How I Learned to Stop Worrying and Love the Deficit

“DOGE has and will do great work to postpone the day of bankruptcy of America, but the profligacy of government means that only radical improvements in productivity can save our country.” — Elon Musk, May 23, 2025

In narrative-world, the House passage of the Big Beautiful Bill and Elon Musk stepping back from DOGE and the White House have had a clear result: no one believes that this administration has any ability (and probably not any real desire) to control explosive growth in the federal deficit. No one is pretending otherwise any longer, not the White House, not Elon, not Bessent, not House Republicans, not the social media MAGA crew.

The narrative strategy going forward — such as one exists — is to say that continued and accelerating fiscal deficits are awkshually a good thing, as all this government ‘stimulus’ will keep a recession at bay and prevent the deficit from going totally parabolic. “Run it hot” is the phrase du jour, and once we get the Big Beautiful Bill through the Senate and the debt ceiling lifted by $4 trillion, why then we can push through all sorts of pro-growth deregulation initiatives and rescission bills and we can ‘grow our way out’ of the deficit over time. The Golden Age may be delayed, but not denied!

How long will it take for these pro-growth initiatives to start bending the curve of uncontrollable federal deficits? Well, according to Elon Musk, the ‘radical improvements in productivity’ that are necessary to save the country (and by which Musk means widespread use of humanoid robotics) are at least four to five years out. And Elon Musk is the most optimistic man alive.

This is a Common Knowledge moment for the global financial system — everyone now knows that everyone now knows that the US deficit cannot be controlled, much less reversed, over the remainder of Trump’s term — and it puts us on a pretty straightforward path to a sovereign debt crisis.

The crisis begins as governments like the US (and also Japan, Italy, France and the UK) are forced to issue more and more debt to fewer and fewer voluntary buyers of that debt. I mean, would YOU lock-up your money in a loan to the US government for the next 10 years for a 4.5% annual interest payment with zero protection against inflation, knowing full well that the US government is going to issue trillions of dollars in new debt over those 10 years? Of course you wouldn’t. No, the only buyers of long-dated US sovereign debt today (and ditto for the sovereign debt of Japan, Italy, France and the UK) are either forced buyers like life insurers and pension funds or artificial buyers like central banks and quasi-central banks, all of whom can be more or less required by the government to buy and hold (i.e. monetize) the debt.

The crisis emerges as non-forced and non-artificial buyers of that sovereign debt decide that a) they’re not going to buy any new debt offerings, and b) they’re going to sell the sovereign debt they already own before it goes down in value any further. This ‘buyer’s strike’ and ‘seller’s hair-trigger’ behavior is accelerated enormously if you’re a non-US, non-forced buyer of US Treasuries, because you are hit by the double whammy of declining value in your Treasuries as interest rates go up AND as the US dollar goes down. Even for a non-US but forced buyer of sovereign debt, say a Japanese life insurer, if you’re gonna be stuck owning long-dated bonds you’re now thinking that you’re better off owning the bonds issued by your own government to avoid the currency risk. For decades now, US sovereign debt has enjoyed the privilege of being ‘the best house in a bad neighborhood’, so that if you wanted ‘duration’ for whatever reason in your portfolio, you preferred long-dated US Treasuries to any other nation’s sovereign debt, all other things being equal. THAT is the narrative that has been shattered, and it’s at the heart of this emerging sovereign debt crisis.

But it’s still an emerging crisis. We’re not there yet, and everyone on Wall Street is waiting and watching to see how it develops, mostly by watching the dollar and 10-year interest rates. None of this is lost on the White House, of course. To postpone the day of reckoning so that this becomes the next administration’s problem (and who knows, maybe a productivity miracle or, more likely, a bigger problem will crop up in the meantime!)Scott Bessent and the US Treasury are engaged in a concerted policy effort to create more forced and/or artificial buying of US Treasuries.

“Stablecoins could create $2 trillion of demand for US Treasuries.” — Scott Bessent, May 23, 2025

Most of these policy initiatives, like a central bank digital currency (CBDC) stablecoin issued by the big banks or the elimination of supplemental leverage ratios on big bank ownership of long-dated Treasuries, are attempts to monetize the debt through the balance sheets of JP Morgan, Bank of America, Citi and Wells Fargo. We are literally going to do the Weimar thing, but – haha! – no one will be wise to our clever ruse because it will be through our giant, centralized banks rather than the giant central bank.

Now when I say ‘the Weimar thing’, I’m referring to the Weimar Republic of Germany in the early 1920s. The German government owed reparation payments to ...