The global financial system is entering a period of fiscal dominance, a condition in which government debt levels and fiscal pressures dictate central bank behavior. Rather than pursuing inflation stability, central banks are compelled to ensure that sovereigns can finance themselves.
With debt-to-GDP ratios at or above wartime levels in the G7, servicing costs now rival traditional government expenditures such as defense and healthcare. This dynamic constrains monetary independence, forces central banks into tolerance of higher inflation, and may encourage the use of “financial repression” – e.g. deliberately negative real yields, regulatory mandates for holding government bonds, capital controls or direct taxation of wealth.
For investors, fiscal dominance is a threat to wealth preservation. Traditional safe havens such as long-duration sovereign bonds may destroy capital in real terms. Equities, private markets, and real assets tend to perform unevenly depending on pricing power, jurisdiction, and policy decisions. We briefly explore the mechanics of fiscal dominance and its implications for investors in a world where monetary independence is increasingly subordinated to fiscal necessity.