One of the questions we often hear from clients concerns the size of the U.S. debt and deficits, and at what point these will become a major problem for the U.S. What these investors seem to be really asking, however, is when will bond investors balk at the size of the debt and refuse to fund the Treasury, and we start to see failed auctions, interest rates skyrocket, and a classic emerging market-type debt crisis start to unfold? That sort of crisis does not seem likely anytime soon, even though we may experience periodic bouts of fear of one. Yet, this in no way means that the size of the debt is not a problem; the reality is that it is already causing problems, and these problems will only get worse unless something changes.
In this Economics Weekly, Richard de Chazal discuss the early signs of a shift toward fiscal dominance and the gradual erosion of Federal Reserve independence—developments that carry significant implications for both the economy and the investment landscape.