🏛️ How Fiscal Dominance Impacts Your Portfolio

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

― Thomas Jefferson

The term ‘ Fiscal Dominance ’ has been popping up more in recent years, thanks to rising U.S. deficits.

Now, with the US dollar under pressure and Trump butting heads with the Fed over interest rates, expect to hear it even more.

If you’re wondering what it even means, don’t worry, we’re diving into it.

It matters because increased government spending can seriously impact:

1. 📉 Debt markets
2. 💵 Currencies
3. 📈 Equities

Basically, for the sake of your portfolio, this trend and its consequences are worth knowing about.

What Happened in Markets this Week?

Here’s a quick summary of what’s been going on:

📈Gold, the fear trade, has become the ultimate greed trade ( Sherwood )

1. Gold just surged past $3,500/oz for the first time ever, up 30% YTD while the S&P 500 lags behind at -10%.
2. Once a fear hedge, gold has now become the “greed trade”. Investors are piling in not just for safety, but for performance.
3. As US assets lose appeal amid global trade tensions, gold is getting love from both sides of the Pacific. Chinese futures and ETF flows are breaking records, while U.S. options traders are equally bullish. But beware the heat: it's now trading 20% above its 120-day moving average, a level historically linked with turning points.
4. Gold is all the rage right now, and like we mentioned two weeks ago , there are 4 big structural catalysts that make continued demand seem likely.

🛑 Microsoft paused AI builds, Amazon might do the same ( Business Insider )

• After Microsoft’s AI data center pause, Amazon is showing signs of tapping the brakes too. Analysts report AWS is walking away from some colocation deals, especially abroad.
• Wall Street fears a broader “digestion phase” is kicking in, where hyperscalers take a breather after years of aggressive expansion.
• While AWS insists this is routine capacity management, investors aren’t convinced. Slower leasing and fewer early-stage agreements hint that hyperscale demand may be cooling, at least temporarily. With trillions riding on the generative AI boom, even a slight slowdown is making markets twitch.
• Cloud and AI infrastructure stocks, especially data center REITs and chipmakers, could face short-term pressure. Analysts are considering trimming exposure or watching for better entry points if hyperscaler demand stays soft.

📉 Tesla reports 20% drop in auto revenue as Q1 results miss estimates ( CNBC )

• Tesla missed Q1 earnings estimates as automotive revenue fell 20% and total revenue dropped 9% year over year.
• Lower vehicle prices, factory retooling for the new Model Y, and rising political risks weighed heavily on both margins and sentiment.
• Profits were saved by regulatory credits, without which Tesla would have lost money on car sales. Musk’s political detour and tariff uncertainties are adding fuel to the fire, while rivals in China and the robotaxi space pull ahead. Energy revenue was a rare bright spot, up 67%.
• However, Musk did just announce that he’s taking a step back from DOGE to focus on Tesla again, and while it may be exactly what shareholders hoping for, some traders say it’s too little, too late .
• Tesla’s core business is slipping. Investors betting on an AI or energy pivot may need more patience for now.

🤝 Bessent says China tariffs are not sustainable as US signals willingness to de-escalate ( Reuters )

• Treasury Secretary Bessent says current US-China tariffs, 145% on Chinese goods, 125% on US exports, are unsustainable, signaling the Trump administration may be ready to dial things back.
• Markets cheered the potential tariff cuts, with the S&P 500 jumping 1.67% on Wednesday, even though no concrete negotiations have begun.
• A de-escalation could ease global recession fears and revive trade, but uncertainty remains high. The IMF and S&P Global warn tariffs are already slowing growth and raising debt. Meanwhile, legal and political pushback inside the US is growing.
• If the tariff tide turns, exporters and multinational stocks could catch a lift. Watch for signals, not promises.

🇪🇺 EU hits Apple and Meta with nearly $800 million in fines amid U.S. trade tensions ( CNBC )

1. The EU just slapped Apple and Meta with nearly $800 million in fines under its Digital Markets Act, targeting App Store restrictions and forced data-sharing models.
2. The move escalates digital trade tensions with the US, where the Trump administration is already retaliating with tariffs on EU imports.
3. These fines could trigger a wave of regulatory-driven shifts in big tech’s business models, especially in data monetization and app ecosystems. Keep an eye on increased compliance costs and delayed monetization in Europe.
4. Some analysts are considering trimming exposure to US tech firms with heavy EU reliance because regulatory risk is quickly becoming profit risk.

🏛️ Fiscal Dominance: How Deficit Spending Could Upend Markets

When we think of government debt & deficits, most people ask:

1. 🤷‍♂️ Is this sustainable?
2. 💰 How will it be paid off?

Both are valid questions, but there’s more to it. Ongoing deficit spending can eventually override central bank policy. That’s where Fiscal Dominance comes in.

🤔 What is Fiscal Dominance?

It happens when a government’s spending & debt levels limit what central banks can do, especially around inflation and interest rates.

🔄 Under Monetary Dominance:

1. Central banks control policy freely
2. Tools like interest rates manage inflation & stabilize the economy.

🚨 But under Fiscal Dominance:

1. Big government deficits + high debt levels put pressure on the central bank to keep rates low
2. Even if inflation rises, central banks hold back from raising rates in order to keep borrowing costs down.

A paper from the Mercatus Center contrasts the two regimes as follows:

Monetary vs Fiscal Policy Regimes - Mercatus Center

💵 How Fiscal Dominance Impacts the Economy (Without Getting Too Nerdy About It)

This is a topic that can get very technical, but we’re going to keep things simple and describe the 4 most important ways that fiscal dominance can impact the economy.

If you dare to go down the rabbit hole, this is a great resource that covers the topic in more detail.

Anyway, here’s how it impacts the economy:

1. 🔥 Inflation Heats Up
   1. Normally, money is created when banks make loans, and central banks influence that process by nudging interest rates up or down. That’s how they keep inflation in check.
   2. But under fiscal dominance? The playbook changes.
   3. If the central bank starts printing money to bankroll government spending, or keeps rates ultra-low to make borrowing cheaper, its ability to manage the money supply fades fast. That means inflation can start to run wild, unchecked by traditional tools.
2. 💸 Debt Spirals and Yields Rise
   1. As the government keeps spending more than it takes in, the debt pile grows. And as it grows, so do interest payments.
   2. Here’s the kicker: while central banks lose their grip on inflation, debt keeps ballooning. This pushes long-term bond yields higher , especially as investors demand more compensation for rising risks. More debt + higher yields = a self-reinforcing deficit loop.
3. 💵 Currency Confidence Wavers
   1. Investors are sharp. If they think the central bank is no longer calling the shots, and instead is just propping up government spending, they may start to lose faith in the country’s debt and its currency.
   2. Throw in swelling deficits and a hesitant central bank that’s afraid to raise rates? That confidence erodes even faster.
4. 📉 Crowding Out the Private Sector
   1. When governments flood the market with bonds, it pulls capital away from the private sector. That means less money for businesses to borrow, invest, and grow.
   2. This "crowding out" effect is like a vacuum, sucking up productive capital and channeling it into less-efficient government spending.

✨ If left unchecked, fiscal dominance can spiral into full-blown economic chaos: hyperinflation, capital flight, crashing currencies, and sovereign debt crises. And that’s not just theory… history has receipts.

📚 Historical Flashbacks to Fiscal Dominance

1. Post-WWII: Many countries leaned on central banks to cover wartime debts. Fiscal dominance was practically baked in.
2. 1980s Latin America: With sky-high inflation and debt meltdowns fiscal dominance was front and center.
3. 1990s Southeast Asia: Another round of economic instability fueled by unsustainable fiscal practices.
4. Recent Years: The massive pandemic stimulus? Some argue it marked the return of fiscal dominance across major economies.

⌚️ Where are we now?

Quite a few G20 countries are running substantial budget deficits, but the US stands out because of its position in the global economy.

US Budget Deficit 1940 to 2054 - US CBO

This is the US Congressional Budget Office projection (as a percentage of GDP), published in March. Here’s a few things to note:

1. 🕰️ Since WWII, deficits rose during recessions, typical of a monetary dominance setup.
2. 📈 The baseline deficit moved higher in the 1970s and again post-2000.
3. 💸 Interest expense is now growing faster than the deficit itself.
4. 🚨 It’s projected to hit 6.3% of GDP by 2054— 2x the 50-year average deficit.
5. 📉 The debt-to-GDP ratio is nearing WWII levels—and set to hit ~170% by 2054 .

🤔 What Comes Next?

Given the recent weakness of the US currency and bond market, it may seem like the fiscal dominance scenarios are playing out in front of us.

In reality, it’s likely that this has more to do with the potential impact of tariffs on the US economy, stocks, and inflation. Regardless, we’re seeing signs that investors globally are less keen to have all their eggs in the US basket.

In developing economies, fiscal dominance has often ended with a currency and/or sovereign debt crisis.

But the situation is somewhat different when it involves the world’s reserve currency, which also happens to be the currency used to price most assets.

There simply aren’t alternatives that are as big or as liquid as the USD. And, many of the alternatives (i.e., the euro, the pound, or the yen) have similar challenges anyway.

This supports the Gold and Bitcoin narratives , but their prices would have to rise a LOT to accommodate all of that capital.

A true move away from the US dollar would likely be a slow, drawn-out process . Still, we may see more frequent bouts of volatility between the world’s major currencies as markets adjust to this new landscape.

It’s worth noting that the USD index recently slipped from 109 to around 100.

That may seem like a sharp drop, but over the past 50 years, the dollar index has swung between a high of 170 in 1984 and a low of 70 in 2008 , so we’re still well within the range.

US Dollar Index (DXY) 1977 to 2025 - TradingView

Other countries with large deficits - including the Eurozone, UK, Japan, and most developing economies could also experience periods of volatility, but they may also benefit if investors look to diversify away from the USD.

Conversely, countries with less debt and smaller deficits could see their currencies appreciate.

The Winners & Losers 📈📉

Outside of currency swings, one of the clearest outcomes of fiscal dominance is likely to be stubbornly high inflation, higher than central banks would prefer.

But here’s the thing: inflation might actually be the least painful way to handle ballooning debt, by simply monetizing it .

So what does this mean for investors? Fiscal dominance can create both tailwinds and headwinds for different parts of the market:

🥇 Winners

1. 🏗️ Fiscal spending sectors – Industries like infrastructure , defense , and healthcare could thrive on increased government outlays.
2. 🏠 Real assets – Inflation usually boosts tangible assets like real estate , commodities , precious metals , and oil .
3. 🌍 Exporters – Companies selling abroad from countries with weaker currencies may enjoy a revenue bump.
4. 📉 Value stocks – Inflation hits future cash flows, making expensive growth stocks vulnerable. Value names could make a comeback.

😔 Losers

1. 📊 Rate-sensitive sectors – Areas like tech, consumer discretionary, financials, and growth stocks may face more volatility and require sharper stock-picking.
2. 📦 Importers – Companies buying goods from strong-currency countries could see margins squeezed by higher costs .

💡 The Insight: Be Cautious, But Don’t Panic 🎯

Market regimes don’t change often, but when they do, they can last for decades. Between Trump’s push to reshape the global economy and surging deficits, we might be watching the early days of a whole new era in markets.

Still, macro themes are tricky to time. That’s why it’s smart to stay flexible and not panic by going all-in on gold just yet.

Here are a few ideas to help navigate whatever’s next:

• 💡 Focus on Real Innovation
  • Innovation and disruption will keep creating value, but now’s the time to be more selective. Look for companies with a real business model and strong execution, not just a shiny pitch.
• ⚖️ Premiums Might Tighten
  • For years, tech growth stocks have traded at a premium. But that premium could shrink if investors shift focus toward value, profitability and real assets. If you are creating or updating a narrative for stock , you may want to take a closer look at the PE multiple you’re expecting investors to pay for it in the future.
• 📉 Use Volatility to Your Advantage
  • Policy decisions are going to keep stirring up the market. As we’ve seen recently, that means more volatility and more opportunities.

Here’s how to stay ready:

1. 🔔 Set Fair value estimates on your watchlist to jump on great opportunities.
2. 🌍 Use the markets page to compare different sector valuations across countries and their historical averages.
3. 🔍 Create custom screeners to spot stocks that benefit from government spending or higher inflation.

The screener below highlights potentially undervalued stocks in the industries that could benefit from increasing fiscal dominance.

Key Events During the Next Week

A packed week of economic data could shape market sentiment and influence central bank decisions. Here’s what’s coming, and why it matters for your portfolio:

📅 Tuesday

1. 🏛️ US Treasury Refunding Estimates : The government will outline how much it plans to borrow in the next quarter. Why it matters : Higher borrowing can push yields up, which often pressures equity valuations, especially growth stocks.

📅 Wednesday

• 🇺🇸 JOLTs Job Openings – Expected to fall from 7.57M to 7.4M
  • Why it matters : Fewer job openings suggest a cooling labor market, which could support the Fed pausing or cutting rates.
• 🇨🇳 NBS Manufacturing PMI – Forecasted drop from 50.5 to 48.5
  • Why it matters : A reading below 50 signals contraction in factory activity. Weak data here could spook global markets tied to Chinese demand.
• 🏛️ US Treasury Refunding Announcement
  • Why it matters : This confirms the size and structure of upcoming debt sales. Large auctions can push yields higher, weighing on equities.

📅 Thursday

• 🇦🇺 Australia’s Trade Balance – Expected to rise from $2.97B to $4B
  • Why it matters : A bigger surplus means more export income, which can support the $AUD and signal strength in global demand for commodities.
• 🇯🇵 BoJ Interest Rate Decision – No change expected (0.5%)
  • Why it matters : After its first hike in 17 years last month, any hint of further tightening or dovish backpedaling will move the yen and impact global bond markets.

📅 Friday

• 🇺🇸 US Unemployment Rate – Forecast to hold steady at 4.2%
  • Why it matters : If unemployment stays low while inflation cools, the Fed may have more reason to ease rates later this year — bullish for stocks.

All eyes will be on big tech earnings this week as four of the Mag 7 report:

• Apple
• Microsoft
• Amazon
• Meta
• Eli Lilly
• Visa
• Mastercard
• Exxon
• Chevron
• Coca-Cola
• McDonalds

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.