This week, as I chart our course through increasingly treacherous economic waters, I’ve spotted an old hazard resurfacing: fiscal dominance. It’s a slow-moving current, often ignored—until it pulls your portfolio into a storm. This is not a predetermined course, but we get closer with every passing day.
What Is Fiscal Dominance?
In calmer seas, central banks steer the economic vessel, keeping inflation steady and the economy moving forward. But under fiscal dominance, the ship’s wheel subtly shifts to the Treasury. Why? Because government debt has grown so vast, interest rates can't rise much without capsizing the budget.
In other words, the central bank becomes less of a captain and more of a deckhand—keeping interest rates low, not because inflation is tamed, but because the government can’t afford higher rates. Today we are seeing higher rates…
Why Should Investors Care?
When fiscal priorities dominate monetary policy, inflation becomes the ballast—used to quietly lighten the debt load. That’s dangerous for long-term investors: it means inflation might persist above target, not as a fluke, but as a feature of policy.
Here’s how the tides may shift for your portfolio:
Fixed-income investors may find real returns eroded as inflation outpaces yields.
Cash holders without commodities exposure may be left adrift—losing purchasing power by staying anchored in seemingly attractive money markets and CDs
Equity markets may appear resilient, but under the surface, valuations can get distorted by excess liquidity and artificial rate suppression. Not all businesses will be able to pass on the added production costs associated with inflation. Additionally, overseas investments may be more attractive (see our Pilots Log: On Steering Through Uncertainty with Conviction)
The fog of fiscal dominance isn’t always announced on the radar—it creeps in slowly, masked by political necessity and market optimism. But for those at the helm of their own investments, awareness is the best lighthouse. Keep your eyes on the monetary horizon, listen to central bank signals carefully—and always know who’s really steering the ship.
In a world where fiscal priorities increasingly cloud the horizon, we at Pilot are steering the ship with clarity and conviction, anchored by our commitment to disciplined, principled long-term investing.
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