🚀 The puck is moving—are you ready?
Debt, Financial Repression, and the Return of Hidden Inflation
The U.S. economy is entering dangerous territory. Deficits are ballooning, inflation is mutating, and monetary policy is quietly being repurposed to keep the system afloat. Beneath it all, hidden inflation is silently eroding purchasing power and trust. Welcome to the feedback loop economy. The federal deficit has surged to $1.4 trillion year-to-date, up 7% from this time last year—even with a growing economy. Federal revenues and outlays have both grown, but spending is once again outpacing income. The main culprits: rising entitlement costs and a massive surge in interest payments, which now account for 21% of the increase in federal outlays. We are also borrowing more in an era of high rates—and it’s costing us.
What’s going on with the One Big Beautiful Bill?
When those cuts are simply extended. In reality, extending the cuts lowers government revenue, increasing the deficit—not reducing it. Meanwhile, the real drivers of long-term fiscal imbalance—entitlements and interest payments—are largely untouched. This isn’t a fix. It’s accounting sleight of hand wrapped in a shiny name.reductionWashington’s newest fiscal showpiece—the “One Big Beautiful Bill” (OBBB)—promises $6.6 trillion in deficit reduction over the next decade, including $1.7 trillion in so-called mandatory savings. But the numbers are misleading. The bulk of the “savings” comes from a budget gimmick: assuming that Trump-era tax cuts will expire as scheduled, then claiming deficit
I Hear Sirens…
With fiscal policy flailing, the Fed is intervening. In May, the FED quietly purchased $20 billion in 3-year Treasuries after a failed auction—an unannounced act of de facto quantitative easing. The reason? Private demand for government debt is weakening.
Meanwhile, reserve requirements for U.S. banks remain at zero, encouraging banks—via regulatory nudges rather than direct mandates—to soak up Treasuries. No need to remind you all of our episode with Chris Leonard , but economists call this financial repression: manipulating markets to keep borrowing costs low.
This is the kind of policy more common in emerging markets under strain. And now it’s happening here.
When the Fed steps in to buy Treasuries, especially after a weak auction, it's a game-changing moment. It reflects not just typical portfolio adjustment, but a shift where central bank implicitly backs fiscal policy—literally monetizing government debt. On May 21, 2025, a 20-year Treasury auction saw subdued private demand (2.46× bid-to-cover—the lowest since February), prompting yields to spike and forcing the Fed to purchase roughly $20 billion in 3-year notes to stabilize the market. This matters because: * Treasury auctions are the backbone of sovereign financing—faltering demand here signals eroding investor confidence, risking higher future borrowing costs for the government. * The Fed’s intervention suppresses yields artificially, making credit cheaper for everyone, not just the government—fueling asset bubbles in housing, stocks, and even education finance. * This covert intervention blurs the line between monetary and fiscal policy, undermining the Fed’s traditional independence and resembling direct financing of the federal deficit—an alarming echo of Modern Monetary Theory in practice. * Finally, with private investors stepping aside, the Fed becomes the buyer of last resort, setting a precedent. If auctions continue to struggle, expect more stealth QE, more liquidity pumping into financial assets, and greater financial fragility—all without the usual warning signs of rising consumer inflation.
In short: when the Fed buys Treasuries to plug auction gaps, it’s not routine—it’s a structural shift with profound implications for interest rates, asset prices, and the future of monetary policy.
“In reality, all this money was chasing assets... So when you've got a policy that's driving up asset prices to boost economic growth, it is dramatically enriching the tiny section of people who own these assets. So that's how the Fed has deeply widened the gap between rich and poor.” – Chris Leonard
Hidden Inflation: The Effects
Official inflation is back in the headlines: 2.4% in May (headline), 2.8% (core). But these figures don’t reflect the full reality. The truth is more insidious: inflation is hiding in plain sight. * Shrinkflation: Product sizes drop while prices stay the same—cost per unit rises, but CPI barely notices. * Hedonic Adjustments: Quality improvements are used to lower the measured price of goods—even if you pay more out of pocket. * Exclusion of Asset Prices: Skyrocketing home and stock prices don’t show up in CPI, even though they reshape real living costs -- This is simply running back the playbook of the mid-2010s QE . * Basket Weight Manipulation: The CPI changes weightings of categories like food and fuel, often dampening the impact of price spikes in essentials. * Limited Scope: Urban-focused CPI data often excludes rural and demographic-specific inflation experiences.