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Today, I wanted to write about everyone’s favorite subject, the U.S. National Debt, and the method we will likely take to get out from under it: financial repression.
Yes, fascinating stuff, I know, but stay with me here. U.S. debt and how much of it is floating in our economy influence just about every aspect of our lives. Our economy moves in debt cycles, and this cycle impacts interest rates, the value of your home, and even the unemployment rate. If our debt load gets too high, it can even lead to a social uprising.
We have been on a historic debt spree lately, and it’s put our country in a very tenuous situation. The U.S. government debt load is currently $37T. For context, we had $26T in debt in 2020 and only $5T in 2000. The more debt we take on, the less economic strength we have. This can impact everything from funding for infrastructure projects to the availability of federal grants for education and research to pressure on tax rates. It also puts us at a major disadvantage in terms of national defense.
But $37T is hard to visualize. This amount doesn’t really mean much without context. The best way to better understand and normalize the $37T debt load is to compare it to the size of our economy, which is $30.5T. Therefore, our debt is currently 121% the size of our economy. Not good.
May 2025 Debt/GDP ratio = 121%
We haven’t had this much debt (relative to our economy) since the end of WWII. Back then, we took on all of this debt to finance our war efforts. This time, we did it because it was politically convenient. Oh, and this ratio is the highest it has ever been in our nation’s history.
So, what do we do about this? How do we get out from under this? There are a few different ways we can lower the debt burden, and each has its pros and cons. However, I think the most likely way we will accomplish this is to inflate our way out of it, a process called financial repression.
The Different Ways We Can Lower the National Debt
There are only five ways a country can lower its debt burden:
1. Austerity
Austerity: Cutting government spending and increasing taxes to reduce debt.
We’re probably not going to pursue this path. One would think this is the most logical approach, but it s a painful process and we’re probably not going to pursue it (at least not anytime soon). Austerity leads to lower economic growth (higher taxes and smaller government spending), higher unemployment, and (possibly) social unrest. Politicians can’t really campaign on this. So, this is probably a no-go.
2. Debt Restructuring/Default
Default: Negotiating with creditors to extend payment terms, reduce interest rates, or write down the principal. Basically, the bondholders of U.S. debt will only get a fraction of what they loaned to the government.
We won’t pursue this path. Perhaps smaller countries can, but the U.S. cannot. U.S. Treasury bonds (our debt) are considered among the safest investment in the world. Defaulting on our debt would be catastrophic and upend everything. The U.S. would lose its creditworthiness, funds would flow out of the U.S., and the world would experience a depression. We would have to start over again.
It’s important to note that the U.S. is already starting to experience a tarnished credit rating. Moody’s just downgraded our country’s credit rating last Friday.
3. Wealth Redistribution
Wealth Redistribution: Imposing higher taxes on wealthier individuals (to pay down the debt load) and reallocating some of this to the lower classes via social services.
We might see some of this in the future (we already have, to a degree, with a progressive tax code and social programs). The problem, if left unchecked, is that this is a slippery slope toward socialism and eventually communism. The further down the socialism /communism path we go, the more economic activity slows. Everyone will suffer under this regime, especially the lower-income households.
Every country that has implemented a version of this has seen a marked decline in economic activity. Countries that have embraced heavy state control of the economy experienced stagnant growth, capital flight, and widespread poverty. Look at Russia, China, Venezuela, Cuba, and Zimbabwe and what this economic policy has done to their societies.
4. Hyperinflation
Hyperinflation: Rapid and unrestrained price increases in an economy over time, typically at rates exceeding 50% each month.
If we pursue this approach, it will cause massive social unrest. See Germany in the early 20th century as an example. Nothing more to add here.
5. Financial Repression
Financial Repression: A strategy where the government inflates away its debt load by artificially keeping interest rates low while allowing for moderate inflation levels. At the same time, the government will direct capital flow and effectively redistribute wealth from savers to borrowers.
There is a lot to unpack here, which I do below, but I think this is the approach we are going to take. In fact, there are signs that we are already starting to head down this path.
Financial Repression
Financial repression occurs when a government keeps interest rates low and lets inflation run high while managing the economy’s capital allocation. This allows for the devaluation of money, which also devalues the government’s current debt. The combination of low interest rates and higher inflation is called negative real interest rates. That, plus a capex boom from government spending, results in a high nominal GDP growth rate that lowers the debt load. Clear as mud, right?
Think of it like this: Let’s assume you have $1,000,000 in savings earning 1% interest, but prices are rising by 5% annually (inflation). Your savings are technically growing, but because inflation is rising much faster, your $1,000,000 (plus 1% interest) actually buys less over time. You are losing purchasing power.
Why would the government do this? It’s a way to shrink their debt without officially paying it off. The government borrows money, but because inflation is higher than the interest they’re paying, they end up paying back less in real terms.
It’s important to note that the debt amount under this scenario doesn’t actually decrease—only the amount of debt relative to the size of the economy. So, financial repression is basically the government using inflation and low interest rates to reduce the real value of their debt—and it comes at the expense of savers.
How The Government Can Accomplish This
Russell Napier, a historian and market strategist, thinks financial repression is the most likely strategy the U.S. will take to lower their debt-load. I agree.
Believe it or not, the U.S. government has done this in the past. From the end of WWII to 1980, we used financial repression to boost our nominal GDP and lower our relative debt.
Usually, the Federal Reserve (our central bank, which is independent of the government) has the power to control the creation of money. However, this power has recently shifted to the government. We saw this on display during the 2020 COVID crisis when the government guaranteed bank loans (“Don’t worry, we’ll back you up if your borrowers can’t pay back their loans.” ): PPP small-business forgivable loans, Main Street Lending Program, Student Loan Payment Suspension, etc.
Newer programs followed shortly thereafter, including the CHIPS and Science Act, Student Loan Forgiveness, Emergency Funding for Ukraine, Community Reinvestment Act, Defense Production Act, etc.
Under Trump, we are seeing proposals for large-scale projects designed to revitalize American manufacturing and energy production.
This isn’t Marxism or central planning. Rather, it is the idea that the government will play a more central role in the direction of the flow of capital. This is a pretty significant shift from what we are used to: let the market decide how it wants to direct its own capital. This hands-on approach by the government can have different names: de-risking, industrial policy, Buy American, re-shoring, or something else, but it means the same thing—government-directed investment.
Credit Guarantees
The government can do all of this through credit guarantee programs. These programs are usually meant to be temporary, short-lived programs, but they have a bad habit of being extended. The reason why is that they are often enacted during crises, and there always seems to be another emergency (Ukraine Invasion, energy crisis, student loan crisis, etc.). Therefore, we will likely see more and more programs enacted. This gives the government the means not to have to retreat from these types of policies. They can keep rolling them into new ones.
These credit guarantees effectively act like free money. The government doesn’t need to raise taxes; it just issues credit guarantees to commercial banks. By controlling the growth of credit, the government can steer the economy in any direction it wants.
If the government wants to combat climate change or promote on-shoring, it can tell banks how and where to grant guaranteed loans or (now) implement tariffs. And this can continue in any direction it wants/needs.
Financial Repression In Motion
Financial repression may sound like an abstract idea, but there is evidence that it’s already in motion. Of course, officials are never going to announce that they plan to use negative interest rates to deflate their debt, but they have done it in the past and I suspect they will do it again.
We’re seeing the early stages of government-directed investment, and a steady push toward de-risking critical industries. These are long-term themes that do not occur for only a few years but rather for a few decades.
The U.S. is walking a tightrope, trying to manage its colossal debt without causing a financial crisis. Remember, financial repression is the combination of negative real interest rates and state-directed spending. The last time the U.S. experienced financial repression was between 1945-1980.
It is entirely possible for the U.S. to keep its inflation rate between 4%-6% while keeping interest rates lower, allowing for financial repression to persist for 15-20 years. This is a guess, of course. A lot can change and global macro is constantly changing. However, history is the best precedent when viewing viable options and the U.S. has had success with this strategy.
Negative real interest rates coupled with more government spending could result in a capex boom here in the U.S. The near-term result could be a boost in jobs and wages, especially for younger people. GDP will likely see an immediate impact, and people will feel great. However, as with all things directed by the government, there will likely be an inefficient use of those funds, and capital will not be allocated well. Projects will become bloated, and productivity will become stale. Economic activity will decline while inflation remains elevated. This is not good (stagflation). We saw this in the 1970s, and stagflation rocked the economy. The way out of this is deregulation and free market capitalism, which is what we saw in the early 1980s (the current regime for the past 40 years). This era led to the rise of Reaganomics and the rising demand for deregulation and a global economy.
This doesn’t mean that things will play out the same way they had 40-50 years ago, but it is worth noting and remembering that history often rhymes.
Savers Pay the Price
In a world where negative real interest rates reign, cash is no longer the safe haven it once was. When inflation outpaces interest rates, every dollar you keep in cash is essentially losing value every day. The purchasing power of your savings slowly erodes while those holding debt and growth assets gain ground. This environment punishes savers and rewards investors.
Your asset allocation strategy has to adapt to thrive in this environment. The old playbook of stashing cash in savings accounts or CDs isn’t going to pay as it used to. Instead, you need to consider investments that can outpace inflation—equities, crypto, or other growth-oriented assets. Having an emergency fund or some dry powder on the sidelines is one thing (and probably recommended). But keeping millions of dollars in cash and not investing it is another (yes, we see this often).
Fixed income might still have a place in your portfolio, but the emphasis will need to shift toward assets with real return potential. The bottom line? Sitting ‘safely’ in cash is no longer a viable strategy. You have to be proactive and ensure that your money is working for you.
