What is fiscal dominance in the US economy?

Fiscal dominance is when government debt levels constrain the Federal Reserve's ability to fight inflation, leading to price increases rather than fiscal adjustments.

Did the 'Hamilton Norm' die in 2020?

Experts believe the 'Hamilton Norm,' the expectation of debt repayment via future surpluses, ended in 2020 due to stimulus packages viewed as gifts, not loans.

How does US debt impact interest rates?

High US national debt makes interest payments a direct economic stimulus, paradoxically making rate hikes counterproductive for inflation control.

Home / Business and Economy / Debt Overload: Fed's Brakes Fail as US Eyes Inflation Spiral

Debt Overload: Fed's Brakes Fail as US Eyes Inflation Spiral

6 Jan

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Summary

US faces 'fiscal dominance' where debt constrains central bank's inflation fight.
The 'Hamilton Norm' of repaying debt died in 2020, increasing permanent debt.
High US debt makes interest payments an expansionary force, unlike past crises.

Debt Overload: Fed's Brakes Fail as US Eyes Inflation Spiral

As the U.S. stares down a debt-to-GDP ratio of 120% in early 2026, economists warn of an impending 'fiscal dominance.' This economic peril, likened to ancient Rome's currency debasement, occurs when government financing needs cripple the central bank's inflation control efforts, forcing adjustments through reduced purchasing power rather than fiscal discipline.

The foundational 'Hamilton Norm,' which presumed debt issuance would be offset by future tax surpluses, is considered defunct since 2020. This shift means government debt is now viewed as a "gift" rather than a loan, eroding the Federal Reserve's ability to manage inflation. Consequently, the massive interest payments on the national debt, exceeding $1 trillion annually, now act as an expansionary force.