The $40 trillion trap: Disinflation is not deliverance

Let us begin not with a headline, but with an arithmetic problem so simple and so damning that it is astonishing it does not dominate every financial broadcast in this country. The United States government now carries $40 trillion in national debt. Not $40 trillion in some distant theoretical future. $40 trillion today. Right now. And the interest payments on that debt have surged to $24 billion—per week. That is not a quarterly or monthly figure. That is $24 billion extracted from the productive economy, handed to creditors, and incinerated, every single week.

If that number has not caused you to pause, allow me to put it in further context. The federal deficit for fiscal year 2026 stands at $1.4 trillion—and we are only nine months into the fiscal year. That works out to $155 billion per month in deficit spending. And lest anyone dismiss this as the residue of emergency pandemic-era fiscal excess, let me be precise: that figure is $100 billion higher than the same period last year. We are not normalizing. We are accelerating. Washington is not slowing its fiscal hemorrhage — it is opening the vein wider.

This is the foundation upon which every discussion of interest rates, inflation, and monetary policy must rest. Any analyst who examines the Federal Reserve's options without first confronting this debt reality is not conducting analysis. They are performing theater.

But first some good news before the really bad news. Several weeks ago, on this podcast, I stated with conviction that future CPI prints would feature disinflationary data—and that this would be sufficient to remove rate hike predictions from the table, at minimum through the July FOMC meeting

Yesterday, we received the June CPI report. It confirmed everything I argued. Consumer prices fell 0.4% month-over-month—the first outright monthly price decline in more than six years. The Core CPI, which strips out food and energy, came in at 2.6% year-over-year in June, down from 2.9% the prior month. And the headline figure decelerated sharply to 3.5% year-over-year, versus the 4.2% reading in the previous month. By any conventional reading, this is a meaningful disinflationary impulse—and it has, as predicted, silenced the rate hike chorus at the Fed, at least for now.

It is worth noting what drove this moderation. Owner's Equivalent Rent—the largest single component of the CPI basket—rose by a very manageable 0.2% month-over-month. This is a direct consequence of the housing market's steep correction. Home prices are rising at just one-eighth of one percent year-over-year today, a world away from the 20% annualized gains that characterized the summer of 2021. When shelter inflation decelerates, the CPI follows. This was entirely predictable. And it was predicted.

The Oil wildcard and Washington's theater

Alas, no disinflationary moment in the modern era arrives without a geopolitical ambush lying in wait. The Strait of Hormuz is, at least partially, closed once again. The United States war with Iran has returned to a kinetic state—the fragile Memorandum of Understanding that briefly suppressed crude oil prices has collapsed, and the market has reacted accordingly. WTI crude, which stood at $67 per barrel as recently as July 6th during the MOU period, has surged back to $80 per barrel today.

Unfortunately, President Trump managed to make matters considerably worse before ultimately retreating. His administration threatened to impose a 20% fee on every cargo ship transiting through the Strait of Hormuz—a declaration that sent oil markets into a brief but violent spike above $80. Then, with characteristic speed, the threat was recanted as prices began to move uncomfortably higher. This is not policy. This is improvisation conducted in real time on the world's most consequential energy chokepoint.

The implications for inflation are real, but investors who understand macroeconomics should resist the temptation to overreact. The CPI is not all about energy. The disinflation in rent and shelter components is structural—it will persist as long as home price appreciation remains subdued. Active investors who positioned their portfolios for disinflation during the earlier part of the year should be well rewarded in the second half. But let no one confuse temporary disinflation with salvation.

Disinflation is not deliverance — The stockman reality check

My friend David Stockman—one of the few voices in American public life who insists on confronting fiscal reality without flinching—puts the matter with characteristic bluntness. If the Federal Reserve had actually managed to hold inflation to its self-proclaimed 2% annual target since 2017, cumulative consumer prices would have risen 17% over that period. That would have been damaging enough. But the Fed did not come close to its target. Consumer prices have averaged 3.5% per annum since 2017—and as a result, the inflation index is actually up 32% over that span. That is not price stability by any definition. It is a decade-long mugging of the middle class.

This is the crucial distinction that is lost in the celebration of any single disinflationary data point. Prices falling from 4.2% to 3.5% year-over-year does not mean prices are falling. It means they are rising more slowly—from an already crushing and unaffordable level. What consumers genuinely need is deflation: actual price declines that restore purchasing power. What they are receiving is a slightly reduced rate of ongoing impoverishment. These are not equivalent. And they should not be celebrated as though they were.

Kevin Warsh and the impossible mission

Will inflation ever retreat to 2%? I have no doubt that the new Fed Chair, Kevin Warsh, intends to try. Warsh is a serious man—considerably more intellectually credible than his recent predecessors. He understands bond markets. He understands the history of monetary error. He has the background and the disposition to attempt genuine tightening.

But good intentions do not override arithmetic. With the national debt at $40 trillion and the annual deficit running at an annualized pace that dwarfs anything in peacetime American history, the scope for meaningful monetary tightening is vanishingly small. Every incremental increase in interest rates compounds the already crushing burden of $24 billion per week in interest payments—payments that crowd out spending, accelerate the deficit, and threaten to trigger a self-reinforcing spiral in the bond market. The Fed cannot tighten its way out of a fiscal crisis created by Congress and the White House. It can only choose how it fails—through inflation or through financial chaos. Warsh will be constrained not by his convictions, but by the catastrophic fiscal position that his institution helped create and that Washington refuses to address.

Gold, stagflation, and the reckoning ahead

An active, long/short investment strategy is not merely preferable in this environment—it is essential. The macro regime we are navigating shifts with unusual speed between deflation, disinflation, inflation, and outright stagflation. Understanding which regime governs the present moment determines everything: which equities to own and whether to be long or short; which portion of the yield curve to position in; whether to be long or short bonds and the dollar; and what commodities represent the best opportunities?

And that brings us to gold—perhaps the most misunderstood asset in the contemporary investment landscape. The consensus view holds that gold is simply an inflation hedge. This is imprecise and, in practice, frequently wrong. Gold is most accurately understood as a hedge against recession—specifically, against the environment in which stock prices fall and the Fed responds by cutting nominal interest rates faster than inflation declines. That dynamic causes real interest rates to fall. And falling real interest rates, combined with declining equity prices, eliminate the two principal competitors for capital that gold faces. In such an environment, gold becomes the preeminent store of wealth.

The day is approaching—and I believe it is approaching faster than consensus imagines—when the Fed will be compelled to monetize a record volume of Treasury debt in order to prevent long-term interest rates from rising to levels that would shatter the federal budget, the banking system, the economy, and markets. That monetization will simultaneously cause inflation rates to rise further, as it tries to cap the increase in nominal rates. Real interest rates will then plummet. This is the fertile environment for stagflation—and it is the environment in which gold's role as the world's ultimate monetary asset will be most powerfully demonstrated.

When will this era arrive? In all likelihood, it will become fully manifest in the aftermath of the next recession. Investors need not position entirely for this scenario today. But your portfolio must be structured with sufficient flexibility to execute decisively when the signals appear. PPS is fully prepared.