Is This the End of American Capitalism?
If interest rates stop being market signals and become policy decisions, what survives may look less like capitalism—and more like permanent crisis management.
America's budget deficit is approximately $1.8 trillion—about 6 percent of gross domestic product (GDP). This is a very high level of indebtedness, especially given that we are running these large deficits during an economic expansion.
Deficits usually grow during bad times, as the government engages in countercyclical spending, such as stimulus checks, extended unemployment benefits, and direct industry subsidies. If the deficit is already 6 percent of GDP in good times, where will it be when the next downturn arrives? Probably about 12 percent of GDP (or higher), which would be the highest since World War II.
There was a sharp but brief recession during the pandemic, and a near-recession in 2015, but the last full economic cycle occurred in 2008, during the financial crisis. That means roughly 18 years without a full recessionary cycle.
Recessions are notoriously difficult to predict, but we're probably closer to the next one than to the last one. President Donald Trump appears determined to keep the economy running hot to prevent a recession prior to the 2026 midterms, which helps explain ideas like his tariff rebate checks. If we do get a recession in 2026 or 2027, we may get Keynesian stimulus spending at a level we have never seen before, adding trillions of dollars to the debt.
Interest rates usually fall during recessions. After 2008, for example, investors fled equities for the safety of Treasury bonds. Even amid the engorged spending of Barack Obama's early presidency, interest rates went down and stayed down, surprising professional investors who expected the increased supply of bonds to drive rates higher. Notably, the Federal Reserve began quantitative easing in November 2008 and continued it for years—long after the initial crisis—effectively capping interest rates. The enormous expansion of the money supply paved the way for the great inflation of 2021–2022.
If the U.S. enters a recession and deficit spending pushes rates higher, the Federal Reserve will likely be pressured to implement Yield Curve Control (YCC)—buying unlimited government bonds with newly created money to suppress interest rates. The U.S. cannot tolerate higher interest rates: The housing market is the most unaffordable in history, with mortgage rates at only 7 percent. If interest rates were to rise significantly, the economy would be in checkmate. But YCC is effectively debt monetization—the same thing that led to hyperinflationary episodes in Weimar Germany and elsewhere. Eventually, YCC would lead to very high inflation, even hyperinflation. But that could take several years.
This is why the next recession could mark the beginning of the end of capitalism in the United States. High inflation or hyperinflation has historically been associated with war, revolution, and massive political upheaval. Even stable democracies—with comparatively robust constitutions and systems of checks and balances—can become fragile during periods of economic upheaval. Sustained high inflation tends to fuel radical politics and extremism on both the right and the left. After the 2008 financial crisis, the Federal Reserve was primarily concerned about deflation and falling prices. By contrast, Japan—a country that experienced decades of falling prices—remained a safe and stable democracy. People adapt to falling prices, but inflation rips societies apart.
In an economy, prices are signals. Interest rates are the price of money, and they give the authorities a clue about how to manage the federal budget. If interest rates are too high, the market is telling the government it is spending too much. If interest rates are too low (like they were a few years ago), the markets are telling the government that it is spending too little (if such a thing is possible).
Right now, the government is spending too much. If the central bank were to cap the interest rate, its usefulness as a price signal would disappear. The government can borrow an unlimited amount of money with no immediate consequences but with one big long-term consequence: inflation.
This is what Alan Greenspan wrote about in his 1966 essay "Gold and Economic Freedom." People can protect wealth from inflationary confiscation through gold—and with gold up over 60 percent in the last year, we can assess a measurable probability of future debt monetization.
The solution to all this is for the federal government to spend less and to get close to balancing the budget. At the very least, Congress must bring the deficit-to-GDP ratio under the rate of growth. But hardly anyone has an appetite for that right now. Hardly anyone wants to do the hard thing. If markets aren't producing the outcomes officials desire, officials subvert the markets.
This short-term thinking will have dire consequences. Our electoral choices are coalescing into right-wing socialism vs. left-wing socialism. Both will lead to high inflation, eventually.
Macroeconomics works on a very long timeframe, and this likely won't come to pass this year or next, but in 10 or more years. But the trajectory is clear. Unless Zombie Calvin Coolidge gets elected in 2028, the United States is headed toward financial ruin.
And yes, people have been predicting this since the mid-1980s, when President Ronald Reagan was running comparatively large deficits. But the overall debt load back then was a fraction of what it is today. We are much closer to the endgame today.
