US Debt Surpasses $40 Trillion as Fiscal Dominance Looms

The U.S. government's debt has surpassed $40 trillion, and the Federal Reserve is trying to combat inflation, which is still above its 2% target rate. Inflation is beneficial for national debt because it reduces the real value of money owed.

However, when monetary policymakers raise interest rates to fight inflation, they increase the government's borrowing costs. This can lead to 'fiscal dominance,' where fiscal policy takes precedence over monetary policy.

'Fiscal dominance' is a situation where the government's need for funds outweighs the central bank's efforts to control inflation. During World War II and its aftermath, the U.S. experienced this phenomenon as it raised massive funds through war bonds.

The national debt jumped from $49 billion in 1941 to almost $260 billion by the end of 1945. The government also sold $185 billion worth of war bonds. Some economists argue that this period led to persistent low interest rates, contributing to inflation jumps in the 1970s.