Why the Fed Can Look Hawkish. The Pieces of Financial Repression Are Quietly Falling Into Place. | Entrepreneurial Thoughts & Erratic Ramblings

America owes almost $40 trillion.

To put that in context, America spends more in defense than the next 6 countries combined. Just the interest to service America’s debt eclipsed the massive defense budget in 2024. Roughly a fifth of every tax dollar you send to Washington goes straight back out the door as interest.

What’s making this worse is that most of the debt was issued in 0% years, whereas the short term interest rates now are at 3.75%, which means the interest bill is further set to rise, aggressively.

Every government that has ever owed this much money relative to its economy has faced the same menu. There are three doors.

The Three Doors

Door one: Cut Spending. The math is brutal. Interest, Social Security, Medicare, Medicaid, and defense consume nearly the whole budget. No politician can propose meaningful cuts to any of those programs and still expect to have a promising career in Washington. That is why the deficit runs near 6% of GDP at full employment.

Door two: Raise Taxes. Same problem, opposite direction. Closing a gap this large would require increases so broad they’d hit everyone for almost every transaction. Possible option only for someone considering political suicide.

Door three: Inflate It Away. This is the quiet door. If wages and prices rise 4% a year while the government pays old lenders 2–3% on the bonds they hold, the debt shrinks in real terms. The debt gets diluted, rather than repaid. Economists have a name for the toolkit that makes this work: financial repression – engineering a world where the return savers receive on government paper stays below inflation. Wealth quietly transfers from the people who hold the debt to the government that owes it.

This isn’t a conspiracy theory. It’s documented American history. From 1942 to 1951, the Federal Reserve openly capped long-term government bond yields at 2.5%, while inflation averaged roughly 6% a year. Bondholders lost about a third of their purchasing power in a decade, and the World War II debt, proportionally even larger than today’s, melted away. It worked.

The Catch Today: It Can’t Be Announced

In 1942, the government’s lenders were patriotic households buying war bonds. Today they’re hedge funds, foreign central banks, and pension managers with a sell button for the moment any asset stops performing. The moment lenders see repression coming, they revolt. They demand higher yields to compensate, or stop showing up to auctions. Rates spike, the interest bill explodes, and the plan defeats itself. The United Kingdom got a taste in 2022, when a single poorly received budget sent bond yields vertical within days and toppled a prime minister in lesser time than it took for a head of lettuce to rot.

So door three has a strange requirement built in: it only works if it never looks like a decision.

There is no memo, no meeting, and more importantly, there doesn’t need to be one. A government carrying $39 trillion of debt has an enormous, structural incentive for three things to be true: for measured inflation to read low, for someone to reliably absorb its borrowing, and for its interest costs to stay below the economy’s growth rate. When an incentive that large persists for years, institutions drift toward it the way water drifts downhill, each agency making individually defensible choices that happen to lean the same direction.

What follows is an inventory of the drift.

Piece One: The Thermometer

The claim, in plain words

Imagine your heating bill is through the roof and the only thermometer in the building is owned by your landlord. Your bill depends on the thermometer’s reading. Your landlord might never once fake a reading, but you’d still want someone else checking the thermometer, especially if he owed money on the boiler.

The US government is in exactly this position with inflation. It owes $39 trillion, and how much that debt really costs depends on the inflation rate, which the government itself measures, through its own statistical agencies. If official inflation reads 3% while true inflation runs 4%, the government quietly wins twice: its inflation-linked obligations cost less, and the public believes its money is holding value better than it is. The claim of this section is not that anyone is faking the numbers. It’s that the agencies holding the thermometer are being weakened, defunded, and re-reviewed. This is happening all at once and all recently, by the one institution with a trillion-dollar-a-year interest in a lower reading.

The plumbing

All of this happened within roughly one year, on the public record:

Kevin Warsh launched five task forces , including one on the data sources the Fed trusts and one on its inflation framework, even while publicly promising the 2% target hasn’t changed.

The Bureau of Economic Analysis (BEA) is rewriting how the...