There is no magic fix. U.S. President Donald Trump’s efforts to place the blame for high rates on the Federal Reserve Board are deeply misleading. The Federal Reserve controls the overnight borrowing rate, but longer-term rates are set by vast global markets. If the Fed sets the overnight rate too low and markets expect inflation to rise, long-term rates will also rise. After all, unexpectedly high inflation is effectively a form of partial default, since investors get repaid in dollars whose purchasing power has been debased; if they come to expect high inflation, they will naturally require a higher return to compensate. One of the main reasons governments have an independent central bank is precisely to reassure investors that inflation will remain tame and thereby keep long-term interest rates low. If the Trump administration (or any other administration) moves to undermine the Fed’s independence, that would ultimately raise government borrowing costs, not lower them.

Skepticism about the safety of holding Treasury debt has led to related doubts about the U.S. dollar. For decades, the dollar’s status as the global reserve currency has conferred lower interest rates on U.S. borrowing, reducing them by perhaps one-half to one percent. But with the United States taking on such extraordinary levels of debt, the dollar no longer looks unassailable, particularly amid other uncertainty about U.S. policy. In the near term, global central banks and foreign investors may decide to limit their total holdings of U.S. dollars. Over the medium and longer term, the dollar could lose market share to the Chinese yuan, the euro, and even cryptocurrency. Either way, foreign demand for U.S. debt will shrink, putting further upward pressure on U.S. interest rates and making the math of digging out of the debt hole still more daunting.

Already, the Trump administration has hinted at more drastic actions to deal with mounting debt payments, should gaining control of the Fed not be enough. The so-called Mar-a-Lago Accord, a strategy put forward in November 2024 by Stephen Miran, now head of Trump’s Council of Economic Advisers, suggests that the United States could selectively default on its payments to the foreign central banks and treasuries that hold trillions of U.S. dollars. Whether or not the proposal was ever taken seriously, its very existence has rattled global investors, and it is not likely to be forgotten. A clause proposed for the huge tax and spending bill that was passed by the U.S. Congress in July would have given the president discretion to impose a 20 percent tax on select foreign investors. Although that provision was removed from the final bill, it stands as a warning of what might come if the U.S. government finds itself under budget duress.

With long-term interest rates up sharply, public debt nearing its post–World War II peak, foreign investors becoming more skittish, and politicians showing little appetite for reining in fresh borrowing, the possibility of a once-in-a-century U.S. debt crisis no longer seems far-fetched. Debt and financial crisis tend to occur precisely when a country’s fiscal situation is already precarious, its interest rates are high, its political situation is paralyzed, and a shock catches policymakers on the back foot. The United States already checks the first three boxes; all that is missing is the shock. Even if the country avoids an outright debt crisis, a sharp erosion of confidence in its creditworthiness would have profound consequences. It is urgent for policymakers to recognize how and why these scenarios could unfold and what tools the government has to respond to them. In the long term, a severe debt or, more likely, an inflationary spiral could send the economy into a lost decade, drastically weakening the dollar’s position as the dominant global currency and undermining American power.