An End to US Debt

Curious about the direction the US is headed? Want a glimpse at what lies ahead?

Here’s the forecast: higher inflation—far beyond expectations. We rely on rising interest rates and the so-called ‘bond vigilantes’ to keep inflation in check. Instead, they will inflate the true costs of modest inflation, paving the way for hyperinflation.

The inflation after WWII gradually eroded our debt, much like termites silently consuming untreated wood, wiping out roughly two-thirds of the debt’s real value by the 1970s. Most people scarcely noticed. Why not harness that mechanism again?

You might suspect—or the POTUS might hope—that enduring a period of 10% inflation could help erase a significant portion of the US national debt. Ten percent annual price hikes—steady and predictable. Wouldn’t that be a reasonable trade-off?

Think again.

Inflation only really “works” when it catches people off guard, similar to a sudden accident or robbery. Otherwise, borrowers and lenders adjust their behavior. Buyers rush to purchase before prices climb, and lenders demand higher interest rates to guard against losses. These increased rates raise debt costs, dampen economic activity, and shrink federal tax revenues—undermining inflation’s intended impact.

Inflation must be unexpected. Once the element of surprise is gone, authorities face a choice: stop inflation or accelerate it into ‘full Weimar’ hyperinflation.

And the ‘bond vigilantes,’ those who supposedly pressure the government to keep inflation in check, might ironically make hyperinflation more probable than commonly believed.

Imagine if Scott Bessent and Kevin Warsh held a joint press event—perhaps on Halloween or April 1st—and declared ‘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.’

How would people respond?

Would they lower their car windows and leave their wallets in plain sight? Would citizens calmly accept the erosion of their retirement savings? Would landlords offer decade-long leases at current rates? Could publishers realistically offer subscribers a “lock-in” for today’s prices over ten years?

And the bond vigilantes? What would their reaction be?

They’d sell off Treasury bonds en masse, demanding 15% or 20% interest to compensate for looming inflation losses. But if the government had to pay such elevated rates—more than any gains from the ‘inflation tax’—the strategy would collapse. The goal is to enable federal spending to grow, yet rising expected inflation actually diminishes government purchasing power. When the ‘bond vigilantes’ take control, inflation ceases to be effective.

The lesson is clear. Just like driving through a dangerous neighborhood prompts you to lock your car and shut the windows, people don’t willingly expose themselves to theft if they have a choice.

Even without an explicit declaration, people can sense what’s coming. As the federal government continues running $2 trillion deficits, it might as well make its direction obvious like a city bus route. No need for elaborate explanations. Federal debt will climb, interest rates will rise, and inflation will follow.

Two years ago, Argentina faced this dilemma. With annual inflation surging over 250%, hyperinflation seemed imminent. Voters recalled the brutal 1989-1990 period when inflation peaked at 2,600%. They were determined not to endure that nightmare again.

Americans lack experience with hyperinflation. They have no historic memory or defenses to handle it. It doesn’t take an expert to see the potential outcome. Many in Congress reminisce about the “golden years” from 1980 to 2020, when borrowing and money printing were easy as interest rates steadily fell. Few grasp why inflation now fails to work or recall any hyperinflation episodes. In the US, such an event feels unimaginable, and considering it is politically unviable. Besides, voters can still blame others for rising prices, but not for slashing welfare or military spending.

Here’s the likely path forward. The federal government will let inflation “run hot.” Interest rates will climb. Deficits will grow (adding more fuel), pushing inflation even higher. Consumers will anticipate worsening inflation as if the government publicly declared a plan to destroy the dollar. Households will scramble to dump dollars like a toxic asset, causing inflation to soar further. Investors will divest from bonds, the dollar, and the nation altogether.

Exactly when, where, or how this will cross into hyperinflation—earning its “hyper” label—we cannot pinpoint. But it will certainly surprise us all.