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birb_cromble  10hr ago (text post)   160 thread views

Qeekly Finance Thread - 2026-09-12

A weekly thread to discuss financial matters - from personal all the way up to global.

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Over the course of this Qeek, I've been learning about the concept of fiscal dominance.

Fiscal dominance is a macroeconomic condition in which government fiscal pressures (high public debt and deficits) effectively dictate or constrain a country’s monetary policy. In a fiscally dominant regime, the central bank’s usual objective of controlling inflation becomes secondary to the Treasury’s budget financing needs, often leading the central bank to accommodate government borrowing by keeping interest rates low or buying government debt. This situation tends to create inflationary pressure

Do you think that we are starting to see that phenomenon in the United States? It seems like the symptoms of said event line up with what we're seeing: stubborn inflation, ripping equities, increasingly schizophrenic Treasury behavior. On the other hand, I'm always suspicious of something that fits a little too well.

If it is happening, what should private American citizens expect, other than high inflation? How would an Argentinian prepare for their fiscal dominance scenario if a time traveler warned them ahead of time?

Argentina is a basket case. Let's focus instead on a closer comparison: Japan.

Japan's debt-to-GDP is much higher than the US. And they grow slower. And they have fewer children. And they are older. So any problems the US might have in the future, Japan already has today.

How does Japan handle its debt? They monetize it. The central bank of Japan owns roughly 42% of Japan's debt. That means they created Yen out of thin air to buy the government debt. And it doesn't stop there. Another 40% of the debt is held by banks, insurance companies, and pension funds that are legally mandated to own it.

You might think this is bad for Japan's currency and you'd be right. Its value against the U.S. dollar has declined by 50% since 2012. That's a common theme. Almost all currencies decline against the dollar over time. Some decline slowly. Some decline quickly. But, except for the almighty Swiss Franc, decline they must. .

The U.S. will monetize the debt. The consequences of that might be hard to predict. But there is enormous capacity for the U.S. to do that given our extremely strong currency and extremely large trade deficit. It's likely that the damage will fall mainly on countries that rely on U.S. exports for their economic growth.

Long term, the health of the US economy will depend on its economic productivity. The important thing is not to take actions that curtail economic growth as they have done in Europe. Fiscal concerns are secondary.

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