Forward Guidance We’re Entering The Final Phase Of Fiscal Dominance | David Beckworth
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Jul 16, 2025 David Beckworth, a Senior Research Fellow at the Mercatus Center and host of Macro Musings, discusses the rising threats of fiscal dominance where government solvency overtakes price stability. He highlights alarming debt levels and persistent deficits. The conversation dives into the role of stablecoins, Treasury strategies, and the importance of reforming the Fed's operations to maintain its credibility. Beckworth warns that without significant structural changes, the independence of the Federal Reserve could be jeopardized, impacting economic stability.
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Understanding Fiscal Dominance
- Fiscal dominance occurs when the Fed prioritizes government solvency over price stability.
- It flips roles where Congress effectively determines price levels, risking inflation control.
Historical Examples of Fiscal Dominance
- The last clear fiscal dominance was during WWII when the Fed pegged interest rates and bought government debt.
- Similar dynamics occurred briefly in 2021 with Fed buying most new treasuries during the pandemic.
Catalysts Driving Fiscal Dominance
- Low interest rates enabled political avoidance of tough fiscal choices, leading to massive debt accumulation.
- Persistently large deficits and rising debt-to-GDP ratios push towards fiscal dominance.