Jerome Powell tells Congress: “Good luck with that debt problem…”

George Washington handed Alexander Hamilton an impossible task in September 1789.

America owed about $75 million in debt from the Revolutionary War. Individual states had already defaulted. Foreign creditors considered the new country a total joke. And domestic bondholders at home were selling their worthless government IOUs for pennies on the dollar.

So, Hamilton came up with a solution. It was highly controversial, but he managed to convince Congress to approve it.

In short, Hamilton issued brand new bonds to investors that effectively rolled up all existing state and federal debts. These new bonds were backed by dedicated tax revenue– including, most controversially, a tax on whiskey. Today that would be the equivalent of taxing Instagram use.

But in fairness his plan worked. Within a decade, US bonds traded for full value. Foreign capital flooded in. The country’s creditworthiness went from laughingstock to gold standard (quite literally after they passed the Mint and Coinage Act of 1792).

Hamilton’s success wasn’t some clever financial trickery. The whole idea was to establish credibility: demonstrate that America was serious about paying its debt. He paired every dollar of borrowing with a specific tax to repay it all. Bondholders could look at the tax revenue, look at the debt, and do the math.

And the math worked.

But that was 237 years ago. Yesterday, Federal Reserve Chairman Jerome Powell admitted that the math no longer works.

“[Today’s] level of the debt is not unsustainable,” Powell said, “but the path is not sustainable. It will not end well if we don’t do something fairly soon.”

Look at that again to understand what he said: the amount of debt ($39 trillion) is not the problem. The problem is the trajectory.

America, he noted, is the world’s reserve currency issuer with the deepest capital markets on earth. It can carry a larger debt load than smaller countries. And that’s true.

But Powell also acknowledged the obvious part: “Our debt is growing substantially faster than our economy. And in the long run, that’s kind of the definition of unsustainable.”

He’s right.

The Congressional Budget Office projects net interest payments on the national debt will hit $1 trillion this fiscal year— nearly triple from 2020. Through the first three months of FY2026, the Treasury has spent $270 billion just on interest. And that doesn’t include the principal amount of debt that has to be repaid to foreign creditors who simply want their money back.

The CBO also projects that, by 2031, the average interest rate on government debt will exceed the rate of economic growth. If interest on the debt is 6%, and the economy is only growing at 4%, then the problem becomes self-reinforcing: debt will grow faster than the economy no matter what Congress does.

This would be a fiscal death spiral, and CBO’s own numbers say it’s just five years away.

After WWII, America faced a similar burden; the public debt was 106% of GDP in 1946. But within three decades the ratio had plummeted to 23%.

How? Simple. The government consistently ran budget surpluses, while an industrial boom powered significant economic growth. Plus (and this is the part nobody likes to mention) the Federal Reserve pegged interest rates below inflation for years– quietly taxing bondholders through financial repression, which slowly melted the debt away.

Not one of those conditions exists today. The US government hasn’t run a budget surplus in decades. Q4 2025 GDP growth was just revised down to a pathetic 0.7%. And inflation is running hot enough that the Fed can’t cut rates without making it worse.

There’s a certain dark humor in the Fed Chairman delivering this warning.

After all, this is the same man who presided over the most aggressive monetary expansion in history: trillions of newly created dollars, years of near-zero interest rates, ‘Quantitative Easing’ that made the government’s borrowing habit completely painless.

The Fed didn’t invent politicians’ spending addiction. But they did hand Congress an unlimited credit card with a 0% introductory rate. Now that the teaser rate has expired, the new interest bill is $1 trillion per year.

The Chairman’s proposed fix? “We don’t have to pay the debt down,” he said. “We just need to have the economy actually growing more quickly than the debt.” Then he added, with a self-aware shrug, “I pretty much limit myself to those high-level points, which essentially everyone ignores.”

So, is Congress going to suddenly find its inner fiscal discipline? Will the Bernie Sanders, AOCs, and Elizabeth Warrens of the world make critical regulatory reforms to unleash economic growth?

I’m not holding my breath.

The most likely course of action– as we have argued for years– is that Congress will continue to do nothing… which will ultimately cause the dollar to lose value and purchase power. Your savings, your income, your retirement account will all buy less.

History is unambiguous about this. Governments invariably choose inflation. Every single time.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/jerome-powell-tells-congress-good-luck-with-that-debt-problem-154914/