Posted:November 1, 2025
Categories: Central Bank, Credit, Economics, Education, Federal Reserve, Monetary Policy
In 86 BC, the Roman general and consul Lucius Cornelius Cinna reigned after the death of Gaius Marius, who was hailed as the “Third Founder of Rome.” This was a dark time in Rome, as the republic was breaking down and the rule of law was eroding.
The Roman economy was struggling with a severe liquidity shortage and a constrained money supply, both exacerbated by the Social War. This war had devastated Italian productivity, ruined estates, and led to severe grain shortages and famine.1 Adding to the chaos, counterfeit coins flooded the market, causing families to hoard sound money and steadily reducing the amount of good money in circulation, a phenomenon later described as Gresham’s Law in 1857.
A debt crisis ensued as the powerful elite, the publicani bankers, began calling in debts. However, the debtors had no money to pay their debts as their land and estates, their primary source of income, were ruined. As a result, Lucius Valerius Flaccus, an elected consul and political ally of Cinna, enacted a measure to cancel three-fourths (75%) of all outstanding debts. This extreme measure is an example of an immediate political solution to solve the “big debt issue” and stabilize the internal economy until Roman access to tax revenue and resources could be restored. The powerful elite bankers weren’t left holding the bag as they still received 25% of debt repayments, and being debtors themselves, they also experienced debt relief.2
Figure 1: The Publican, painting by Marinus van Reymerswaele (1490–1546)
Source: Wikimedia Commons
In this case, the political faction (Cinna/Flaccus) decisively won the battle against the structure of debt and credit, subordinating the interests of financial stability (and creditors) to the urgent need to restore domestic political and economic order. Similar battles have taken place in the United States, stretching back to Thomas Jefferson in the 1790s, and continue today, with President Trump and Fed Chair Jerome Powell battling for monetary control.
Historical Battles: Presidents vs. Federal Reserve
As discussed in part one of this series, a battle is currently brewing between the Federal Reserve Board, responsible for the nation’s monetary policy, and the President, who has great power over the nation’s fiscal policy. The Federal Reserve manages monetary policy, which involves setting short-term interest rates and controlling the supply of money in the system. Fiscal policy consists of the government’s decisions regarding taxation and spending to influence economic activity, manage aggregate demand, fight recessions, or curb inflation. The current battle is not new. Below is a historical list of past battles:
The Pre-Federal Reserve Battles (1790s to 1830s)
The Federal Reserve was created in 1913, but was actually the nation’s third attempt at a central bank. The United States had two attempts at a central bank, both of which led to intense political conflict involving the president.
Post-Federal Reserve Establishment Battles (1913 to Present)
Once the Federal Reserve was established in 1913, conflicts focused on interest rates, monetary policy independence, and government financing needs.
All in all, we’ve got 11 battles. Regarding the first two national banks, the President was victorious in both cases. Of the nine post-1913 battles, I would argue the Fed is currently winning 6 to 2, with Presidents Hoover and Nixon emerging victorious. It now appears the Trump v. Powell Redux will probably bring the score to 6 to 3.
Bowing to Fiscal Dominance
Our monetary system is debt-based, which creates fragility and conditions of economic instability, as the larger the debt grows, the more fragile it becomes. A President Trump “victory” is defined by the subordination of monetary policy (the Fed’s domain) to fiscal policy (the President’s/Congress’s domain), a condition called “fiscal dominance,” in which the central bank is forced to accommodate massive government deficits.
The debt-based monetary system’s reliance on unending growth of government debt generates economic inequality (wealth gaps) and price instability (inflation). This, in part, fueled the rise of populism in recent years. President Trump won the 2024 election with a decisive victory, paving the way for a renovation of the central government.3 Given the scale of the national debt and almost all current politicians’ lack of incentive for fiscal prudence,4 the President can enforce monetary easing (lower interest rates) through political pressure. The Federal Reserve, captive and entirely subsumed by the Treasury's fiscal needs, must comply to prevent sharp spikes in government interest rates and a potential sovereign debt crisis, thereby confirming the central bank's political subordination.5 Even if the Federal Reserve were independent, this fiscal dominance forces it into relinquishing its independence to avoid a debt spiral.
All in on Interest Rates
There are three main levers the government can pull to rein in the current budget deficit, which is running at about $1.8 trillion, or about 7% of Gross Domestic Product (GDP, aka income).
Ray Dalio argues in his 2025 book, How Countries Go Broke, that to stabilize debt and deficits, the authorities should pull all three levers equally to bring the budget deficit down to 3% of GDP. The figure below shows projections of his solution compared with the Congressional Budget Office's (CBO) current estimate.
Figure 2: USA Central Bank Debt Level (% of Government Revenue)
Source: Ray Dalio7
With the passage of the “One Big Beautiful Bill” (OBBB), the administration has gone “all in” on the interest rate lever, keeping tax cuts in place while raising spending. This is the primary reason you see such a battle now between the politicians and the Fed. This may not be such a bad route, as Dalio argues in favor of interest rate cuts as the main driver:
“Interest rates falling by 1% is about four times more effective at reducing the debt-to-income ratio over the next 20 years than a 1% increase in tax revenue…besides lowering government debt service payments, interest rate cuts would boost asset prices, which would raise capital gains tax receipts and be stimulative to the economy, and raise inflation, which would raise tax revenues.”8
He also argues:
“The biggest influence on the government’s deficit is ironically not Congress, which determines spending and taxes—it is the Federal Reserve, which determines interest rates….Given that, if I were deciding for the president and/or Congress, I would want the Federal Reserve to lower the interest rate.”9
Rome to the US: Political Factions are Winning
This ongoing battle will be a significant factor in how markets move forward. At the end of the day, it appears that, much like the political faction in Rome in 86 BC, the political faction in today’s society has the upper hand.
True to form, the Federal Reserve lowered short-term interest rates by 0.25% again this week. The Fed is cutting interest rates, even though inflation remains elevated and stocks hit all-time highs. Further, tensions in the Repo market have been growing of late, raising liquidity concerns. The level of commercial bank reserves has also trended lower. This reduction in market liquidity is a primary reason the Fed is also ending its Quantitative Tightening (QT) in December.
Many financial pundits are criticizing the Fed’s bullying by the politicians. However, our country is now at a point where politicians and the Fed should work together before we have another crisis. Because, as we all know, they will absolutely work together during a financial crisis, just as they did during the 2008/2009 global financial crisis and the 2020 COVID crisis. Lowering interest rates will hurt some, but also benefit others. Negative real interest rates might be in the future, which, all in all, might be a first step towards fiscal consolidation, paving the way for cutting spending and/or raising taxes.
As a result, we are squarely in an inflationary regime, fueled by a decade-plus of zero-percent interest rates, followed by massive monetary stimulus in 2020-2021, and now possibly negative real interest rates. This is a reason to stay bullish, albeit cautiously bullish, knowing that fragile fiscal positions can cause hiccups in markets.
References
DISCLOSURES & INDEX DESCRIPTIONS
For disclosures and index definitions, please click here.
