or, alternatively, Trump lets inflation run to erode the real value of the debt.

On Thursday, I’ll get more into the details surrounding the United States’ current position. I wanted to set the scene of fiscal dominance in the United States today before diving into the direction we could see it heading in.

I’ll discuss the U.S. consumer, inflation expectations, trade deals, and supply chain constraints on Thursday. Be sure to subscribe if that sounds of interest to you.

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