The New Fed Chair is About to Cancel America's $39T Debt Crisis

Added: 2026-05-26

[00:00:00]America's now facing one of the biggest debt problems in its history. The national debt is close to $39 trillion.

[00:00:06]Interest payments are exploding. The government is spending more and more just to service old borrowing. And now, at the center of this crisis, a new Federal Reserve chair has entered the story, Kevin Warsh.

[00:00:19]President Trump's choice to run the Federal Reserve is now on the job.

[00:00:23]>> So, no one in America is better prepared to lead the Federal Reserve than Kevin Warsh.

[00:00:28]>> Warsh has been confirmed by the Senate as the next chair of the Federal Reserve. He's expected to face immediate pressure from his long-time supporter, Donald Trump, to lower interest rates despite rising inflation. And he's coming in with a very different view of inflation, interest rates, and the role of the Fed.

[00:00:47]And that's why some people are now going as far as saying this new Fed chair is about to cancel America's $39 trillion debt crisis.

[00:00:55]But, the real story here is more complicated than that. He can't erase the debt. He can't press a button and make $39 trillion disappear.

[00:01:03]What he may do is change the way America manages the debt, the way inflation is measured, the way interest rates are handled, and the way the Fed's massive balance sheet is reduced. If that happens, it could affect almost every American from homeowners and retirees to savers, workers, and first-time buyers.

[00:01:21]Reuters reported Kevin Warsh has been a sharp critic of the Federal Reserve for the last 15 years, ever since leaving his job there as governor in 2011.

[00:01:30]His own words serve as a baseline for what to look for as he settles into his new role as Fed chair.

[00:01:35]Inflation is a choice, and the Fed must take responsibility for it. This matters because Warsh does not talk about inflation the same way many officials have talked about it over the last few years. Many policymakers blamed inflation on supply chains, the pandemic, oil shocks, tariffs, Russia, Ukraine, global disruption. Warsh's view is much more direct. He argues that inflation is ultimately the responsibility of the Central Bank. In his view, if there is too much money in the system, if the Fed expands its balance sheet too much, and if the government keeps spending while the Fed helps absorb that borrowing, then prices will eventually rise.

[00:02:10]And this is important because it changes the whole conversation.

[00:02:13]If inflation is mainly caused by the Fed, then the solution is not just waiting for supply chains to heal. The solution is changing how the Fed behaves. Take a look at this clip from the Hoover Institution interview where Warsh explains inflation in his own words. Yeah, so I believe what Milton and you just channeled, which is inflation is a choice.

[00:02:35]Uh as you said at the beginning of this setup, inflation and ensuring price stability was granted to the Federal Reserve by the Congress most recently in a review of its statutes in the 1970s so that there would be one agency that would be responsible for prices. No more blaming the other guy. We're giving the baton to you, the Central Bank. Go after it and get it. Now, you wouldn't know from recent commentary of the last several years that inflation were a choice. In fact, during the run-up to the Great Inflation last 5 or 6 years, what did we hear about the causes of inflation? It was because of Putin and Ukraine. Yes. It was because of the pandemic and supply chains.

[00:03:15]Well, Milton would be outraged to hear that and in my own subtle way, I was troubled to hear it as well. Those things lead to a change in prices. After all, in a market economy, the prices change in Walmart every day. That's how the market economy works. It's not the Central Bank's role to police those prices. This is where the debt story begins because America's debt crisis is not just about how much the government owes.

[00:03:37]It's also about the interest rate it pays on that debt. When interest rates are low, Washington can carry a huge debt load more easily. But when interest rates rise, the cost of servicing that debt explodes.

[00:03:49]That means more tax money goes towards interest payments instead of roads, defense, health care, social security, or helping ordinary people. And this is already happening. The government is paying hundreds of billions, and in some years, over a trillion dollars just as interest.

[00:04:05]That's money that doesn't build anything. It doesn't repair anything. It doesn't help families. It simply pays the cost of old borrowing. Warsh reported, Warsh argues that the Fed has enabled government spending by expanding its balance sheet during the financial crisis and allowing it to stay large long after the crisis was over.

[00:04:21]That's why Warsh wants to trim the Fed's balance sheet, now about $7 trillion, and on path for a gradual increase as part of his regime change goal at the central bank.

[00:04:31]What's less clear is whether he will also push for reduced government spending. This is the key point. Warsh is not just talking about cutting rates.

[00:04:38]He's talking about changing the machinery behind the system.

[00:04:42]The Fed's balance sheet grew massively after the financial crisis and then again during COVID.

[00:04:48]The Fed bought government bonds and other assets, flooding the system with liquidity.

[00:04:53]Supporters say that helped prevent economic collapse during emergencies, but critics argue that the Fed never fully stepped back after the emergency was over. Warsh seems to believe the Fed became too big, too involved, and too willing to treat normal times like crisis times. So, his plan is not simply to cut interest rates and move on. His bigger idea is to shrink the balance sheet, reduce the Fed's role in the markets, and restore some separation between the Fed and the Treasury. Take a look at this clip where Warsh talks about quantitative easing and the Fed printing trillions. You know, you keep printing a trillion here and a trillion there, it's going to catch up to you, Peter. I mean, back in your day in Washington and in my day, various parts of the economic institutions would spend millions on this project or billions on that. We are a big and strong economy.

[00:05:40]We can tolerate these sorts of things even if these projects aren't perfect.

[00:05:44]But when the Federal Reserve prints trillions, especially in benign times, it changes everything. Now, this is where the title becomes controversial because when people say the new Fed chair is about to cancel America's $39 trillion debt crisis, they're not talking about literal cancellation. The Fed does not have the power to cancel debt. Congress spends the money, the Treasury issues the debt, investors buy the bonds.

[00:06:11]The Fed can influence interest rates, liquidity, and financial conditions, but it cannot legally wipe out the national debt. So, what are people really talking about?

[00:06:20]They're talking about something quieter.

[00:06:21]They're talking about reducing the debt burden in real terms.

[00:06:25]That means the debt still exists on paper, but inflation makes the dollars used to repay that debt worth less over time.

[00:06:32]IMF working paper states, "High public debt often produces the drama of default and restructuring, but that is also reduced through financial repression, a tax on bond holders and savers via negative or below market real interest rates."

[00:06:47]After World War II, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-based erosion.

[00:06:56]Financial repression is most successful in liquidating debt when accompanied by inflation. That is the real heart of this story. The IMF paper is not saying debt magically disappears. It's saying governments have historically reduced debt burdens by keeping real interest rates low or negative. A real interest rate is the interest rate after inflation. So, if a saver earns 3%, but inflation's 5%, that saver is losing purchasing power.

[00:07:21]On paper, they earned money. In real life, their money buys less.

[00:07:25]For the government, that can be useful.

[00:07:27]If the government borrows money today and pays it back later with dollars that are worth less, the real burden of that debt falls.

[00:07:34]That's how inflation can quietly help borrowers, including governments, while hurting savers. This is why normal Americans need to pay attention. If Wash manages to shrink the balance sheet, reduce inflation, and allow lower interest rates, some Americans could benefit. People with credit card debt, car loans, business loans, and adjustable rate debt could eventually see some relief if rates come down.

[00:07:56]Businesses could borrow more cheaply, hiring could improve, investment could rise, and if economic growth improves, that could help the government collect more tax revenue without raising taxes.

[00:08:06]That's the positive version of the story, but there is another side. If the debt burden is managed by keeping real interest rates low while inflation continues to eat away at purchasing power, savers and retirees could suffer.

[00:08:17]Imagine someone who worked for 40 years, saved carefully, and now depends on interest from savings or fixed income.

[00:08:24]If their savings accounts pay less than the true cost of living, they're being quietly taxed. Nobody sends them a bill, nobody announces a new tax, but every month their money buys less food, less fuel, less insurance, less medicine, less housing.

[00:08:38]And that's why financial repression can be politically easier than raising taxes.

[00:08:43]It's harder for people to see.

[00:08:44]IMF working paper states, one of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail.

[00:08:51]This effect, other things equal, reduces the government's interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression combined with inflation produces negative real interest rates, this also reduces or liquidates existing debts. It's a transfer from creditors to borrowers.

[00:09:12]That explains the whole mechanism in plain English. The government benefits when it pays less interest than it otherwise would. It benefits even more if inflation is higher than the interest it pays. But the cost doesn't vanish, it moves. It moves from the government to bondholders, it moves to savers, it moves to retirees, it moves to ordinary workers whose wages do not keep up with prices.

[00:09:34]It moves to anyone holding cash while the value of that cash falls.

[00:09:38]So, when people call this debt cancellation, they're missing the most important point. The debt isn't canceled, the burden is transferred.

[00:09:45]Take a look at this clip where Walsh explains the two tools, interest rates and the Fed balance sheet.

[00:09:50]>> get into this mess overnight, we're not going to get out of it overnight. To make the numbers you said somewhat easier, I think, to understand, we were paying about a billion dollars in interest expense every day the day before COVID. We're now paying more than three billion dollars per day in interest expense. None of that's going to strengthen the military or help the least well off among us. That is being squandered away.

[00:10:15]So, what do I suggest? Um as you pointed out and as you and I have discussed, but I'm not sure the economics profession believes this, there are two monetary policy instruments. One is setting of interest rates and the other is this money we keep talking about. We call it QE, we call it the central bank's balance sheet.

[00:10:35]If we would run the printing press a little quieter, we could then have lower interest rates.

[00:10:43]Because what we're doing right now is we have all this money that's being flooded into the system, which causes inflation to be above target. That's the seven trillion dollar balance sheet you're talking about. For homeowners with fixed rate mortgages, this type of environment can actually help. If you locked in a low mortgage rate years ago and inflation pushes wages and income values higher, your monthly fixed payment becomes easier to manage over time.

[00:11:10]You repay old debts with cheaper dollars. That's the borrower's advantage. But for the first-time buyer, the story may be much worse. Even if the Fed cuts short-term rates, mortgage rates are influenced by long-term bond yields. If investors fear inflation, they may demand higher yields to buy long-term debt.

[00:11:29]That can keep mortgage rates high. So, existing homeowners may benefit while young families trying to buy their first home remain trapped by expensive houses and expensive financing. For workers, the danger is confusion. Official inflation numbers may improve, especially if the Fed focuses on trimmed measures that remove extreme price movements.

[00:11:49]But families don't live inside trimmed inflation. They live in grocery stores, petrol stations, rent payments, insurance bills, medical costs.

[00:11:57]If official inflation looks better while everyday life still feels expensive, public trust will fall even further.

[00:12:03]People will feel like Washington is celebrating while they're still struggling. And that's why this issue matters beyond Wall Street. It's not just about bonds and balance sheets.

[00:12:11]It's about the price of ordinary life.

[00:12:14]So, is the new Fed chair about to cancel America's $39 trillion debt crisis?

[00:12:19]Not literally, that would be false. The debt is not going to vanish, but he may be about to change how the crisis is managed.

[00:12:27]If Washington's Fed shrinks the balance sheet, changes how inflation is understood, and tries to create room for lower rates, America's debt burden could be reshaped. And if inflation stays above real interest rates, the value of that debt could be reduced slowly over time.

[00:12:43]But that comes with trade-offs.

[00:12:44]Washington may get relief, borrowers may get relief, asset owners may do well.

[00:12:49]But savers, retirees, renters, and working families could pay the hidden cost through weaker purchasing power.

[00:12:56]So, the real story is not that America's debt will be canceled. The real story is that the debt crisis may be transformed into something quieter, slower, and harder to see. Instead of a dramatic default, it could be managed through inflation, lower real rates, balance sheet reform, and time. That may sound less dramatic than cancellation, but for normal Americans, it may be far more important. Because the question is not only whether Washington can survive the debt crisis.

[00:13:24]The question is who pays the price while Washington tries to escape it.