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Fortune••business
Key Points:
- With the U.S. debt-to-GDP ratio nearing 120%, economists including Janet Yellen warn of fiscal dominance, where the central bank's ability to fight inflation is constrained by government financing needs, potentially leading to inflation-driven economic instability.
- Fiscal dominance occurs when the Federal Reserve cannot raise interest rates effectively without triggering unsustainable government interest payments, forcing it to tolerate higher inflation to avoid a debt crisis.
- The traditional "Hamilton Norm"—the expectation that government debt will be repaid through future taxes—has eroded since 2020, with pandemic stimulus spending perceived as permanent gifts rather than loans, undermining trust in fiscal responsibility.
- High interest rates, instead of contracting spending, may paradoxically stimulate the economy due to massive government
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