Since leaving the gold standard in 1971, the default government response to any financial crisis has been to expand the money supply. This creates a persistent, long-term inflationary pressure that investors must factor into their strategies, particularly for fixed-income assets.

Inflation from a supply disruption, like an oil price spike, will eventually fade. It only becomes persistent and embedded in the economy if governments try to 'help' consumers pay for higher costs with stimulus checks, which increases the broad money supply.

When the prevailing narrative, supported by Fed actions, is that the economy will 'run hot,' it becomes a self-fulfilling prophecy. Consumers and institutions alter their behavior by borrowing more and buying hard assets, which in turn fuels actual inflation.

Due to massive government debt, the Fed's tools work paradoxically. Raising rates increases the deficit via higher interest payments, which is stimulative. Cutting rates is also inherently stimulative. The Fed is no longer controlling inflation but merely choosing the path through which it occurs.

The standard 2% inflation target is a deliberate government policy that functions like a tax on savings. By ensuring money loses value over time, it disincentivizes hoarding and forces citizens to spend or invest, thereby stimulating economic activity.

Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.

In a world of high debt and low organic growth (from demographics and productivity), the only viable path for governments is to ensure nominal GDP grows. This will likely be achieved through inflationary policies, making official low-inflation forecasts unreliable over the long term.

Since WWII, governments have consistently chosen to print money to bail out over-leveraged actors rather than raise taxes or allow failure. This long-term policy has systematically devalued currency and concentrated wealth, creating today's deep economic divide.

High debt and deficits limit policymakers' options. Central banks may face pressure to absorb government debt issuance, which conflicts with the goal of raising interest rates to curb inflation, leading to a new era of "fiscal dominance."