Image Source: Unsplash

The United States is entering an era of structurally entrenched fiscal spending. Mandatory programs like Social Security, Medicare, and interest on the national debt dominate the federal budget—and these obligations are only growing.

Meanwhile, political will for fiscal restraint is virtually nonexistent. As a result, Washington is likely to continue “running the economy hot,” relying on government spending to drive growth. The hope is that nominal GDP growth will outpace debt accumulation, increasing tax receipts faster than borrowing costs—essentially trying to grow our way out of the debt crisis.

However, interest costs are a major part of the equation. With U.S. national debt surpassing $37 trillion and interest expenses rising rapidly, higher long-term rates could crowd out other priorities. In response, the Federal Reserve may be forced to resume a role it played in the 1940s and 1950s: suppressing long-term yields. This form of financial repression or yield curve control allows the government to borrow cheaply even in an inflationary environment, but distorts capital markets and punishes savers.

This isn’t without precedent. After World War II, the Fed capped Treasury yields below inflation to manage war debt. Although today’s debt wasn’t caused by war, the fiscal math is similar. If inflation remains persistently above the Fed's 2% target, holding yields low would gradually reduce the real debt burden.

Meanwhile, China is opening the monetary floodgates, rapidly increasing its M1 money supply to stimulate its slowing economy. The world’s two largest economies are now injecting liquidity—one through fiscal dominance, the other through monetary stimulus.

The likely result: prolonged nominal growth, persistent inflation above target, and suppressed interest rates. Financial repression will quietly shift wealth from savers to debtors. In short, the U.S. plans to grow its way out of debt—and the Fed may quietly help. As Lyn Alden puts it, “Nothing stops this fiscal spending train—it’s moving full steam ahead.”

Moving on to “Plan B”

Since the COVID-19 pandemic, U.S. debt has exploded from $23 trillion to over $36 trillion. Even more alarming, annual interest payments have nearly doubled from under $600 billion to $1.2 trillion. To address this, the Department of Government Efficiency (DOGE) was launched with Elon Musk at the helm. Musk initially proposed $2 trillion in savings—later scaled back to $1 trillion, then again to about $150 billion for fiscal year 2026.

Clearly, cutting spending is no longer a serious plan. Both political parties show little interest in fiscal discipline. Enter Plan “B”: grow our way out of debt.

The Trump administration wants the Federal Reserve to help lower interest payments, but with inflation still above target, Fed Chair Jerome Powell has shown no urgency to cut rates. Some inflationary pressures, such as tariffs, are just starting to bite—especially in auto prices:

Japan automakers raise US prices, reaching limit of absorbing tariff costs

Nearly three months since the US imposed a 25% tariff on automobile imports, Japanese carmakers are starting to raise prices and preparing to boost American production. Toyota has decided to increase vehicle sales prices in the US by an average of $270 from July. The company said it made the decision based on the announcements of price hikes by a number of competitors, as well as market trends.

Japanese automakers kept prices unchanged at first after the tariffs were imposed. But Subaru and Mitsubishi Motors have since raised them, while Mazda Motor is exploring doing so. They have little choice but to raise prices, having reached their limit in absorbing cost increases.

With or Without You

The FOMC met on July 30 and, as expected, held rates steady. However, two members dissented, pushing for a rate cut—the most dissenting votes since 1993.

In the post-meeting press conference, Powell stressed that the full inflationary impact of tariffs has yet to be felt and reiterated that inflation remains too high to justify rate cuts. Though Powell’s term runs until May 2026, Trump may act unilaterally. He has floated replacing Powell over cost overruns in Fed renovations or may simply name a successor early—effectively making Powell a lame-duck.

The leading candidates, Fed Governors Michelle Bowman and Christopher Waller, both dissented at the July meeting and have called for lower rates. If Trump names one of them as Powell’s early replacement, markets will start tuning in to the new appointee and discount Powell’s leadership.

From (Not) QE to (Not) Yield-Curve Control

Another way the administration is circumventing the Fed is by adjusting Treasury debt issuance. The Treasury is favoring short-term T-bills over long-term bonds to reduce borrowing costs and suppress long-term yields. In July, the Treasury Borrowing Advisory Committee (TBAC) announced it would double buybacks in the 10-30 year maturity range. This signals that demand for long-term debt is weak, and the Treasury must step in to stabilize the market.

Michael Howell of CrossBorder Capital calls this “not yield-curve control yield-curve control.” In effect, the Treasury is doing what Japan has done for decades: artificially managing rates to manage debt.

The GENIUS Act (“Guiding and Establishing National Innovation for U.S. Stablecoins Act”), passed in July, supports this effort. It requires stablecoins to hold 1:1 reserves in cash or T-bills. Treasury Secretary Bessent estimates stablecoins could become a $3.7 trillion market by 2030—potentially a massive new buyer of U.S. debt.
 

Image Source: X

We've Seen This Movie Before

By the UST effectively reducing the supply of long-term US debt given a lack of demand at the same time of doubling their purchases of long-term debt the UST is effectively undergoing yield-curve control by attempting to cap interest rates, a key feature of financial repression.

Financial repression is a range of government policies that aim to benefit debtors like a government while punishing savers as interest rates are artificially suppressed below the rate of inflation. Savers earn a negative real yield of interest while debtors such as the government can attempt to grow their way out of debt.

The result: the economy grew, tax revenues rose, and the debt-to-GDP ratio fell—but at the cost of high inflation. Between 1940 and 1951, average annual inflation was 5.8%, peaking at nearly 20% in 1947.
 

Image Source: FederalReserve.gov

The debt monetization propelled the economy’s size (and tax base) higher and drove down the debt to GDP ratio, but it came with a cost; runaway inflation. The understanding that the caps on interest rates could not be maintained without exacerbating the inflationary trends led to the Treasury-Federal Reserve Accord of 1951 that effectively ended the cap on interest rates.

During this monetary experiment period in the 1940s where the US economy was run hot, the average annual inflation rate was 5.8% and reached as high as 19.7% in 1947, as shown below.
 

Image Source: FSWM, Bloomberg

Our view is that history is repeating. The Treasury and Fed are once again working in tandem to suppress rates and inflate away the debt burden. This may be painful—especially for savers—but it sets the stage for long-term recovery and a future bull market.

In this environment, we recommend investors hold monetary hedges—precious metals, Bitcoin, and hard assets that central banks can’t print. These will continue to be a central part of our client portfolios.

Adding Fuel to the Commodity Fire

While the long-term policy environment is inflationary, China’s short-term actions could also fuel commodity gains. Bloomberg’s China Credit Impulse Index (red line below) leads the JP Morgan Global Manufacturing PMI (black line) by several months. The surge in Chinese stimulus suggests global growth may soon reaccelerate—which would be bullish for commodities.
 

Image Source: FSWM, Bloomberg

China has also begun construction of the Medog Hydropower Station, the largest dam ever built. Three times larger than the Three Gorges Dam and costing $167 billion, the project will consume:

• 60x the cement used for Hoover Dam
• More steel than 116 Empire State Buildings
• Enough concrete for five highways around the Earth

Ongoing industrialization and large-scale infrastructure projects—exemplified by the Medog Hydropower Station—underscore a global trend of rising demand for raw materials. This sustained momentum reinforces our conviction in maintaining an overweight allocation to commodities and hard assets.

Outlook

We are entering the traditionally weak season (August to October), and with markets up sharply since April, a pullback wouldn’t be surprising.

That said, our longer-term view remains bullish. Fiscal and monetary policies are aligned to run the economy hot. We remain optimistic on risk assets, commodities, and monetary hedges like gold and Bitcoin.

We will continue monitoring for signs of a market reversal, but at present, we see no reason to shift to a defensive stance.

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