The Age of Fiscal Dominance? Lyn Alden Thinks So

16th November, 2025

Fiscal dominance is what happens when government deficits and public debt become so large that fiscal policy (rather than the central bank’s monetary policy) dictates the pace of growth, credit creation, and inflation. In a fiscally dominant system, it is government spending that drives the economy, while the central bank’s power to steer it through interest rates fades into the background.

For much of the late 20th century, things worked the other way around. Economies operated under monetary dominance, a regime where the Federal Reserve and other central banks controlled credit cycles by adjusting rates. Raise rates to cool inflation; cut them to spur growth. For nearly forty years, that mechanism appeared to work.

But the world has changed. Despite the sharpest tightening cycle in four decades, deficits remain huge, growth continues, and inflation refuses to die. The reason, argues macro strategist Lyn Alden, is that we have crossed into a new regime: fiscal dominance has taken hold, and the government’s balance sheet now outweighs the central bank’s in shaping the economy’s direction.

What Fiscal Dominance Means in Practice

In a fiscally dominant world, the government’s spending decisions overpower the interest-rate lever. Deficits act as a continuous source of new money in the economy, sustaining demand even when the Fed tries to tighten. Monetary policy, once the primary tool for managing inflation, becomes reactive, adjusting to fiscal reality rather than shaping it.

For decades, the pattern was predictable: when unemployment rose, deficits widened; when the economy boomed, deficits shrank. Since 2016, that relationship has collapsed. The U.S. now runs enormous deficits regardless of the business cycle, that’s a sign that government spending has become structural, not cyclical.

When the Treasury spends more than it collects in taxes, it injects new purchasing power into the system. If those deficits are large enough, they can sustain growth even in the face of higher rates. That’s fiscal dominance in action, it’s when the government’s fiscal engine overpowers the central bank’s monetary brakes.

How We Got Here

Alden traces the rise of fiscal dominance to three intertwined forces: debt, demographics, and the end of disinflation.

Debt: The Arithmetic of Scale – The U.S. debt burden has reached levels that make traditional policy responses self-defeating. When interest rates were near zero, the debt looked manageable. But as yields climbed, interest costs exploded. Every one-point increase in average borrowing costs adds hundreds of billions of dollars in annual spending, feeding the very deficits the Fed aims to contain. Tightening monetary policy now worsens the fiscal problem.
Demographics: The Entitlement Wave – An aging population guarantees higher government spending. Social Security and Medicare outlays grow automatically, while the tax base shrinks. These obligations are politically untouchable, making large deficits a permanent feature of the landscape.
The End of Disinflation – For forty years, globalization, automation, and cheap energy kept prices low, masking the inflationary effects of debt. That era is over. Supply chains are shorter, labor costs are rising, and governments are spending heavily on defense, reshoring, and green energy. Fiscal stimulus now translates far more directly into inflationary pressure.

Together, these trends make deficits structural. They no longer expand and contract with the business cycle; they simply persist, driving the economy forward whether the Fed likes it or not.

The Historical Parallel

The last major episode of fiscal dominance in the U.S. occurred during the 1940s, when wartime spending pushed federal debt above 100% of GDP. To finance that debt, the Federal Reserve capped interest rates, buying Treasury bonds and holding yields below inflation. The policy kept borrowing costs manageable but produced years of negative real returns for savers, it was a quiet process of financial repression that gradually eroded the debt burden.

The parallels today are striking. Once again, the government’s financing needs overshadow the Fed’s inflation target. Once again, inflation serves as a release valve, a politically tolerable way to reduce debt in real terms without explicit default or painful austerity.

Fiscal dominance doesn’t always lead to a debt crisis. In strong institutional settings like post-war America, it can unfold slowly, with inflation quietly working down the debt load. In weaker systems (think of 1980s Latin America) it can spiral into currency collapse. The outcome depends on productivity, politics, and credibility.

The Investor’s World Under Fiscal Dominance

If government deficits drive the economy, the rules for investors shift dramatically.

The bond market – Under fiscal dominance, bonds are designed to lose value in real terms. Inflation becomes the mechanism through which debt is managed, eroding the purchasing power of fixed-income returns. Long-duration government debt, once the safest asset class, becomes the most vulnerable.
Equities – Many companies locked in low-cost debt during the last decade and now enjoy pricing power that allows them to pass on inflation. Some even benefit from government spending itself, especially in defense, energy, and infrastructure. Stocks tied to tangible assets or essential goods can act as partial inflation hedges.
Commodities – Gold, prime real estate, and other select commodities maintain purchasing power when fiat currencies are inflated away. Alden’s advice is straightforward i.e., own scarcity, limit exposure to long-dated bonds, and think in real terms rather than nominal ones.

Global diversification also becomes more important. When domestic fiscal expansion weakens real yields, capital tends to seek opportunity elsewhere. Emerging markets with commodity wealth or manufacturing strength could outperform as the U.S. contends with its fiscal burden.

The Trap for Fiscal Hawks

Fiscal hawks i.e., economists and politicians who have long warned about runaway debt, see fiscal dominance as the inevitable result of years of fiscal excess. In one sense, they’ve been vindicated. Yet the regime itself makes their preferred solution (sharp spending cuts or balanced budgets) nearly impossible.

When interest expense alone consumes a growing share of the budget, austerity becomes counterproductive. Cutting spending slows growth and reduces tax revenue, worsening debt ratios. Raising taxes risks recession and political revolt. The math corners policymakers into the least painful option available – inflation.

Alden views this not as a moral failure but as a mechanical inevitability. Once the system depends on deficits to sustain itself, it can’t deleverage voluntarily. Inflation becomes the quiet default because it’s the path of least resistance that preserves nominal stability at the cost of real value.

Fiscal hawks may continue to call for discipline, but the structure of the modern state makes it unlikely. Fiscal dominance, once established, tends to persist until some external shock, like a productivity boom, a new monetary system, or political upheaval, resets the cycle.

The New Monetary Order

The shift to fiscal dominance doesn’t mean chaos, but it does mean the rules of the past no longer apply. Inflation will likely average higher than the Fed’s 2% target for years. Recessions may become shorter but inflationary rather than deflationary. The Fed’s authority will remain, but within tighter bounds defined by fiscal necessity.

Monetary policy is no longer the script; it’s the stage direction. The real story is written by Congress and the Treasury; through stimulus bills, entitlement programs, and geopolitical spending. The Fed’s role is to manage expectations and maintain market confidence while accommodating the fiscal realities it cannot change.

For investors, survival means adaptation. Understand that money and policy have fused. Think in real terms, prioritize scarcity and resilience, and stop assuming that bonds will protect you when the next downturn hits.

Lyn Alden’s message is not apocalyptic, only realistic. Fiscal dominance is the natural consequence of decades of accumulated debt and political expediency. It will persist until inflation, growth, or a new monetary order resets the balance. Until then the Treasury, not the Fed, is steering the ship.

Source: