When national debt grows too large, an economy enters "fiscal dominance." The central bank loses its ability to manage the economy, as raising rates causes hyperinflation to cover debt payments while lowering them creates massive asset bubbles, leaving no good options.

A condition called "fiscal dominance," where massive government debt exists, prevents the central bank from raising interest rates to cool speculation. This forces a flood of cheap money into the market, which seeks high returns in narrative-driven assets like AI because safer options can't keep pace with 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.

Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.

Governments with massive debt cannot afford to keep interest rates high, as refinancing becomes prohibitively expensive. This forces central banks to lower rates and print money, even when it fuels asset bubbles. The only exits are an unprecedented productivity boom (like from AI) or a devastating economic collapse.

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.

Massive government issuance is crowding out private credit and making sovereign bonds inherently riskier. This dynamic is collapsing credit spreads and could lead to a market where high-quality corporate bonds are perceived as safer than government debt, challenging the concept of a 'risk-free' asset.

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.

Enormous government borrowing is absorbing so much capital that it's crowding out corporate debt issuance, particularly for smaller businesses. This lack of new corporate supply leads to ironically tight credit spreads for large borrowers. This dynamic mirrors the intense concentration seen in public equity markets.