Falling Off a Fiscal Cliff in 2026

Wild gyrations in precious metals prices may signal the beginning of the 2026 financial crisis. Silver prices increased 250 percent, to $114 per ounce over the past year before falling back to $80 per ounce. Gold prices have also been volatile, increasing above $5,000 per ounce before falling sharply in recent days. 

We have not seen such volatility in precious metals prices since the lost decade of the 1970s. The United States has benefited from the dollar’s dominance as a reserve currency, but it is no longer the safe haven it once was.

For several decades, the United States has been incurring unsustainable levels of debt, which has now reached $38 trillion. U.S. debt is projected to continue to grow at an unsustainable rate, exceeding our national income by midcentury. The rate of growth in U.S. government debt will soon exceed the economy’s growth rate, the ultimate test of debt sustainability.

The United States was able to incur this debt only because other countries increased their holdings of U.S. Treasuries. Other countries have responded to the dollar’s declining value and volatility by reducing their holdings of U.S. Treasuries. The recent decision by Denmark to sell its U.S. Treasury reserves reflects this growing risk, as does the U.S. threat to gain control of Greenland.

As foreign governments decrease their U.S. Treasury reserves, the cost of borrowing by the U.S. government increases, and the risk in holding U.S. Treasuries rises. The cost of servicing the U.S. debt now exceeds expenditures for national defense.

The best measure of the risk in holding U.S. Treasuries is the sharp increase in borrowing costs. The interest rate on U.S. 10-year Treasury notes increased from close to zero during the COVID-19 pandemic to more than 4 percent. Interest rates on government debt in other countries have also increased, but they remain well below those of U.S Treasuries. The sharp increase in interest rates on Japanese debt has led to intervention by the U.S. and Japan to stabilize bond markets. While bond markets have stabilized in the near term, interest rates are signaling that we are in the early stages of a financial crisis.

The 2026 financial crisis is much like the one that occurred at the end of the 1970s. As in the 1970s, investors are seeking safety in assets such as gold and silver, driving precious metal prices to unprecedented levels.

The 2026 financial crisis differs from that in the 1970s because it doesn’t have a happy ending. The 1970s were followed by the “Great Moderation” of the 1980s and 1990s. During those years, Congress constrained federal spending growth and ultimately balanced the federal budget. The Fed pursued a tighter monetary policy to bring inflation under control. As inflation rates fell to meet the Fed’s targets, interest rates on U.S. Treasuries declined, reducing borrowing costs.

In the current financial crisis, there is no evidence that Congress will eliminate deficits and stabilize debt. For more than two decades, the Federal Reserve has pursued a monetary policy to accommodate deficit spending.  

The sharp pullback in precious metals prices coincided with President Trump’s appointment of Kevin Warsh as Fed chairman. Financial markets applauded this appointment because Warsh is a deficit hawk. However, we should curb our enthusiasm; Warsh will face the same headwinds that Arthur Burns faced as Fed chairman during the Nixon administration. At the height of the financial crisis in the 1970s, President Richard Nixon met with Milton Friedman and asked him to moderate his criticism of Burns. Friedman is reported to have said, “I don’t blame Arthur, Mr President, I blame you.”

Deja vu to 2026, where Fed policies have triggered a new round of inflation, and the very independence of the Fed is now under threat. The use of tariffs as a foreign policy tool has threatened a return to protectionism. The new restrictions on international trade and investment have resulted in geoeconomic fragmentation, increasing the risk of military conflict. Critics will challenge this assessment of the 2026 financial crisis as pessimistic and myopic, but we can no longer ignore the market signals of failed U.S. policies.

Read the full article in DC Journal:https://dcjournal.com/falling-off-a-fiscal-cliff-in-2026/

William Owens is a former vice chairman of the Joint Chiefs of Staff and serves on the Board of the Prosperity for US Foundation.

Barry W. Poulson is professor emeritus at the University of Colorado Boulder and serves on the Board of the Prosperity for US Foundation.