An End To US Debt

Want to know where the US is headed? Want a peek at the future?

Here it is: more inflation. More than you expect. We depend on rising interest rates and the ‘bond vigilantes’ to ride herd on inflation. Instead, they will drive up the real costs of moderate inflation…leaving hyperinflation as the likely outcome.

Our WWII debt was disarmed by inflation. Slow and steady, like termites eating through untreated wood, it cut about two-thirds of the real value of the debt by the 1970s. People hardly noticed. Why not make it ‘work’ for us again?

And you might think — or POTUS might believe — that we could stomach a few years of 10% inflation and thereby wipe out a big piece of all the US national debt. Smooth. Reliable. 10% annual price increases. Wouldn’t it be worth it?

Forget it.

Inflation, like a traffic accident or a mugging, only really ‘works’ when you don’t see it coming. Otherwise, lenders and consumers take a different route home. They buy before prices rise...and demand higher interest rates to protect themselves from future losses. The higher interest rates add to the carrying cost of debt, chill the economy and lower the feds’ tax receipts – making inflation much less effective.

Inflation has to be a surprise. When the surprise disappears, the authorities either stop inflating...or they go ‘full Weimar’ into hyperinflation.

And the ‘bond vigilantes,’ those heroes who pressure the feds to keep inflation under control, may actually make hyperinflation more likely than you think.

Suppose Scott Bessent and Kevin Warsh held a joint press conference, maybe on Halloween or April 1st. Imagine that they announced ‘An End to the US Debt...we’re going to let inflation run at 10% per year until we get this monkey off our backs.’

What would people do?

Would they roll down their windows and put their purses where they could be easily snatched? Would they sit contentedly, perhaps holding hands, as the feds take away their retirement money? What would landlords do; offer 10-year leases at today’s rates? How about publishers? Would they offer subscribers a chance to ‘lock in’ today’s price for the next ten years?

And the bond vigilantes? What would they do?

They’d dump their Treasury debt...demanding interest of 15% or 20% to offset the inflation losses they see coming. But if the feds had to pay so much more in interest — even more than they gained from their ‘inflation tax’ — the grift wouldn’t work at all. The whole point is to allow the feds to spend more money. But once people expect more inflation, the actual spending power of the government goes down, not up. In effect, when the ‘bond vigilantes’ are in the saddle, inflation no longer ‘works.’

The point is obvious. When you drive through a bad neighborhood, you roll up your windows and lock your doors. You don’t let yourself get robbed — not if you can help it.

Even without an official announcement, people can read the handwriting on the wall. As long as the federal government is running $2 trillion deficits, it might as well post its destination like a cross-town bus. No need to spell it out. The federal debt pile gets bigger. Interest rates go up. Inflation too.

Argentina was faced with the choice two years ago. Its annual inflation rate had soared over 250%. It looked like it might soon go into hyperinflation. Voters knew what that would be like. They recalled 1989-1990, when the inflation rate went to 2,600%. They didn’t want to do that again.

Americans have not been exposed to hyperinflation. They have no memory of it and no immune defenses against it. So, it doesn’t take a genius to see where this leads. Members of Congress may fondly recall those glory years — 1980-2020, when they could borrow and print at will...as interest rates steadily went down. Almost none of them understands why inflation no longer works...or remembers an episode of hyperinflation. In America, it is almost unthinkable. And you certainly won’t win an election by thinking about it. Besides, rising prices can still be blamed on other people. Cuts to welfare or the Pentagon cannot.

Here’s what will happen. The feds will allow inflation to ‘run hot.’ Interest rates will go up. They’ll add fuel (more deficits!)...and let it burn even hotter. And then, consumers will anticipate higher rates of inflation. It will be as if the feds had stood on the Capitol steps and announced their intention to destroy the dollar completely. Households will want to get rid of it like a hot potato — sending the inflation rate even higher. Investors will pull their money out of bonds, out of the dollar and out of the country.

Where, when, or how — exactly — it earns its ‘hyper’ prefix, we can’t say. But it will be a big surprise to us all.