Instead of a transparent default, the U.S. government's strategy is to devalue its debt by keeping interest rates below inflation. This policy, known as 'financial repression,' erodes the real value of the dollar, effectively transferring wealth from savers and bondholders to the government to pay down its massive debt.

To control rising long-term interest rates caused by a loss of market confidence, the U.S. is buying its own 10-30 year bonds. This is funded by issuing short-term IOUs that the Fed purchases—an act of money printing disguised withodyne names like "liquidity easing."

The last time US debt-to-GDP was over 110% was after WWII, when the debt was halved in five years through real rates that hit -13%. Today's debt levels imply the same outcome is mathematically necessary, requiring years of significant inflation that will destroy the wealth of bondholders.

Raising taxes or cutting spending are politically impossible for tackling the massive U.S. debt. The only acceptable route for politicians is to print more money, a "soft default" that devalues the currency and effectively acts as a hidden tax on savers and wage earners.

The U.S. faces a massive debt problem with only two politically tenable exits: massive economic growth fueled by AI, or devaluing the debt through inflation. With the AI boom proving slower than hoped, the government is being forced down the path of inflation, using covert methods to avoid public backlash against austerity or default.

Instead of hiking short-term rates, the Fed may follow Japan's lead by letting long-term yields rise. This "stealth steepening" devalues currency, boosts exports, and helps manage government debt, creating a favorable environment for banks that profit from a steeper yield curve.

With debt-to-GDP at 130%, the implicit policy is to use inflation to devalue the debt burden. This is becoming explicit, with proposals like using tariff money for direct stimulus checks. This strategy favors risk assets and creates a 'full on euphoria tech bubble' if real yields go negative again.

Japan's new pro-crypto laws are a strategic move to manage its massive debt. By encouraging the creation of yen-backed stablecoins, they can mandate that these reserves be held in Japanese government bonds. This creates a new, persistent source of demand for their debt, mirroring a U.S. strategy.

Tyler Cowen predicts the US will eventually resort to several years of ~7% inflation to manage its national debt. This strategy, while damaging to living standards, is politically more palatable than raising taxes or cutting spending. Rapid, AI-driven productivity growth is the only plausible alternative to this outcome.