The Fed’s Vanishing Parachute

How Debt Has Castrated Monetary Policy

Introduction: Why Even Pacifists Should Care

For decades, Americans have lived under the quiet assumption that the Federal Reserve could always stop inflation if it got out of hand. If prices started to spiral, the Fed would hike interest rates, cool the economy, and restore balance.

That assumption is now broken. Exploding government debt has grown so large that the Fed’s most powerful weapon—rate hikes—no longer works the way it used to. This shift is called fiscal dominance, and it has profound consequences: it means central banks can no longer guarantee price stability.

We are standing at the edge of a new era. To see why, let’s go back to the last time inflation nearly destroyed the American economy.

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The Fed Cannot Stop Runaway Inflation

The 1970s: When Inflation Nearly Won

The 1970s were defined by stagflation—rising prices and weak growth. Gas lines, soaring food bills, collapsing confidence in the dollar: many feared the American economy was finished.

The turning point came in 1979 when President Jimmy Carter appointed Paul Volcker as Federal Reserve Chair. Volcker took a sledgehammer to inflation by raising interest rates to 19%—levels unseen since the Civil War.

• Mortgages hit 18%.

• Businesses collapsed.

• Unemployment spiked.

It was brutal. But it worked. Inflation broke, and the U.S. dollar survived.

Why was this possible? Because in 1980, America’s national debt was relatively small—about 30% of GDP. The government could afford high interest rates without bankrupting itself.

Today: A Very Different World

Fast forward to 2025. U.S. debt is not 30% of GDP, but 120%—$36 trillion and counting. Interest alone is projected at $1.1 trillion a year, nearly half of the annual deficit.

For perspective:

• Every 1% rise in rates adds about $360 billion in federal interest payments.

• Include state, local, and private debt, and that number balloons to $570 billion.

This means the old Volcker playbook is gone. If the Fed tried to hike rates to 19% today, the government would be forced to refinance trillions at sky-high costs. Within two years, the annual deficit could explode to nearly $5 trillion—close to 20% of GDP.

No investor in the world would finance that. The Fed would have no choice but to print money to cover the gap—the very act that fuels hyperinflation.

Fiscal Dominance: When the Tail Wags the Dog

This is the heart of the problem: fiscal dominance.

In normal times:

• Rate hikes slow the economy (less borrowing, less spending).

• Rate cuts stimulate the economy (cheaper loans, more spending).

But under fiscal dominance, with debt so massive:

• Rate hikes inject money into the economy, because the government must pay more interest, pouring cash into the system.

• Rate cuts pull money out, because the government pays less, draining liquidity.

The Fed’s tools are reversed. What once restrained inflation now fuels it.

Why Inflation is Now Structural

Because the Fed cannot act freely, governments are forced into desperate moves:

1. Keep rates artificially low → to avoid insolvency.

2. Raise taxes → to reassure investors (as Britain is doing).

3. Print money → to absorb deficits (as Japan has effectively admitted).

This combination guarantees long-term inflation. Unlike the 1970s, there is no Volcker parachute. The Fed cannot shock the system back into balance.

What Happens Next?

The U.S. still has one advantage: the dollar remains the world’s reserve currency. Foreign governments, corporations, and investors must hold dollars to settle trade and buy commodities. This buys time—perhaps another decade or two.

But history gives warnings:

• Britain once held reserve currency status. Overspending and war debts after WWI destroyed it.

• Weimar Germany printed to cover its debts in the 1920s, unleashing hyperinflation that destroyed its middle class.

The U.S. risks the same trajectory. Without fiscal reform, we face a world where:

• Inflation runs unchecked, 20–30% or higher.

• The Fed’s credibility collapses.

• The dollar’s reserve status erodes, replaced by alternatives.

Conclusion: Flying Without a Parachute

For half a century, investors trusted the U.S. dollar because of the “Volcker parachute”—the idea that if inflation got bad, the Fed would always raise rates high enough to stop it.

That parachute is gone. Congress spent it.

We are now flying without one. When the next crisis hits, the Fed will find its nuclear option has no fuse.

Key Takeaway for the Neophyte

• Inflation control once depended on Fed rate hikes.

• Debt has now made those hikes impossible.

• The U.S. economy is structurally locked into long-term inflation.

The question is not if this matters to you.

But when, since…