Should the U.S. Return to Sound Money?

Executive Summary

In 1971 President Nixon took the U.S. off of the gold standard. Since then, the U.S., like most countries, has operated with an “unbacked” or “fiat” currency. Then, the U.S. deficits began to explode (see first graph). In a perfect world, surplus years would be used to reduce the overall debt. However, as seen in the second graph, the total debt is now nearly $37 trillion, as it is not being reduced. Now annual debt service for the U.S., on the overall debt, is over $1 trillion. The last graph shows the rapid increase in annual interest costs. The U.S. cannot afford high interest rates. All the money printing to fund the deficits, including the interest payments, eventually causes hyperinflation. It seems to be time for sound money policies.

For further analysis, continue to read The Details below for more information.

“My impression is that future generations will look back on this moment and say, ‘this is where they completely lost their minds.”
–John Hussman

The Details

On a long-term timeline, it is easy to spot when money in the U.S. became “unsound.” Money was backed by some form of gold up until President Nixon took the U.S. off of the gold standard in 1971. Being backed by gold, a scarce commodity that has been recognized for centuries as a currency, kept politicians from “creating” money at their whim. The limited amount of gold mined each year kept a lid on the expansion of the monetary base.

All of this changed in 1971 when President Nixon took the U.S. off of the gold standard. Since then, the U.S., like most countries, has operated on a “fiat” basis. Fiat in Latin means “let it be done.” Now the flood gates were opened, and the government was free to overspend. Notice in the graph below, how after 1971 Federal deficits exploded.

With each passing crisis, the Federal Government, working in conjunction with the “unrelated” Federal Reserve Bank (Fed), has expanded deficit spending and the monetary base. The deficits after the Tech Bubble seem large, but in reality, they were nothing compared to those incurred during the Great Financial Crisis and Recession. And yet even those paled in comparison to the incredible deficits surrounding the pandemic. One would think that with the pandemic behind us, deficits would have disappeared, or at the very least shrunk. But, over the first six months of the current fiscal year, ending September 30, 2025, the Federal Government has already accumulated a deficit of $1.3 trillion.

Here’s the dilemma, deficits are cumulative. In a perfect world, the debt incurred in deficit years would be paid off in surplus years. That has not happened. Even in the small number of surplus years around 2000 (as shown in the graph above), the Federal debt, on an annual basis, continued to grow. Now the U.S. is staring at a cumulative debt balance of nearly $37 trillion as shown in the graph below.

Even as the debt skyrocketed, when interest rates were (artificially) low, not much attention was paid to it. However, now as interest rates have risen, a light is being shone on it. The interest needed to service this mountain of debt has become the highest budget item after Social Security and Medicare. Interest due is now over $1 trillion per year. This might also shed some light on why some people are screaming for interest rates to be lowered. This level of debt service is simply unsustainable. Any increase in interest rates could spark a crisis.

The average lifespan of a fiat currency is about 35 years; however, some have made it close to 80 years. Why is the lifespan so short? Because politicians and central bankers learn they can avoid the immediate pain in a crisis by borrowing money to fund their spending. When they run out of investors willing to purchase their debt, they turn to the central bank to “create” money to buy the debt. As this continues, the increase in the money supply leads to inflation. If continued, hyperinflation results, thus the end of the fiat currency.

It is highly likely that if a recession begins soon, the Federal Government and the Fed will turn to their normal playbook. That means more debt-financed stimulus. With so much Federal debt already outstanding, the Fed will end up funding the new debt. Up to now, each crisis has called for more debt, so signs point to an even greater sum of monetized debt next time. The next large surge in debt and monetization could lead to significantly higher inflation. The time has come for the U.S. to return to some form of sound money, before it is too late.

The S&P 500 Index closed at 5,283, down 1.5% for the week. The yield on the 10-year Treasury Note fell to 4.33%. Oil prices rose to $65 per barrel, and the national average price of gasoline according to AAA decreased to $3.15 per gallon.