What the Hell is That? Volume Six
Today... a whole new animal.
Editor's Note: I’m on vacation… stop calling, no more spam phone numbers...
Dear Fellow Traveler:
You know that uncle who’s always broke, but the family pretends he’s not…
Then someone sends an email about a day before the Holidays that says, ‘No more loans… whatever you do… no more money…’
And then… somehow… that same author ends up lending the uncle money?
That’s U.S. monetary policy in 2025.
Except this uncle prints the world’s reserve currency and has nuclear weapons.
Huzzah!!!
As The Tail Wags the Dog
Today, we’re defining a new term…
I’ve mentioned it before… but never went down the rabbit hole because…
I get the sense you’d stop reading…
Well, we can’t ignore it anymore.
It’s called… Fiscal dominance.
This is the type of boring economics term designed to make your eyes glaze over.
The truth is… It’s not boring.
Because it’s dominating your financial life.
Here's how this works.
When a government’s debt gets too big… and I mean… really big… the costs of maintaining that debt limit what the central bank can do to manage the debt.
America crossed that Rubicon somewhere around $33 trillion in debt… while our GDP hovered around $27 trillion.
We just hit $37 trillion while you were blinking in the last few weeks… then added another $100 billion for fun…
So, how does this Fiscal Dominance thing work?
Eric Leeper (Economist!) from the Mercatus Center explains the impact of this situation.
When we are under 100% debt-to-GDP, the Federal Reserve (or any other central bank) can still pretend to be independent.
But if a nation gets above that level, where debt-to-GDP surpasses 120%, their debt starts calling the shots.
Today, the U.S. government owes so much money that the Fed can't raise rates without accidentally blowing up the U.S. Treasury.
That’s what happened a few years ago… raising rates to contain inflation.
We should have raised the Fed Funds rate to 6% in 2022 to tame and drown inflation.
But we couldn’t - or else we could have created MASSIVE insolvency levels across the entire banking space and for god knows how many corporate entities.
Now, instead of fighting inflation, the Fed has to act like a relationship counselor to keep the whole financial marriage from imploding.
Remember the uncle?
Let’s say he runs up $200,000 on credit cards and has no printing press.
What happens is that every one of his family’s decisions from that point forward revolves around how to prevent them from collapsing into bankruptcy.
But again, this uncle prints money and sometimes invades other nations.
This is The Math I Hate
We owe $37.1 trillion.
At current rates (4% to 5%), that’s over $1.5 trillion per year in interest alone.
That’s before money for schools, roads, or the military.
Every 1% hike is worth $371 billion more.
Raise rates to 7%… which used to be normal… and interest devours the budget.
Germany tried this in the ‘20s. It ends with wheelbarrows.
Post-WWII America had to subordinate the Fed until 1951 just to keep from drowning in war debt.
Turkey has been doing this under Erdoğan. It’s going poorly.
The Fed knows how to add up all this debt...
They can't pretend all this debt doesn't exist when setting policy.
How the Game Works Now
Remember how I said the debt calls the shots.
Well… the debt has broken the will of the Federal Reserve.
We used to operate in a normal period of monetary policy.
Back in the day… when the economy overheated, the Fed would raise interest rates.
Higher rates meant higher payments to borrow money.
With fewer people seeking loans and less credit, the economy would cool down.
That would reduce inflation.
And everyone was happy (but not really…)
That was the playbook…
But here’s what has happened - as a result of the last 30 years of debt increases…
Now, when the economy overheats, the Fed has a very long series of conversations about maybe raising rates.
They talk.
They promise ‘transitory’ inflation (that’s now running for years)…
Then Treasury panics about debt service.
So the Fed backs off.
Support comes in.
Asset prices inflate.
Inequality accelerates…
Yada… yada…. yada… We end up with socialist mayors in our largest cities…
This isn’t a conspiracy.
It’s math.
The government didn't plan to weaponize its debt.
But debt this large creates leverage against your spending priorities.
Every policy decision now runs through math that didn't matter 30 years ago.
And while the Fed still claims independence.
But the debt service payments suggest otherwise.
Treasury's End-Run
Now, here’s the next phase of this.
The Treasury's been issuing more short-term bills instead of long-term bonds.
It's like choosing to pay your mortgage with credit cards because the monthly payments look smaller.
They're safe, liquid, and check all the regulatory boxes.
When banks buy T-bills with freshly created deposits, it pumps liquidity into the system. The Treasury spends that money into the economy.
This isn't "shadow money printing.” It's basic debt shuffling.
That said, it creates liquidity through regular operations instead of dramatic Fed meetings.
Smart bureaucrats figured out how to work the system without triggering alarms.
This whole setup creates a form of accommodation.
If government spending is increasing - and it always is - that money has to go somewhere.
With rates artificially constrained by fiscal math, investors pile into stocks, real estate, Bitcoin, vintage baseball cards, whatever.
Money is like water… it finds the cracks.
Your portfolio isn't just rising because companies got better at making widgets.
The game's rules changed to favor asset holders.
The Hard Assets Gold Rush
Gold's hitting records while central banks provide accommodation.
Bitcoin's a rocket ship because of growing liquidity…
Even silver's getting invited to the party… breaking toward $40 per ounce.
This isn't a coincidence. It's logic.
When monetary policy gets handcuffed by fiscal needs, finite assets are a play...
Heck… even central banks are buying gold while printing money.
When Systems Break (It Happens Fast)
This whole system has natural limits.
History shows the endgame arrives fast.
We’re seeing crisis events way too often. For now, the dollar still rules the world. Bond markets function normally (mostly).
But we're drifting toward territory where fiscal math increasingly overrides monetary independence.
When systems break, they don't send an advanced notice. (We have to figure them out… and we do…)
March 2020's crash started in late February...
The September 2019 repo crisis spiked overnight rates from 2.4% to over 10% in one week.
Silicon Valley Bank imploded in a few days.
The April 2025 tariff meltdown chopped 10% off U.S. stocks in a few days.
Government spending keeps growing until markets say "enough."
But when markets say "enough," they don't file a polite complaint.
They crater bond prices and spike yields until politicians panic.
What to Do About It
Until this all changes… and it will, smart positioning means owning stuff that thrives when fiscal constraints keep money looser…
Hard Assets: Gold, silver, Bitcoin for currency debasement. Central banks are buying gold and printing money. Follow what they do, not what they say.
Quality Stocks: Companies with pricing power, minimal debt, and cash flow that doesn't need Fed life support. Think Berkshire Hathaway, Visa, Microsoft, businesses that compound through cycles without begging for bailouts.
Infrastructure Plays: Utilities, energy pipelines, data centers. AI needs power. EVs need charging. Reshoring needs electricity. These are the new tollbooths on economic growth.
International Exposure: Switzerland, Singapore, Norway, countries with commodities, stability, and currencies that don't require fiscal dominance. Even 10% provides a meaningful dollar hedge.
Real Assets: REITs and commodity exposure that can pass inflation costs to customers.
Emergency Cash: Keep powder dry for rapid dislocations, they happen fast and create bargains for those ready to act.
Volatility Protection: Positions that benefit from sudden market stress, since fiscal dominance makes systems more fragile, not less.
Momentum Following: Ride liquidity flows instead of fighting them. When accommodation returns, everything moves together.
Inflation Defense: TIPS and I-Bonds for fixed income, though yields remain artificially suppressed.
The goal isn't predicting when fiscal dominance peaks…
Watch for these warning signals:
Debt-to-GDP stays above 120% (we're already there)
Bond yields spike without Fed policy changes (market revolt)
Treasury auction problems or weird T-bill patterns (financing stress)
Emergency interventions become routine (firefighting as standard procedure)
We built a system where fiscal math handcuffs monetary freedom.
Your portfolio benefits from this math in the short run.
Your long-term purchasing power faces growing risks.
The question isn't whether fiscal dominance peaks… It's whether we can manage the transition without triggering the kind of market revolts that make economic textbooks.
The game's rules changed.
Play by the new rules.
Stay positive,
Garrett Baldwin
quick question what would happen if the government put a limitation on borrowing power against short term U.S. debt (under two years maturity) of 10% maximum