"From Inflation to Implosion"
by MN Gordon
"The 2026 fiscal year started on October 1. The Treasury, so far, has reported its spending for the first two months. The dismal results should come as no surprise. The U.S. government has already run up a deficit of $458 billion – and there’s still 10 more months to go. Specifically, for the months of October and November there were total outlays of $1.198 trillion, with receipts of just $740 billion. The difference – the $458 billion – was made up with debt. Of the $1.198 trillion in outlays, $179 billion was to pay the net interest on the debt.
Here at the Economic Prism, we remember when the ‘annual’ deficit first exceeded $450 billion. You may too. It wasn’t very long ago – 2008 to be exact. At the time we thought spending was totally out of control. Little did we know, just one year later, 2009, the budget deficit would spike to $1.4 trillion. Now trillion-dollar annual deficits are the norm.
With this current rate of spending, the 2026 fiscal year deficit will come in around $2.75 trillion. This deficit, like each annual deficit, will be racked and stacked on top of the total government debt. After many decades of extreme deficits, the U.S. national debt is at $38.5 trillion – and rising fast.
The critical observation here is that too much spending is never enough. Congress, the politicians elected to represent us, have failed at their jobs. They are incapable of making the tough decisions needed to balance the budget. Each member has his or her pet projects and programs to cover. Some want free drugs for old people. Others want taxpayer loot for roads and bridges in their district. Some want more warfare spending. Others want more welfare spending. Many want both.
Short Timer Thinking: The Washington politicians know the runaway spending cannot go on forever. But they intend to be retired – or dead – when the ultimate debt and currency crisis erupts. The average age of members of the House at the beginning of the 119th Congress was 57.9 years. And for Senators the average age was 63.9 years. These are short timers. With short timer thinking. And they care little about future generations or the nation’s long term financing prospects.
Similarly, President Donald J. Trump is 79 years old. He’s not thinking about the next decade or two. He’s thinking about the upcoming mid-term election. He wants to use the government purse to buy votes. One means Trump recently stated is to distribute tariff revenue in the form of $2,000 checks. Trump calls it a dividend check. Yet, this tariff revenue was effectively the spoils of a regressive tax on American consumers. The Committee for a Responsible Federal Budget estimates this plan could cost $600 billion, which is double the tariff revenue projected for fiscal year 2026. The difference, the $300 billion, would be made up with debt.
Trump has also said he wants to eliminate the income tax. It’s about time. The income tax shouldn’t exist to begin with. If you didn’t know, the income tax was unconstitutional under the constitution that was drawn up by the original authors. The Supreme Court case Pollock v. Farmers’ Loan & Trust Co. (1895) struck down an earlier income tax, saying it was a “direct tax” requiring apportionment by population, which was impractical.
To overcome Pollock, the 16th Amendment was passed, stating, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration”. This level of power and extreme theft would have been completely unacceptable to America’s founders. Yet we live with it each and every day.
Unleashing the Beast: The 16th Amendment is what unleashed “the beast” and is the origin of today’s mammoth government that reaches its tentacles into all corners of American life and across the globe. Eliminating the income tax would be a vast step in the direction of smaller, more limited government. But this assumes spending is dramatically cut and long-standing promises, like social security, are revoked.
From what we can tell, this isn’t Trump’s intent. He believes that in the absence of the income tax, government funding will be made up with tariff revenue. The tariff revenue, however, isn’t enough to cover his dividend checks. In fact, annual tariff revenue wouldn’t even be enough to cover one month of current government outlays. Regardless, all the talk of using tariff revenues to pay out dividend checks and eliminate the income tax is a giant distraction from the fact that the nation is flat out broke and is maxing out its credit cards before its creditors ultimately cut it off.
When the government spends money it doesn’t have, it has two main ways to cover the tab. It can borrow the money by selling T-Bills to domestic and foreign investors. Or it can borrow from credit the Federal Reserve creates out of thin air. Both add to the $38.5 trillion debt. Both inject money into the economy that has not been earned.
The effect is simple, and intuitive. Every new dollar conjured into existence dilutes the value of every existing dollar already present. It’s simple supply and demand. When the supply of money goes up way faster than the supply of real goods and services – like cars, houses, or even a loaf of bread – the purchasing power of your money plummets. That’s why you’re paying more for groceries, more for rent, and why your savings account seems to be shrinking in real terms, even if the number in the bank stays the same. The connection is direct…
From Inflation to Implosion: Runaway government spending is the engine, and consumer price inflation is the toxic smoke it burps into the atmosphere. The spending on pet projects and $2,000 dividend checks is just more fuel being dumped on an already raging fire. But there’s a danger far greater than domestic inflation. The U.S. dollar, for all its current woes, still holds the title of the world’s primary reserve currency. This status is what allows the U.S. to run these astronomical deficits without instantly collapsing.
The rest of the world, from central banks to global commodity traders, needs U.S. dollars for international trade. They effectively finance our debt by holding dollars and T-Bills. The GENIUS Act is an attempt to perpetuate this. However, the world isn’t stupid. They see America’s spending and debt problems. They see the $38.5 trillion debt bomb and the total lack of political will to defuse it. Every time Congress greenlights a massive, debt-funded spending bill, it tells international creditors that Washington does not care about financial integrity.
As trillion-dollar deficits become routine, and the President talks of eliminating the income tax without a credible revenue replacement, these global players watch with unease. They know that sooner or later Washington will try and inflate its way out. And that this will ultimately lead to the inevitable outcome of a significant dollar devaluation. By this, the dollar’s value would implode relative to all goods and services. Moreover, this would happen as all currencies continue to lose value against gold.
From a practical standpoint, consumer prices would explode higher, interest rates would spike up, and the standard of living would collapse. If you think this could never happen in America, you’re living in ignorant bliss."
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