The calendar reads June 13, 2025, but I’m getting flashbacks to December 1977.
As Israeli fighter jets strike Iranian nuclear facilities and President Trump calls Federal Reserve Chair Jerome Powell a “$600 billion numbskull,” we’re witnessing a dangerous historical parallel to the Carter-Burns-Miller transition that helped create the Great Inflation.
Yet today’s constraints—with federal debt at 119% of GDP versus 35% in Carter’s time—make the situation far more perilous.
The anatomy of a central banking disaster
The playbook is eerily familiar.
In 1977, President Carter praised Arthur Burns as “Mr. Fiscal Integrity personified” before replacing him with G. William Miller, a corporate executive with no monetary policy experience.
Carter’s advisers, led by Stuart Eizenstat and Charles Schultze, complained that Burns refused to be a “team player” and wouldn’t coordinate fiscal and monetary policy.
When Burns publicly criticized the Carter administration as ineffective in October 1977, his fate was sealed.
Today, Trump’s assault on Powell follows an nearly identical script.
After initially praising Powell’s appointment, Trump has escalated his attacks, branding him “Too Late Powell” and declaring his “termination cannot come fast enough.”
The President’s June 12 outburst—claiming Powell costs America “$600 billion a year” by refusing to cut rates—represents the most direct presidential attack on Fed independence since Nixon’s infamous pressure on Burns.
The candidate speculation mirrors 1977 with uncanny precision. Carter’s shortlist included corporate executives like Miller, Reginald Jones of GE, and Irving Shapiro of DuPont.
Today, Trump eyes Treasury Secretary Scott Bessent and former Fed Governor Kevin Warsh, with Bessent emerging as the favorite. Both eras feature the disturbing pattern of prioritizing political loyalty over monetary expertise.
The velocity nightmare I warned about is materializing
In my February post, “Trump’s Tariffs and the Fed: A 1970s Velocity Nightmare,” I highlighted the most ominous parallel.
When Carter announced Miller’s appointment in December 1977, velocity of money accelerated by 4% within months—before any policy changes or external shocks. By the time of the Iranian Revolution in February 1979, velocity had surged 7% from pre-Miller levels.
The mechanism is devastatingly simple: when markets lose faith in Fed independence, households and businesses reduce money holdings, accelerating velocity and driving inflation without any increase in money supply.
Today’s data confirms my worst fears: Michigan’s latest survey (June 2025) shows one-year inflation expectations at a staggering 5.1%, down from May’s catastrophic 6.6% but still far above anything sustainable.
Even more concerning, the survey notes that “consumers remain guarded and concerned about the trajectory of the economy” despite the modest improvement.
Miller’s tenure proved disastrous. Inflation rose from 6.6% when he arrived in March 1978 to 11.8% when he departed in August 1979. The dollar plummeted 34% against the Deutsche Mark and 42% against the yen.
Economic historian Steven Beckner’s assessment was brutal: “If Nixon appointee Burns lit the fire, Miller poured gasoline on it… Without question the most partisan and least respected chairman in the Fed’s history.”
Geopolitical déjà vu with nuclear overtones
Yester, June 13, 2025 Israeli strikes on Iran’s nuclear facilities create an eerie parallel to the 1979 Iranian Revolution.
Then, the fall of the Shah triggered oil prices to surge from $13 to $34 per barrel, while Iranian production fell by 4.8 million barrels daily.
Today, Brent crude initially spiked 13% to $78 on news of “Operation Rising Lion,” though modern energy markets show more resilience with U.S. shale production and strategic reserves providing buffers absent in the 1970s.
Yet the fundamental dynamic remains: Middle East instability tests central bank credibility precisely when political pressure peaks.
In 1979, the oil shock forced Volcker to choose between accommodating inflation or crushing the economy. Today, Powell faces the same dilemma with the added complexity of Trump’s tariffs creating simultaneous supply shocks.
The geopolitical timing appears almost orchestrated. Carter faced the Iranian Revolution just as Miller’s policies unraveled. Trump confronts an Israel-Iran conflict as his attacks on Powell intensify.
Both presidents used external crises to justify political interference with monetary policy, creating the very instability they claimed to prevent.
The unpleasant monetarist arithmetic of fiscal dominance
Here’s where the monetarist arithmetic becomes truly unpleasant—and where today’s situation diverges catastrophically from the 1970s. Let me walk you through the numbers that keep me awake at night.
In 1977, with federal debt at just 35% of GDP and interest rates around 7%, debt service consumed roughly 1.5% of GDP—manageable even with Volcker’s eventual 20% rates.
Fast forward to 2025: federal debt stands at around 120% of GDP, with interest rates at 4.5%. Current debt service already consumes about 3.8% of GDP – and we are heading towards 5% of GDP rather fast.
Now here’s the killer: the fiscal dominance equation. When debt-to-GDP ratios exceed 100%, the central bank loses its ability to control inflation through interest rates alone.
Why? Because raising rates sufficiently to combat inflation would explode debt service costs, forcing either:
- Fiscal austerity so severe it would crash the economy, or
- Monetization of the deficit, creating the very inflation you’re trying to fight
With $35 trillion in federal debt, each 1% rate increase adds roughly $350 billion to annual interest costs—but that’s just the direct effect.
The unpleasant arithmetic comes from the feedback loop: higher rates → larger deficits → more debt issuance → higher term premiums → even higher rates. At current debt levels, this spiral becomes self-reinforcing above certain threshold rates.
My calculations suggest that threshold is around 7-8%.
Here’s why:
The critical equation is r > g + (p/d), where r is the real interest rate, g is real GDP growth, p is the primary surplus, and d is the debt-to-GDP ratio. With debt at 120% of GDP and realistic primary deficits of 2-3% of GDP, the math becomes unforgiving.
At 7-8% nominal rates:
- Interest costs hit $2.8 trillion annually (about 10% of GDP)
- The required primary surplus to stabilize debt/GDP exceeds 6% of GDP
- But higher rates crush growth, making g negative
- This pushes the required fiscal adjustment above 8-9% of GDP
No democracy has ever achieved fiscal tightening of this magnitude without revolution or default.
Above 8%, the arithmetic becomes truly explosive: every 1% rate increase requires an additional 1.2% of GDP in fiscal adjustment, creating an accelerating spiral. The market knows this, which is why term premiums would explode, pushing rates even higher.
Volcker could take rates to 20% because with 35% debt/GDP, the fiscal adjustment needed was painful but achievable – about 2-3% of GDP.
Powell faces a required adjustment 3-4 times larger. The fiscal constraint binds long before inflation is conquered.
The expectations-velocity death spiral
This is where my February warning might become prophecy.
The monetarist identity MV = PY is iron law—if velocity (V) rises and money supply (M) doesn’t fall proportionally, either prices (P) or output (Y) must adjust.
With the Fed constrained by fiscal dominance, they cannot reduce M enough to offset rising V.
Result: P must rise.
But here’s the truly unpleasant part: velocity isn’t mechanical—it’s driven by expectations.
When people expect inflation, they reduce real money balances, velocity rises, and inflation becomes self-fulfilling.
The Michigan survey’s 5.1% inflation expectation (down from May’s terrifying 6.6%) remains dangerously elevated. As the survey notes, consumers’ fears about tariffs have only “softened somewhat”—they haven’t disappeared. And rising oil prices certainly won’t help to reduce inflation fears.
The data from 1977-78 is instructive but understates today’s risks. Then, velocity rose 12% over five years. Today, with instant information, algorithmic trading, and crypto alternatives, velocity shifts could happen in months, not years.
A 10% velocity increase with current M2 of $21 trillion would add $2.1 trillion of nominal demand—roughly 8% inflation even with zero real growth.
Why Powell cannot be Volcker (even if he wanted to)
The arithmetic is brutal and inexorable. To achieve positive real rates with 5.1% inflation expectations, the Fed would need nominal rates above 7%. At those levels:
- Federal interest expense: $2.5 trillion (versus $952 billion projected for 2025)
- Interest expense as % of federal revenue: 50-55% (versus ~20% today)
- Required primary surplus to stabilize debt/GDP: 5-6% of GDP
That last number is the killer. The U.S. hasn’t run a primary surplus above 2% of GDP since the 1990s. Achieving 5-6% would require either:
- Cutting Social Security, Medicare, and defense by 35%, or
- Raising all tax rates by 50%
Neither is politically feasible. The Fed knows this. Markets know this. Which is why Trump’s pressure, combined with fiscal dominance, creates a doom loop: the Fed cannot credibly commit to fighting inflation because everyone knows fiscal constraints will force capitulation.
The terrifying endgame
Here’s what keeps me up at night: we’re not heading for a 1970s-style inflation.
We’re might instead be heading for something much worse—a fiscal dominance trap where monetary policy becomes subservient to debt dynamics.
The sequence will likely be:
- Velocity acceleration (this might already have started): As Fed credibility erodes, velocity rises 5-10%
- Inflation surge: With fiscal constraints preventing adequate response, inflation hits 6-8%
- Bond market revolt: Real rates turn deeply negative, term premiums explode
- Fiscal crisis: Interest costs spiral, forcing either overt monetization or default
- Currency crisis: Dollar loses reserve status as foreign holders flee
The irony is exquisite in its horror. Trump attacks Powell for “$600 billion” in interest costs, but his assault on Fed independence risks triggering a sequence where interest costs exceed $3 trillion, inflation destroys middle-class savings, and the dollar’s global dominance ends.
Conclusion: When history rhymes in a minor key
The Carter-Miller-Volcker sequence taught us that political interference with central banking creates disasters requiring painful cures.
But that lesson assumed the cure remained available. Today, fiscal dominance means the Volcker solution—crushing inflation with extreme rates—is mathematically impossible.
We’re not just repeating the 1970s; we risk replaying them without an exit strategy.
The unpleasant monetarist arithmetic shows why: when debt exceeds 100% of GDP, fiscal dominance trumps monetary independence. The central bank becomes a prisoner of debt dynamics, unable to fight inflation without triggering sovereign crisis.
Trump’s “$600 billion numbskull” comment will prove tragically ironic. By undermining Fed independence precisely when fiscal constraints bind most tightly, he’s creating conditions for interest costs that will make $600 billion look like pocket change. The real numbskulls are those who think you can suspend the laws of monetary economics through political will.
History doesn’t repeat, but it does rhyme. This time, however, it’s rhyming in a minor key, and the song ends not with Volcker’s triumph but with fiscal and monetary ruin. The unpleasant arithmetic admits no other conclusion.
