Warsh's "hot potato": Cutting interest rates destroys the dollar, not cutting interest rates destroys the economy.
2026-05-20 09:05:16
Following Kevin Warsh's confirmation as Federal Reserve Chairman last week, he immediately received a stark reminder of the challenges facing central banks—a reminder manifested in a general surge in global government bond yields. This surge was triggered by the oil price spike stemming from the US-Iran conflict. Alongside rising yields came news that, according to government statistics, the CPI rose 3.8% over the past year, while wages increased by only 3.6%. This means that while many Americans have seen nominal wage increases, their real income (adjusted for inflation) has actually declined.
The decline in real income explains why more and more Americans are maxing out their credit cards or accumulating large amounts of credit card debt.
According to the latest data from the Federal Reserve Bank of New York, total household credit card debt in the United States climbed to approximately $1.33 trillion by the first quarter of 2026, a record high. Meanwhile, the U.S. personal savings rate plummeted to 4.0% in the first quarter of 2026, a significant drop of 2.2 percentage points from 6.2% two years ago. This means that despite nominal wage growth, the shrinking real purchasing power after adjusting for inflation has forced many households to rely on credit cards to fill the gap between daily expenses and income—Americans added $44 billion to their credit card balances in the fourth quarter of 2025 alone.
President Trump's "solution" to the economic problems facing the American people is lowering interest rates. Jerome Powell, the Federal Reserve Chairman succeeded by Warsh, had previously refused to lower interest rates to the level Trump desired, a key reason for Trump's decision not to re-nominate Powell. Concerns that Warsh would allow Trump to dictate monetary policy help explain why only one Democratic senator supported Warsh's nomination in the Senate confirmation vote.
However, while interest rate cuts may slightly reduce the interest rates consumers pay on credit cards and other items, they will further weaken the value of the dollar, thereby further reducing Americans' real income and plunging them into a deeper debt quagmire.
As of the end of March 2026, the total U.S. federal debt had climbed to approximately $39.1 trillion. In a high-interest-rate environment, the burden of debt interest is expanding at an unprecedented rate.
According to data from the U.S. Treasury Department, interest payments on Treasury bonds in the first six months of fiscal year 2026 (October 2025 to March 2026) exceeded $622.5 billion, with $102 billion in interest paid in March alone.
Multiple institutions predict that net interest payments on the U.S. national debt will exceed $1 trillion for the first time in fiscal year 2026, almost three times the $345 billion paid in 2020. This means that the U.S. federal government will spend approximately $2.8 billion per day just on interest payments.
Even more worrying is that this figure will continue to climb. More than $10 trillion in U.S. Treasury bonds will mature in the next year. With the current yield on 10-year Treasury bonds remaining above 4.6% and the yield on 30-year Treasury bonds exceeding 5%, the Treasury must roll over these debts at much higher interest rates than when they were initially issued, further driving up interest costs.
The conflict between the US and Iran has already damaged the interests of economies worldwide and could trigger a global debt crisis by causing government debt defaults due to supply chain disruptions. These disruptions could also pose a new challenge to the foundation of the dollar's status as the world's reserve currency—the "petrodollar system" that links the dollar to oil.
After President Nixon severed the last link between the dollar and gold, then Secretary of State Henry Kissinger reached an agreement with Saudi Arabia: in exchange for US military support, Saudi Arabia pledged to settle oil trades solely in US dollars.
In recent years, there has been growing interest in challenging the petrodollar and the dollar's status as the world's reserve currency, largely because governments around the world oppose the U.S. government's use of the dollar's status to support its sanctions policies.
The end of the petrodollar and the dollar's status as the world's reserve currency could trigger severe inflation as the Federal Reserve frantically injects money into the economy to monetize the ever-increasing federal debt. The good news is that this could ultimately lead to the complete collapse of the "welfare-war state" and the fiat currency system upon which it depends. While the short-term consequences of such a collapse would be painful, if those of us who know the truth can successfully persuade enough people to support free markets, limited government, and a non-interventionist foreign policy, this crisis could usher in a new era of peace, prosperity, and freedom.
In summary, Warsh inherited an unprecedentedly complex picture: inflation eroding real income, soaring credit card debt, persistently expanding fiscal deficits, global supply chains disrupted by war, and structural challenges facing the petrodollar system. He faced pressure from Trump to cut interest rates while simultaneously needing to maintain the Federal Reserve's independence and the dollar's purchasing power. While rate cuts could alleviate debt costs in the short term, they could accelerate dollar depreciation and worsen inflation; maintaining tight monetary policy could exacerbate economic pain and political backlash. Regardless of the path he chose, Warsh's decisions would profoundly impact the dollar's status as the world's reserve currency and the future direction of the global financial system.
Declining real income and credit card debt trap
The decline in real income explains why more and more Americans are maxing out their credit cards or accumulating large amounts of credit card debt.
According to the latest data from the Federal Reserve Bank of New York, total household credit card debt in the United States climbed to approximately $1.33 trillion by the first quarter of 2026, a record high. Meanwhile, the U.S. personal savings rate plummeted to 4.0% in the first quarter of 2026, a significant drop of 2.2 percentage points from 6.2% two years ago. This means that despite nominal wage growth, the shrinking real purchasing power after adjusting for inflation has forced many households to rely on credit cards to fill the gap between daily expenses and income—Americans added $44 billion to their credit card balances in the fourth quarter of 2025 alone.
Trump's demands for interest rate cuts and Warsh's dilemma of independence
President Trump's "solution" to the economic problems facing the American people is lowering interest rates. Jerome Powell, the Federal Reserve Chairman succeeded by Warsh, had previously refused to lower interest rates to the level Trump desired, a key reason for Trump's decision not to re-nominate Powell. Concerns that Warsh would allow Trump to dictate monetary policy help explain why only one Democratic senator supported Warsh's nomination in the Senate confirmation vote.
However, while interest rate cuts may slightly reduce the interest rates consumers pay on credit cards and other items, they will further weaken the value of the dollar, thereby further reducing Americans' real income and plunging them into a deeper debt quagmire.
Fiscal Dilemma: $39 Trillion in Debt and Interest Burden
As of the end of March 2026, the total U.S. federal debt had climbed to approximately $39.1 trillion. In a high-interest-rate environment, the burden of debt interest is expanding at an unprecedented rate.
According to data from the U.S. Treasury Department, interest payments on Treasury bonds in the first six months of fiscal year 2026 (October 2025 to March 2026) exceeded $622.5 billion, with $102 billion in interest paid in March alone.
Multiple institutions predict that net interest payments on the U.S. national debt will exceed $1 trillion for the first time in fiscal year 2026, almost three times the $345 billion paid in 2020. This means that the U.S. federal government will spend approximately $2.8 billion per day just on interest payments.
Even more worrying is that this figure will continue to climb. More than $10 trillion in U.S. Treasury bonds will mature in the next year. With the current yield on 10-year Treasury bonds remaining above 4.6% and the yield on 30-year Treasury bonds exceeding 5%, the Treasury must roll over these debts at much higher interest rates than when they were initially issued, further driving up interest costs.
Global debt crisis and the potential end of the petrodollar
The conflict between the US and Iran has already damaged the interests of economies worldwide and could trigger a global debt crisis by causing government debt defaults due to supply chain disruptions. These disruptions could also pose a new challenge to the foundation of the dollar's status as the world's reserve currency—the "petrodollar system" that links the dollar to oil.
After President Nixon severed the last link between the dollar and gold, then Secretary of State Henry Kissinger reached an agreement with Saudi Arabia: in exchange for US military support, Saudi Arabia pledged to settle oil trades solely in US dollars.
In recent years, there has been growing interest in challenging the petrodollar and the dollar's status as the world's reserve currency, largely because governments around the world oppose the U.S. government's use of the dollar's status to support its sanctions policies.
Inflation Risks Following the Shaking of the Dollar's Status and Prospects for a New Order
The end of the petrodollar and the dollar's status as the world's reserve currency could trigger severe inflation as the Federal Reserve frantically injects money into the economy to monetize the ever-increasing federal debt. The good news is that this could ultimately lead to the complete collapse of the "welfare-war state" and the fiat currency system upon which it depends. While the short-term consequences of such a collapse would be painful, if those of us who know the truth can successfully persuade enough people to support free markets, limited government, and a non-interventionist foreign policy, this crisis could usher in a new era of peace, prosperity, and freedom.
Warsh is at the center of the storm; his policy choices will determine the fate of the dollar.
In summary, Warsh inherited an unprecedentedly complex picture: inflation eroding real income, soaring credit card debt, persistently expanding fiscal deficits, global supply chains disrupted by war, and structural challenges facing the petrodollar system. He faced pressure from Trump to cut interest rates while simultaneously needing to maintain the Federal Reserve's independence and the dollar's purchasing power. While rate cuts could alleviate debt costs in the short term, they could accelerate dollar depreciation and worsen inflation; maintaining tight monetary policy could exacerbate economic pain and political backlash. Regardless of the path he chose, Warsh's decisions would profoundly impact the dollar's status as the world's reserve currency and the future direction of the global financial system.
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