See how well you understand the Finances of America. Every American should understand the basic components of how our Government manages the finances of the Country. Only through knowledge are we able to understand the financial state of the country, and thus the health of the country and from this knowledge the ability to make informed decisions.
“Knowledge will forever govern ignorance; and a people who mean to be their own governors must arm themselves with the power which knowledge gives.”
James Madison
Test Government Finance Knowledge
About how much Revenue does the U.S. Federal government collect in a typical recent year?
Order of magnitude: Federal revenues are in the mid single-digit trillions, not billions. For example, in Fiscal year 2024 the federal government collected about $4.9 trillion in revenue. That was just under 20% of U.S. GDP for that year. Learn more: Federal Revenue overview.
How the U.S. Could Reduce Debt Without Breaking the Economy
The U.S. National Debt just passed $38 trillion according to the US Treasury’s Debt to the Penny. [1][2] Not all debt is bad, but if it gets too large then debt can matter a lot, even those denominated in a fiat currency, because interest costs compound and grow they can crowd out other national priorities. Growing up your parents may have told you that it’s a lot easier to get into something, then to get out. That is especially true for debt, easy to get in, and painful to get out. Now that we have reached the point where interest payments are over $1 trillion annually, the US has crossed into that uncomfortable territory. The real challenge is to bring debt growth under control without causing a recession or a bout of high inflation. Ray Dalio, a billionaire hedge fund manager who has written books on Why Nations Succeed and Fail, and How Countries go Broke, popularized the idea of a “Beautiful Deleveraging” – a balanced, multi-year process that reduces the painful process of deleveraging when lowering debt burdens through a mix of growth, moderate inflation, controlled austerity, and targeted debt adjustments, rather than a painful deleveraging that could lead to recession, extreme reductions in services, tax increases, and austerity measures. [3][4]
This piece frames what a Beautiful Deleveraging could look like for the United States, why it’s hard, the challenges faced, and how policy could balance the Deflationary forces of tightening with the Inflationary tools sometimes used to ease the adjustment—aiming for a soft landing that improves the country’s long-run fiscal and economic health, while minimizing the pain along the way.
Current Status
National Debt: The National Debt stands at just over $38 trillion (gross) with over $30 trillion of which is Debt held by the public. [2]
Deficits: Structural Annual deficits running over $1trillion at around ~6% of GDP. [5][6]
Interest Costs: Net Interest over $1 trillion annually. The Congressional Budget Office (CBO) Long-Term Budget Outlook (March 2025), Net Interest reaches 5.4% of GDP by 2055, up from ~3.2% of GDP around 2025. [7][8] Independent analysis by the Committee for a Responsible Federal Budget (CRFB) highlights a related pressure point: by the 2050s, net interest would consume roughly 28% of federal revenues, absent policy changes. [9]
According to CBO’s latest long-term outlook, by 2055 total Federal outlays (spending) are projected at about 26.6% of GDP, with Net Interest (interest paid on National Debt) near 5.4% of GDP. That means that roughly one-fifth (~20%) of Federal spending will be used to pay interest on the debt. At that scale, interest costs rival or exceed most standalone programs and risk crowding out other priorities if unaddressed. [7][8][9]
What “Beautiful Deleveraging” Means
In Economic terms, Beauty is about reducing debt while avoiding (or at least minimizing) the painful parts of deleveraging and therefore managing that successfully can be Beautiful. Dalio’s Deleveraging framework was originally developed to explain past debt cycles and emphasizes a balanced mix of tools so that the economy can reduce debt without crashing demand and involves these components:
Spending Restraint (public and private demand constraint),
Income growth (real GDP growth),
Debt Restructuring or Terming out (Monetary intervention when necessary), and
A measured amount of Money/Credit creation (Moderating and managing inflation).
These components, when executed with great skill, political courage, and balance, can help the economy grow enough to ease debt ratios while avoiding a deflationary spiral. [3][4]
For a sovereign like the U.S., that balance translates into a policy with credible fiscal consolidation, productivity-oriented growth policies, and a monetary policy that avoids both runaway inflation and hard-landing deflation. Because the U.S. issues debt in its own currency with deep capital markets, it has more room to maneuver than most, but it is not immune to arithmetic: if interest rates (R) run above growth (G) (See our Article on R > G), debt ratios tend to rise unless deficits are reduced. CBO’s long-term projections foresee precisely this pressure in their future outlook. [9]
Pain Points: Why Deleveraging Is Hard
There is a reason it’s hard, in general large broad spending cuts, and more and higher taxes are not popular. While the components and levers are well known, it takes a healthy amount of political courage to propose policies that maybe unpopular, a great deal of skill and coordination to execute these policies, and likely a good amount of luck and good timing for a sustained period likely across several administrations. A deleveraging can proceed along two of these painful paths, spending cuts and tax increases, and each has tangible real-world consequences:
Spending cuts: Less public consumption and investment, fewer or slower growth in transfers, and potentially fewer (e.g. program eliminatinos) or lower service levels (e.g., processing times, enforcement, infrastructure maintenance). In macro terms, cuts are deflationary, they reduce aggregate demand, which can cool inflation but also growth and employment in the short run.
Tax increases: Higher effective tax rates reduce disposable income and/or after-tax returns to investment, is also deflationary. Design matters: broadening the base (fewer exemptions) generally distorts behavior less than steep marginal rate hikes, but either path tightens demand.
Because both mechanisms have a contractionary/deflationary impact and create conditions that can lead to recession, economic hardship, and job loss, a multi-year consolidation approach is part of Dalio’s framework. Instead of a fiscal cliff and extreme austerity based spending cuts; Dalio’s approach phases changes over time; and pairs tighter budgets with growth-friendly policies (innovation, expansion, permitting, skills, productivity increases) that lift the supply side. The goal is to keep nominal GDP growth (real growth + inflation) from collapsing, otherwise debt-to-GDP can rise even while you cut, because the revenue denominator shrinks.
Deleveraging Menu (and Their Trade-offs)
The Tax Project has outlined (See our Article: “Ways Out of Debt”) a non-exhaustive review of policy options to deleverage. Below we provide a summary group them by mechanism. [10]
1) Consolidation via Revenues (Tax Increases)
Summary: Revenue measures (Tax Increases) are deflationary near-term but can be structured to minimize growth drag (e.g., emphasize consumption/external taxes with offsets, or reduce narrow, low-value tax expenditures).
2) Consolidation via Outlays (Spending Cuts)
Summary: Spending cuts can be deflationary; pairing it with supply-side reforms (education/skills, streamlined permitting for productive investment, R&D incentives, labor force productivity growth) can mitigate growth losses and raise potential output over time.
3) Pro-Growth, Supply-Side Reforms (Growth)
Summary: Growth and Supply side reforms (e.g. Productivity, Innovation, Permitting, Energy inputs) that generate real productive growth is the least painful way to lower debt-to-GDP without relying on high inflation.
4) Inflation and Financial Repression (Print Money)
Summary: Modest inflation can ease real debt burdens, part of Dalio’s balance, while managing highly destructive excess inflation. That is why the “beautiful” approach uses only modest inflation alongside real growth, fiscal and monetary management, not inflation as the main lever. [7][9]
The Sooner we Start, the Easier it is
The bottom line is, the longer we wait the harder it gets, the problem will not go away on its own, it only gets worse over time. The 2025 CBO long-term outlook provides a forecast, and it doesn’t paint a great picture:
Debt Outlook: Debt held by the public rises toward 156% of GDP by 2055, under current-law assumptions. [8][11]
Outlays vs Revenues: Outlays (spending) climbs from ~23.7% of GDP (2024) to 26.6% (2055); revenues rise more slowly to 19.3% – expanding an already large and persistent structural gap. [8][12]
Net interest: Reaches 5.4% of GDP by 2055—roughly one-fifth of total federal outlays and around 28% of Federal revenues. [7][8][9]
Those numbers underscore the reason to start now: the later the adjustment, the harder the challenge required to stabilize debt. Conversely, a timely package that the public views as credible and fair can anchor long-term rates lower than otherwise, reducing the interest burden mechanically.
A “Beautiful” U.S. Deleveraging
The Tax Project does not propose or advocate specific policies, however a workable plan using the Dalio Framework would likely include a mix of the following components aimed to stabilize debt-to-GDP within a decade and then bend it downward while sustaining growth and guarding against excessive inflation relapse. A balanced approach:
A multi-year fiscal framework enacted up front allowing for a ordered and measured deleveraging.
Credible guardrails: Deficit targets linked to the cycle; a primary-balance path that improves gradually, with automatic triggers to correct slippage.
Composition: Roughly balanced between base-broadening revenues and spending growth moderation in the largest programs (phased in).
Quality: Protect high-return public investment; target lower-value spending and tax expenditures first.
Administration: Resource the revenue authority to improve compliance; align incentives and simplify.
A growth package to offset the deflationary impulse.
Supply-side reforms with high ROI: energy and infrastructure permitting; skilled immigration; workforce skills; competition policy that fosters innovation and productivity tools.
Private-sector: Reduce regulatory frictions that impede capex expenditures in goods and critical infrastructure.
Monetary-Fiscal Coordination in the background—not Fiscal Dominance.
Monetary-Fiscal Coordination: The Federal Reserve keeps inflation expectations anchored; it does not finance deficits but it can smooth the adjustment by responding to the real economy and anchoring medium-term inflation near target. Over time, a credible Fiscal policy promoting growth helps bring Rates (R) down toward Growth (G), easing the arithmetic. [7][9]
Contingency tools (use sparingly)
“Terming out” Treasury debt Lock in more fixed, long-term loans and rely a bit less on short-term IOUs. Why it helps: If rates rise, less of the debt has to be refinanced right away, so interest costs don’t spike as fast. If the term premium is reasonable and the Fed is in an accommodative stance, shorter term lower rate treasuries maybe attractive to reduce Net Interest expenses.
Targeted restructuring (not the federal debt—specific borrower groups) Adjust terms for groups where relief prevents bigger damage (e.g., income-based student loan payments, disaster-area mortgage deferrals). Why it helps: Stops small problems from snowballing into defaults and job losses while the government tightens its own budget.
This mix qualifies as “beautiful” by balanacing inflationary and deflationary elements. It shares the burden across levers; it avoids hard financial shocks; it relies primarily on real growth + structural balance rather than high inflation or sudden austerity. Done credibly, long-term rates fall relative to a laissez-faire (do nothing) approach, lowering interest costs directly and via lower risk premia. The country benefits both intermediate (by not inducing a recession and harsh economic measures), and long term freeing up revenue to more productive uses than Debt payments, and supporting growth.
Managing the Macro Balance: Deflation vs Inflation
All this sounds good, but the practical art is to offset deflationary consolidation with pro-growth supply measures, not with high inflation. Consider the balancing act between these different variables:
Consolidation (deflationary): Fiscal discipline reduces demand, manages structural gaps, good for taming inflation; risky for growth if overdone or badly timed.
Growth Reforms (disinflationary over time): Expand supply, lower structural inflation pressure; raise real GDP and productivity, improving the debt to GDP ratio.
Monetary Stance: Should keep inflation expectations managed; if growth softens too much, gradual monetary easing is available if inflation is on target.
Inflation temptation: Modest inflation can reduce some of the burden mechanically, but leaning on inflation as the adjustment tool can backfire if markets demand higher interest rate (term) premiums; nominal rates can rise more than inflation, worsening R > G and Net interest. CBO’s baseline already shows interest outlays rising markedly even without an inflationary strategy. [7][9]
A “Beautiful Deleveraging“ aims too creates a “soft landing” keeping nominal GDP growth positive, inflation expectations managed, and real growth strong enough that debt-to-GDP falls without creating undue Economic hardships. Managing each of these variables with the often blunt tools available, many of which don’t manifest for months, or years is quite the magic trick, requiring patience, skill, and acumen.
Risks and Pitfalls
The road ahead can be bumpy and full of challenges, managing the risks is key to a successful deleveraging. Here are some areas that can derail a “Beautiful Deleveraging.”
Front-loaded austerity that slams demand into a downturn or recession; a gradual path anchored by rules and automatic stabilizers is safer and creates less hardships. It means that we will endure less pain over a longer period. Some may want to rip the band aid off and take the measures all at once.
Policy whiplash (frequent reversals) that destroys credibility and raises risk premia (higher Interest rates); stable consistent policies beat one-off “grand bargains” and political vacillations.
Over-reliance on rosy outlooks; plans should make conservative growth assumptions, and reasonable baselines.
“Kicking the can” down the road with laissez-faire policies until interest dominates the budget, leaving painful, crisis-style adjustments as the only option is the biggest of all the Risks. CBO’s outlooks illustrates how waiting raises the eventual cost, and negative consequences. [7][8][9]
Is it Worth it?
On the surface, that’s an easy question, however the answer may pit generations against each other each with their own point of view and different perspectives. Current generations at or near retirement who may not see the worst effects of a laissez-faire policy may see the risk of recession, and cut backs in service as an unacceptable change to their Social Contract which they may have worked a lifetime under a set of expectations that they counted on. Younger generations, may see it as generational theft, placing an undue burden on them for debt they had little or no part in creating. Both are valid perspectives, however, the long term effects of a “Beautiful Deleveraging” will deliver these positive durable payoffs for the Country:
Out of Doom Loop: High debt is a trap, as out of control interest expenses rise, debt grows and the gap between revenue and debt rises in a self reinforcing doom loop. Breaking that loop is key to a healthy economy.
Lower Interest burden: As debt drops, so does Net Interest expenses. Instead of crowding out other expenses, revenue is freed up to other National Priorities (e.g. Healthcare, Education, Infrastructure, Social Services, Surplus, Sovereign Wealth). [7][9]
Greater Macro resilience: With manageable debt exogenic shocks, pandemics, wars, financial events, give the Government financial space to manage these events without taking on negative levels of debt.
Higher Trend growth: When consolidation is paired with genuine productivity reforms, lower debt ratios are correlated with higher growth, supporting living standards and the tax base. [14][15][16]
Summary
A “Beautiful Deleveraging” is but one way to approach the intractable problem of high debt. It represents a reasonable approach that balances near term realities with long term impacts. Our choices now will define the America of the future, and the quality of life younger Americans will have and future generations will inherit. Will it be painless? Probably not, it will likely require some sacrifice and discipline. The challenge wasn’t created in a short period, and it won’t be solved in a short period. Is it achievable? If we face the truth with candor about trade-offs, accept phased steps that the public deems fair, and have a bias toward investments that raise long-term productive capacity, than it is possible. The biggest question is the will of the American people. That, more than any single policy, will determine our future. At the Tax Project we will always bet on informed Citizens making the best choices for America – we will always bet on America. That defines the essence of a “Beautiful Deleveraging.” [3][4][10]
Citations
[1] U.S. Department of the Treasury, America’s Finance Guide: National Debt (accessed Oct. 2025): “The federal government currently has $37.98 trillion in federal debt.” (fiscaldata.treasury.gov)
[2] Joint Economic Committee (JEC) Debt Dashboard (as of Oct. 3, 2025): Gross debt ~$37.85T; public ~$30.28T; intragovernmental ~$7.57T. (jec.senate.gov)
[3] Ray Dalio, What Is a “Beautiful Deleveraging?” (video explainer). (youtube.com)
[4] Ray Dalio, short-form clip on “beautiful deleveraging.” (youtube.com)
[5] Reuters coverage of CBO near-term deficit path (FY2024-2025). (reuters.com)
[6] Associated Press summary of CBO’s 10-year outlook (debt +$23.9T over decade; drivers). (apnews.com)
[7] Congressional Budget Office, The Long-Term Budget Outlook: 2025 to 2055—headline results: net interest 5.4% of GDP by 2055; outlays path. (cbo.gov)
[8] Peter G. Peterson Foundation, summary of the 2025 Long-Term Outlook: outlays to 26.6% of GDP; interest path and historical context. (pgpf.org)
[9] Committee for a Responsible Federal Budget (CRFB), analysis of CBO 2025 outlook: interest consumes ~28% of revenues by 2055; R > G later in the horizon. (crfb.org)
[10] Tax Project Institute, Ways Out of Debt: US Options for National Debt (June 14, 2025). (taxproject.org)
[11] Reuters recap of CBO long-term debt ratio (public debt ~156% of GDP by 2055). (reuters.com)
[12] CBO, Budget and Economic Outlook: 2025 to 2035 (context for near-term path). (cbo.gov)
[15] Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The Real Effects of Debt (BIS Working Paper No. 352). Bank for International Settlements.
[16] Eberhardt, M., & Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics, 97(1), 45-58.
The “Debasement Trade” is a prominent investment strategy in current finance, defined by the systematic movement of capital out of assets denominated by sovereign promises, such as fiat currencies and traditional fixed-income securities, and into assets characterized by verifiable, finite supply, often referred to as “hard assets” [1]. This strategy is fundamentally a defensive measure, designed to preserve the real value of wealth against the risk of the currency’s diminishing purchasing power, which results from accelerating national debt and large/rapid monetary expansion [2]. The shift reflects a growing, fundamental loss of confidence in the long-term fiscal solvency of major economies, especially the United States, whose currency serves as the global reserve.
I. Historical Context: Debasement as a Sovereign Tool
The act of currency debasement, the reduction of a currency’s intrinsic value without altering its face value, has been a recurring fiscal strategy throughout history. While the methods have evolved, the economic rationale remains consistent: to increase the effective money supply to meet government financial needs, typically to fund large expenditures or manage mounting debts [3].
Physical Debasement: The Precedent
In the ancient and medieval worlds, debasement was a physical process. The Roman Empire offers a classic example, where successive emperors reduced the silver content of the denarius over several centuries [4]. By substituting precious metals with cheaper base alloys, the government could mint a greater volume of currency from the same reserves, allowing the Treasury to stretch its resources for state expenses. This practice, however, led directly to rising prices (inflation) as merchants recognized the coin’s diminished intrinsic worth.
Another significant example occurred in 16th-century England under King Henry VIII, a period often cited as the “Great Debasement” [5]. To finance ongoing conflicts, the silver purity of English coinage was drastically reduced (From over 90% to as low as 25%). This act, while providing short-term funding for the Crown, destabilized domestic and international trade, leading to public mistrust and prompting the widespread hoarding of older, purer coins—an economic phenomenon later formalized as Gresham’s Law (“bad money drives out good”) [5].
The Structural Shift to Fiat Debasement
The transition to a fiat monetary system fundamentally redefined debasement. Following President Nixon’s 1971 decision to suspend the convertibility of the U.S. dollar into gold, the global financial system moved entirely away from the commodity-backed anchors of the Bretton Woods agreement [6] (See our Article on Bretton Woods). In this modern context, debasement is not about physical manipulation but about administrative action: the unconstrained expansion of the money supply through central bank policy. The erosion of a currency’s value is now primarily a function of excessive issuance relative to underlying economic productivity [7].
US M2 Money Supply
Figure 1 Source: Federal Reserve
II. The Conditions of the Modern Debasement Trade
The current period is characterized by macroeconomic conditions that have accelerated investor concern and institutionalized the Debasement Trade as a key portfolio consideration.
The Scale of Sovereign Indebtedness
The primary catalyst is the unprecedented scale of the U.S. National Debt, which is over $37 trillion [8]. Unlike previous debt cycles, the current trajectory is sustained by structural spending (23 consecutive years with deficit, last 5 $trillion+), regardless of the political party in power [9]. This fiscal reality presents governments with a limited set of options: implement politically unpalatable spending cuts or tax hikes, or employ the politically more palatable solution of allowing the currency’s value to decline.
The Debasement Trade is predicated on the rational assumption that policymakers will inevitably choose the latter, utilizing monetary tools to reduce the real burden of the debt and its service costs [1]. Through inflation, the real value of the debt owed to bondholders is effectively diminished over time, a process often described as “financial repression.”
Investor Flight to Scarcity
The response from institutional investors has been explicit. Citadel CEO Ken Griffin has been a vocal proponent of this thesis, characterizing the current market environment as a “debasement trade” [10]. Griffin notes a tangible shift in capital, with investors seeking to “de-dollarize” and “de-risk their portfolios vis-a-vis US sovereign risk” by accumulating non-fiat assets [10].
This trend is observable through market data:
Currency Depreciation: The U.S. dollar index (DXY) has experienced significant periods of sharp depreciation against major currencies and, more dramatically, against hard assets like gold [11].
Reserve Diversification: Globally, the dollar’s share as the primary reserve currency held by central banks has been steadily declining, reaching multi-decade lows [12]. This signals a structural move by foreign governments to reduce reliance on the U.S. dollar, further supporting the debasement thesis [13].
US Dollar Valuation
Figure 2 Source: Federal Reserve
III. Monetary Policy, QE, and Hyper-Liquidity
The mechanics of modern debasement are inextricably linked to central bank interventions, specifically Quantitative Easing (QE).
Quantitative Easing and Money Supply Growth
QE, a policy initiated following the 2008 Financial Crisis and dramatically expanded during the 2020 COVID pandemic response, involves the central bank (the Federal Reserve) creating new electronic money to purchase vast amounts of government and mortgage bonds [14]. This injects large amounts of money (hyper-liquidity) into the financial system, resulting in an exponential, historically unprecedented surge in the M2 money supply (See Figure 1) [14].
This expansion is the engine of modern debasement. When the volume of money in circulation grows at a pace far exceeding the underlying growth in the economy’s productive capacity, the result is an inevitable loss of the currency’s value [15].
Inflation as the Mechanism of Debasement
The consequence of this imbalance is widespread inflation, which acts as the functional manifestation of currency debasement. Inflation is not merely a rise in prices but a measurable loss of the currency’s ability to retain its value [15]. Some consider this type of inflation a hidden tax (See our Article on Is Inflation a Stealth Tax?). Data confirms this erosion: significant cumulative price increases over recent five-year periods have fundamentally lowered the purchasing power of the dollar [10].
The Debasement Trade views inflation as structural rather than temporary—a direct result of governments financing massive deficits through the printing press, effectively taxing the population through reduced purchasing power rather than legislative mandate.
US Inflation
Figure 3 Source: Federal Reserve
IV. Political Debate and the Precedent of the Plaza Accord
The current anxiety surrounding debasement is focused on specific policy discussions within Washington concerning the intentional manipulation of the dollar’s value.
The Deliberate Devaluation Thesis
Certain U.S. economic advisors, notably within the Trump administration, have argued that the dollar’s status as the world’s reserve currency creates a structural “overvaluation” that persistently harms U.S. trade competitiveness [16]. Proponents of this view suggest that managing a controlled depreciation of the dollar is a necessary measure to correct global trade imbalances and support domestic manufacturing [16].
This thesis has led to policy suggestions, sometimes grouped conceptually under the name “Mar-a-Lago Accord.” These suggestions include strategies such as utilizing tariffs to adjust global currency levels or even taxing foreign holders of U.S. Treasury debt [16]. Such discussions signal a willingness by policymakers to consider actions to achieve fiscal and trade goals, even at the expense of currency stability (Inflation).
Purpose: The Plaza Accord was a multilateral agreement signed by the G5 nations (France, West Germany, Japan, the United Kingdom, and the United States) [17]. Its specific goal was to engineer an orderly depreciation of the U.S. dollar against the Japanese yen and German Deutsche Mark. At the time, the U.S. dollar was considered significantly overvalued due to high U.S. interest rates and robust capital inflows, which led to a massive U.S. trade deficit [18].
Mechanism: The participating nations agreed to coordinate currency market interventions, specifically selling U.S. dollars, to achieve the desired depreciation [18].
Outcome and Relevance: The Accord successfully achieved its short-term goal, weakening the dollar significantly [18]. However, it ultimately failed to deliver long-lasting correction to the underlying U.S. trade imbalances because the structural domestic factors—namely, low private savings and high government borrowing—remained unaddressed [19].
The historical parallel is crucial: while a new “accord” might temporarily achieve a devaluation target, the Debasement Trade argument suggests that without fundamental fiscal discipline, any managed decline will merely lead to renewed instability and require further monetary interventions.
The Official Stance
Despite the policy discussions, U.S. Treasury Secretary Scott Bessent has publicly distinguished between short-term currency fluctuations and long-term policy [20]. He maintains that the core of the U.S. “strong dollar policy” is to take long-term steps to ensure the dollar remains the world’s reserve currency, focusing on U.S. economic growth and stability, rather than obsessing over the exchange rate [20]. This distinction is intended to reassure global markets that the U.S. is not actively pursuing the dollar’s demise, even if domestic fiscal and monetary choices suggest otherwise.
V. Implications for Citizens and the Move to Hard Assets
The consequences of currency debasement are most keenly felt by the average citizen, whose financial well being may depend on the dollar’s stability. This is especially true after the post COVID rapid inflation period felt by most Americans who are now keenly aware of the negative impacts of inflation.
Inflationary Wealth Transfer
Debasement operates as a stealthy wealth transfer mechanism [21].
Erosion of Fixed Income: Citizens holding dollar-denominated assets, such as savings accounts, fixed pensions, and bonds, see the real value of their wealth diminish steadily [7]. This is especially punitive for retirees and those on fixed incomes.
Asset Price Distortion: While nominal asset prices (stocks, real estate) reach record highs in dollar terms, this surge is often an illusion. When these assets are measured against hard assets like Gold or Bitcoin, the appreciation is significantly tempered, reflecting the currency’s dilution rather than pure economic growth [22].
This disparity: those who are asset-rich (owners of real estate, commodities, or equities) are protected, while the working class and cash holders are negatively effected as their wages and savings buy less in real terms.
The Embrace of Hard Assets
The Debasement Trade is the strategic answer to this inflationary trap. Investors are choosing assets defined by their scarcity:
Gold (Traditional Hedge): Gold has served as a reliable store of value and inflationary hedge for millennia, its value enduring precisely because it cannot be created by a central bank [23]. Surges in the gold prices directly reflect the decline in the dollar’s relative value [12].
Bitcoin (Digital Scarcity): Bitcoin has been increasingly adopted as a contemporary hard asset [1]. Its maximum supply of 21 million coins is secured by cryptography and network consensus, rendering it immune to sovereign fiscal or monetary manipulation [2]. Its inclusion in the Debasement Trade reflects a redefinition of “hard money,” moving beyond the physical limitations of precious metals to the mathematical certainty of code [22]. The dramatic appreciation of Bitcoin is viewed by many investors not as a speculative frenzy, but as a rational re-pricing of mathematical scarcity relative to infinitely expanding fiat currency [1].
USD vs Hard Assets
Figure 4 Source: TradeView
VI. Conclusion: A Structural Shift
The Debasement Trade is more than a momentary market tactic; it is a structural investment shift reflecting deep seated concerns over fiscal integrity of the world’s leading economies. Driven by high and persistent debt accumulation, coupled with the unconstrained power of central banks to expand the money supply through QE, the trade represents a fundamental shift in investor trust, from faith in government promises to reliance on the verifiable scarcity of hard assets. As long as the structural imbalance between monetary creation and productive capacity persists, the strategic movement toward assets like gold and Bitcoin will continue to be a defining feature of the global financial landscape.
Webull (syndicated from Bloomberg/Benzinga). (2025, July 3). U.S. Treasury Secretary Bessent refuted claims that the recent depreciation of the U.S. dollar would affect its status as the world’s major currency. https://www.webull.com/news/13098149616067584 (Webull)
The terms “surplus”, “deficit” and “debt”, or “National Debt”, are often used at the same time, and sometimes interchangeably, but they represent distinct concepts in government finance. Understanding the difference is crucial for grasping the fiscal health of our nation. This article discusses the differences, helps define them and put them in terms Citizens can use.
What is a Surplus & Deficit?
Imagine your household budget for a given period, say a month. You have money coming in (your income) and money going out (your expenses).
Deficit: If in that period you spend more money than you earn, you have a deficit. You’ve spent more than your current income . For a government, a budget deficit occurs when its total expenditures (spending on programs, services, etc.) exceed its total revenues (money collected from taxes, fees, and other sources) within a specific fiscal year (typically October 1 to September 30 in the U.S.) [3]. That is to say Total Expenses exceed Total Revenue.
Deficit
Inadequacy or insufficiency. “a deficit in revenue.”
The amount by which a sum of money falls short of the required or expected amount; a shortage. “budget deficit.”
Deficiency in amount or quality; a falling short; lack. “a deficit in taxes, revenue, etc.”
Surplus: Conversely, if you earn more money than you spend in a given month, you have a surplus. The government experiences a budget surplus when its revenues exceed its expenditures in a fiscal year. This means that your Total Revenue exceeds your Total Expenses and you have money left over [3].
Surplus
Being more than or in excess of what is needed or required: synonym: superfluous. “surplus revenue.”
Being or constituting a surplus; more than sufficient. “surplus revenues; surplus population; surplus words.”
An amount or quantity in excess of what is needed.
What is a National Debt?
Now, let’s extend that household analogy. If you consistently spend more than you earn each month, you’ll likely need to either a) Reduce Spending, b) Increase Revenue, c) Take from Savings, or d) Borrow money (use credit). Your use of credit might be a credit card, a loan from a bank, or borrowing from friends and family. This accumulated borrowing represents your total debt.
National Debt: The National Debt (or public debt) is the cumulative total of all the money the federal government has borrowed over its entire history to cover past deficits, minus any surpluses [1, 3]. When the government runs a deficit, it has to borrow money, usually by issuing Treasury bonds, bills, and notes. This new borrowing adds to the National Debt. When it runs a surplus, it can use that extra money to pay down a portion of the existing debt, or put into funding other programs and services.
While the US Government has mechanisms that you and I don’t have that make it different than a Credit Card, for our analogy the National Debt accumulates like the total balance on your credit card or loan statement, which reflects all the outstanding purchases (expenses) you’ve made over time and haven’t fully paid off (debt). Every time you have a monthly deficit (spend more than you earn and put it on credit), your overall credit card debt increases.
Debt
Something owed, such as money, goods, or services.”used the proceeds to pay off her debts; a debt of gratitude.”
An obligation or liability to pay or render something to someone else.”students burdened with debt.”
The condition of owing. “a young family always in debt.”
National Debt and Deficits in Context, why does it matter?
For the United States, carrying some debt is nothing new, with rare exception the U.S. has carried debt since its inception [2]. Carrying some debt is normal, and perhaps beneficial – say like a Mortgage and a Credit Card bill you pay each month. However, the scale and trajectory of the US National Debt have dramatically changed over the last few years. The US has had some economic shocks that increased the debt rapidly including the 2008 Great Recession, and the COVID Pandemic. What is different now with our current National Debt is that it is the highest it has ever been ($36.95 Trillion) [10] greater than our entire country’s annual economic output of $29.18 trillion in 2024 (Debt to GDP > 100%) [11]. Troubling is that this is a peace time debt surpassing World War II levels of spending. To some, more concerning is that each year we have a deficit in our budget, now exceeding over a trillion dollars annually, that appears to be a structural shortfall. Meaning, the government’s revenue is consistently below its expenses and commitments that isn’t one time or transient, and must borrow each year to meet its funding needs.
The last time the U.S. federal government ran an annual budget surplus was in 2001 [1, 3]. Since then, the nation has experienced a continuous string of deficits (over 20 years in a row). This persistent pattern isn’t just a result of temporary economic downturns; it’s driven by structural deficits.
Structural deficits refer to a persistent imbalance between government spending and revenues that exists even when the economy is operating at its full potential (i.e., not in a recession, or major economic shock) [1, 3]. These are not caused by the ups and downs of the business cycle but by fundamental, long-term mismatches in revenue and expenses [3]. Key drivers of structural deficits in the U.S. include:
Aging Population: As the population ages, programs like Social Security and Medicare face increasing demands, leading to higher spending. Fewer working-age individuals contribute taxes relative to the growing number of retirees receiving benefits [1].
Rising Healthcare Costs: Healthcare costs consistently outpace economic growth, putting upward pressure on government spending for programs like Medicare and Medicaid [1].
Tax Policies: Decisions to cut tax rates without corresponding spending reductions, or a tax base that doesn’t keep pace with the modern economy, can contribute to insufficient revenue.
Increased Spending Commitments: Long-term commitments to various government programs and services, without sustainable funding mechanisms, create an ongoing gap.
These underlying factors mean that even during periods of economic prosperity, the U.S. government is projected to continue spending more than it collects, contributing to the ever-growing national debt [1].
Are Deficits Bad? What about Interest?
Deficits, and Debt spending are not all bad. Government can step in to “prime the pump” in times of economic turbulence to smooth a business cycle, and some government investments add to overall productivity. However, while sometimes beneficial (e.g., during wars, pandemics, or severe economic crises to stimulate recovery), persistent and large deficits are generally not a good thing because they directly lead to a larger national debt, and a larger national debt brings its own set of challenges:
Increased Interest Payments: Just like you pay interest on your credit card debt, the government must pay interest on the National Debt [8]. As the debt grows, so does the amount of interest the government has to pay. If your credit card balance keeps growing, a larger and larger portion of your monthly payment goes just to interest, leaving less money to pay down the principal or for other essential spending.
Real-World Impact: For the U.S. federal budget, interest payments on the national debt have become one of the fastest-growing “programs” [8]. These payments are mandatory and siphon away funds that could otherwise be used for other programs like education, infrastructure, scientific research, defense, or reducing taxes [8]. In 2024 Interest expenses exceeded $1 trillion dollars, passing the US Military as the 3rd largest expense in the Federal budget [12].
Crowding Out Budget Items: As the Interest payments grow, if they get large enough it puts the government in a difficult situation. If they are unable offset the deficits with more Revenue they may be forced to reduce other programs, or add to the Debt compounding the challenge. This has the effect over time of crowding out other government expenses in order to pay the rising Interest expenses.
Higher Interest Rate Expenses: When the government borrows heavily to finance its deficits, it competes with private businesses for available capital in the financial markets [9]. This increased demand for capital can drive up interest rates from investors who are taking on more risk from a highly leveraged seller. Higher interest rates make it more expensive for the government to borrow money to finance the debt. This leads to increasing Interest expenses. For example if you’re constantly maxing out your credit cards, banks might be less willing to lend you money or increase your interest rate to compensate for their higher risk.
Reduced Fiscal Flexibility: A large and growing national debt limits the government’s ability to respond effectively to future crises (like recessions or natural disasters) or to make necessary investments [8]. With a significant portion of the budget already allocated to interest payments, policymakers have less room to maneuver. If your household expenses match your income, an unexpected medical emergency or job loss can be catastrophic if you have no financial buffer or ability to borrow more without extreme difficulty. This can lead to difficult choices, potentially requiring painful tax increases or spending cuts during times when economic stimulus or social support is most needed [8].
Risk of Fiscal Crisis: In extreme cases, if investors lose confidence in a government’s ability to manage its debt, they may demand much higher interest rates or stop lending altogether. This could lead to a fiscal crisis, where the government struggles to pay its bills, potentially causing economic instability, inflation, and a loss of trust in the nation’s financial system [8]. This situation is unlikely to happen in the US as the Reserve Currency in the World, and backed by the US Governments unlimited ability to tax.
US Advantages: The Reserve Currency and Fiat Money
It’s important to acknowledge that for countries like the United States, whose currency (the U.S. dollar) holds reserve currency status, there’s a unique advantage. As the world’s primary reserve currency, the dollar is widely used in international trade, finance, and as a store of value by central banks globally [5]. This creates a consistently high demand for U.S. Treasury bonds, even amidst large deficits, making it easier and often cheaper for the U.S. government to borrow money [5]. Foreign governments and investors are generally willing to lend to the U.S. at relatively low interest rates because U.S. Treasury securities are considered extremely safe and liquid [5]. However, this ability is not unlimited and we may get to a point where that is tested (See our article Return of the Bond Vigilantes).
Furthermore, because the U.S. government issues its debt in its own fiat currency (a currency not backed by a physical commodity like gold, but by government decree), it theoretically has the ability to “print” more money to pay its debts. This gives it a degree of flexibility that countries borrowing in foreign currencies do not possess [5].
However, most mainstream economists believe that while these factors allow for higher debt levels, they do not negate the long-term risks associated with persistent structural deficits and a continuously rising national debt. Even with the reserve currency advantage and the ability to issue debt in fiat currency, there are still significant potential downsides:
Inflation: While printing money can address debt, doing so excessively without a corresponding increase in goods and services (productivity) can lead to inflation, eroding the purchasing power of the currency [7].
Loss of Confidence: Even for a reserve currency, if debt levels become truly unsustainable or if the government appears unwilling to address its fiscal imbalances, investors could eventually lose confidence, leading to a depreciation of the currency and higher borrowing costs as demand moves away from the dollar.
Intergenerational Equity: Accumulating massive debt effectively transfers the burden of repayment (through future taxes or reduced services) to younger and future generations.
It’s worth noting that a minority school of thought, known as Modern Monetary Theory (MMT), holds a different perspective. MMT proponents argue that a sovereign government, which issues its own fiat currency, is not financially constrained in the same way a household or business is [6]. They contend that such a government can always create enough money to meet its obligations and finance spending, as long as it avoids inflation [6]. From this viewpoint, the primary limit on government spending is the availability of real resources in the economy, not the ability to finance deficits [6]. While MMT has gained some academic traction, its policy prescriptions and core tenets remain largely outside the economic mainstream and are considered outside of the mainstream by most economists, who emphasize the importance of fiscal sustainability and the risks of unchecked government spending and debt [7].
Conclusion
In conclusion, surpluses are annual measures of revenue outpacing expenses, deficits are an annual measure of overspending, and the national debt is the cumulative total of all borrowing less surpluses. Persistent deficits lead to growing debt, which in turn leads to higher interest payments, potential crowding out of private investment, reduced fiscal flexibility, and an increased risk of economic instability. While the U.S. dollar’s reserve currency status and the nature of fiat currency provide certain advantages in managing debt, most economists agree that these do not make the nation immune to the long-term structural problems that large and growing deficits entail [13][14]. Addressing these long-term fiscal challenges requires difficult policy choices to ensure a sustainable economic future.
If interest rates rise faster than growth, debt becomes a trap.
I. Introduction – The Spread That’s Breaking the System
For decades, America managed to grow its economy faster than the cost of borrowing. That dynamic kept deficits manageable and debt levels sustainable. But today, a worrying shift is underway: the effective interest rate on government debt (R) is now greater than the real growth rate of the economy (G). In economic shorthand, we’ve entered an era of R > G.
This equation may sound academic, but it has very real consequences. When borrowing costs exceed economic growth, the debt burden doesn’t just increase – it compounds. This creates a growing strain on the federal budget, limiting our ability to invest in future needs.
The R > G concept was popularized by economist Thomas Piketty in his book Capital in the Twenty-First Century, where he applied it to inequality: when the return on capital exceeds the rate of economic growth, wealth concentrates at the top. But the same logic can apply to nations. When the interest rate on debt exceeds growth, public debt compounds and can overwhelm fiscal capacity.
As of 2024, the U.S. national debt reached $36.2 trillion[1], with annual net interest payments of $1.125 trillion, consuming approximately 22.0% of all Federal revenue, according to the latest FRED data[2][3]. This means that more than $1 of every $5 dollars in revenue goes just to service debt. In fact, interest has now surpassed National Defense spending to become the third-largest Federal expense, after Social Security and Medicare[4].
II. What Happens When R > G? A Costly Imbalance
There are negative consequences when the government’s interest payments (R) rise above its economic growth rate (G), and those consequences can build quickly. The result is a compounding debt burden that becomes more difficult to manage each year.
At its core, the National debt grows based on a simple formula:
Debt(T+1) = Debt(T) × (1 + R – G)
Where:
Debt(T) = total debt in the current year Debt(T+1) = total debt in the following year R = effective interest rate on the debt G = real GDP growth rate
As long as Growth (G) exceeds Interest Rates (R), debt tends to shrink relative to the economy – that’s GOOD! But when R > G, even a stable budget with no new spending deficits leads to rising debt as a percentage of GDP – that’s BAD! This is worse in the U.S. context, because the Federal government has run over 20 consecutive years of deficits. We are compounding the problem even before adding the negative effects of R > G.
In 2023, the average interest rate on publicly held debt rose above 3.3%, while real GDP growth hovered near 2%[2]. This gap means the government must devote more revenue for the same services just to stay in place—and even more to reduce debt.
Figure 1 Source: FRED
III. The Cost Spiral: Interest is Crowding Out the Future
Interest on the National debt is now the fastest-growing part of the federal budget. In FY2024, interest payments exceeded $1.1 trillion, surpassing military spending for the first time[3][4].
As interest rises, it reduces the budget available for priorities like:
Infrastructure and clean energy projects
Scientific and medical research
Education, public health, and social services
These tradeoffs are already showing up in budget negotiations. If trends continue, interest could consume more than 25% of federal revenue by 2030, even under conservative projections[5]. That would mean better than 1 in 4 dollars would be spent servicing debt payments. Imagine the dinner table discussion if your credit card interest alone was taking a quarter of your income, that is the situation America could soon face.
Figure 2 Source: FREDFigure 3 Source: FRED, CBO
IV. Why are Interest Rates Rising? What It Means for the Future?
To understand the R > G dynamic, we first need to ask: why are interest rates rising?
Interest rates are set by a combination of factors:
The Federal Reserve’s target rates
Investor expectations about inflation
The supply and demand for government bonds
Since 2022, the Federal Reserve has raised rates to fight inflation. Meanwhile, investors have demanded higher returns to protect against rising prices from inflation. Additionally, increasing government borrowing has added more bonds to the market, pressuring yields upward[6]. All of which are putting upward pressure on interest rates.
Can we control interest rates?
The Federal Reserve’s role in Monetary policy gives them huge power to influence rates, however even they are subject to market forces during their Open Market Operations. So in short, yes they have great influence, but not control and where that control occurs changes based on the term.
Short-term rates? Generally yes, the Federal Reserve sets the Fed Funds rate which sets short term rates.
Long-term rates? No—those are driven by global investor confidence, inflation expectations, and the perceived durability of U.S. fiscal policy and trust in the dollar.
That’s why many economists believe elevated interest rates may persist, especially if inflation remains sticky or if global lenders become more cautious about U.S. debt levels. In fact, nearly $11 billion exited U.S. long-term bond funds in Q2 2025 amid concerns over debt and inflation, while investors favored short-term securities[6]. Federal Reserve Chair Jerome Powell recently emphasized that the Fed will maintain its “wait-and-see” approach due to persistent inflation risks shaped by tariffs and uncertainty[7].
What it means for the future?
When looking at our current situation and what the future may hold, you must evaluate the impact of rising Interest Rates (R) would have on the budget and our debt costs. We created a sensitivity table using our current National Debt to show the effects of a 1% to 3% increase in Interest Rates (R). As you can see the increase in Debt Servicing costs goes up substantially, exacerbating an already challenging problem. Is this likely to happen? Interest rates have been fairly stable and the Federal Reserve monitors this closely, but is it unheard of? In the late 70’s early 80’s with inflation out of control, interest rates peaked over 20%, and were over 10% for more than 3 years, and never dropped below 6% for Paul Volker’s entire term as Chair of the Federal Reserve from 1979-1987.
Avg Interest Rate (%)
Est. Interest Cost ($T)
Increase from 2024 ($B)
0% (2024 Actual 3.36%)
$1.10T (Actual)
0
1% Increase (4.36%)
$1.43T
$327B
2% Increase (5.36%)
$1.75T
$655B
3% Increase (6.36%)
$2.08T
$982B
V. Ignoring the Problem Makes It Worse
The future may come faster than we expect, and this isn’t one of those challenges that if you ignore gets better on its own.
Just a few years ago, some projections warned interest might eventually exceed 30% of Federal revenue[5]. But with today’s rate environment, we’re already at 22%, and climbing – you don’t have to imagine too hard with annual structural Federal Budget deficits adding to the National debt, reaching 30% no longer seems like a stretch.
If left unresolved, rising debt interest may eventually leave policymakers with only difficult choices:
RAISE TAXES: Broad increases that may include middle-income earners
REDUCE SPENDING: Cuts to Social Security, Medicare, defense, or other mandatory programs
PRINT MONEY: Central bank debt monetization—risks inflation or currency credibility
This is no longer a theoretical risk. It’s embedded in the current budget and growing with every year of inaction. Interest is no longer just a line item — it’s becoming as challenging as Medicare, and Social Security entitlements. All growing, or having funding challenges simultaneously.
Figure 4 Source: FRED, CBO
VI. Japan: A Glimpse into the future? A Blueprint to Not follow?
Some point to Japan as evidence that high debt can be sustained without any issues provided inflation remains under control if the debt is held in the states fiat currency. But key differences limit the comparison:
Japan’s debt is largely owned domestically
It has a current account surplus
It battled deflation, not inflation
However, even Japan is now being tested. After years of ultra-low rates and decades of stagnant growth, it has begun reversing policy, increasing interest rates, and weakening the long-standing yen carry trade where people would borrow from Japan at low interest rates and invest in higher returning areas outside of Japan. These shifts have raised Japan’s borrowing costs and led to rising debt service burdens as interest rates rise (R) [8][9].
Analysts from Barclays and the IMF have noted that Japan’s growing interest expenses could strain its fiscal outlook if growth remains weak[10]. This has important implications for the U.S., which faces a more inflation-prone environment and heavier reliance on foreign buyers of US Debt.
VII. How Do We Escape? The Tough but Necessary Choices
Solving the R > G imbalance will require a mix of political will power, discipline, and hard policy choices:
RAISE REVENUE: Greater revenue sources through taxation, tariffs, and fees
SPENDING DISCIPLINE: Slow or reduce spending, reevaluate larger budget items including mandatory spending on entitlements
BOOST GROWTH: Invest in productivity, innovation, infrastructure, and labor force participation
RESTORE FISCAL CONFIDENCE: Send clear signals that America’s Fiscal position is sound to reduce risk premiums
AVOID MONETARY SHORTCUTS: Don’t Print Money to ease debt that risks creating runaway inflation
It is likely to require a combination of a number of these solutions. The solutions are not mysterious—they’re well known. As noted by the Committee for a Responsible Federal Budget, former Fed Chair Ben Bernanke, and former CBO directors, the issue isn’t technical—it’s political will[11].
VIII. Conclusion
We are no longer warning about R > G — we’re living it. It may not scream that the sky is falling or that America will become insolvent tomorrow. However, it is quietly altering the structure of our National budget by crowding out other items, limiting our ability to provide services, putting pressure on our structural annual deficits, and creating growing economic risks that continue to build over time creating great and greater consequences for the health of America’s future.
In the past, fiscal hawks cautioned that rising interest costs could one day consume a dangerous share of revenue. That day has arrived. As of 2024, 22.0% of federal revenue is already going to interest — and rising.
This isn’t theoretical. It’s a structural shift embedded in the fiscal outlook. Every year we delay action compounds the problem. Interest becomes the dominant force in our fiscal future — not a side expense, but a driver of debt itself.
The good news? The earlier we act, the more options we have, and the easier (not easy) managing it becomes. With thoughtful, balanced reform, the U.S. can navigate this challenge and return to fiscal stability. However, it starts with recognizing that this isn’t about politics or beliefs — it’s about math.
Because when the Rate of interest (R) exceeds the rate of Growth (G), time is not on our side.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
