InDeFLATION.

This time last year I wrote a piece titled The End of the American Experiment in response to Project 2025. Not just to the white paper but to the realization that they were going to successfully implement every part of it. Here’s what I said about inflation:

“Inflation and job losses will enter a vicious cycle to first pressure the long end of the yield curve and then the short end, causing the deficit to balloon beyond projections.”

I know it’s gauche to quote oneself but I’m putting it out there to demystify economics. It’s just not that hard. Especially when you learn to take Republicans at their word. But there’s a difference between past Republican administrations—including Trump 1.0—and this one. The real power structure behind the scenes of Trump 2.0 is determined to burn the barn to get to the nails. They’re looking for a do-over. Because the greater the chaos, the bigger the calamity, the greater the reset and ability to alter our politics.

Nothing brings about more chaos and calamity than inflation.

So let’s go through the recent inflation print then get back into the prediction game to talk about what comes next.

Producer Price Index (PPI)

The recent producer price data sealed our fate for the foreseeable future.

PPI for final demand moved up 0.4% in August, bringing final demand to 5.4% for the 12 months ended in August. These are big numbers with even distribution across sectors. PPI is the leading indicator of inflation that shows up in your household budget three to four months down the road. These are the cost drivers before things get priced for retail delivery.

This is markedly different from the headline consumer price index numbers and the Fed’s preferred Personal Consumption Expenditures, which is about to undergo downward revisions due to methodology. These are the true underlying drivers of inflation and why economists care a great deal about PPI. By the time inflation is in the headline numbers we see, it’s already too late. Behind the scenes, policymakers are supposed to adjust to these numbers to get ahead of things.

The pressure alone from diesel prices is showing up in every industrial sector from transportation to manufacturing. Of course, this isn’t exclusive to the United States; this is now a global phenomenon. But it extends beyond fuel and into crucial inputs for agriculture as well. As the Council on Foreign Relations writes:

“Several indicators are pointing to a more severe crisis in 2027. Reduced nutrient availability, caused by high fertilizer prices, could constrain yields in the Northern Hemisphere further. Grain and crop prices have climbed in step: wheat up 24% from January to July 2026, rice 14%, soybeans 8%, corn 4%. Farmers had already cut fertilizer purchases after the April price spike, and the continued climb has not reversed those decisions.”

Producers and growers can only hedge so much before they have to simply absorb the going price for inputs and pass it along. But it extends beyond pricing and into supply as well. The attacks on infrastructure and reduction in shipping routes are reducing product in absolute terms. So we’re looking at smaller crop yields for an ever-expanding population. Again, this is all forward-looking stuff on top of prices that are already difficult to manage.

Now we’re staring down the barrel of yet more inflation as the year goes on and rolls into 2027.

There are only two logical paths forward when it comes to this type of inflation. Either we continue with persistent inflation that robs even more purchasing power from the American people, or we enter a deflationary spell. The latter would be catastrophic and we’ll talk about that in a moment.

The time for disinflation—the ideal scenario in which prices that have been needlessly inflated begin to cool—is over.

The financial media and pundit class will be looking to the Federal Reserve for answers, but they won’t find any there. The market has spoken and the market trumps the Fed in a period of fiscal dominance.

Reminder: fiscal dominance is when a nation’s debt burden reaches a point where the central bank no longer has the ability to influence market rates for debt issuances.

The proverbial train has left the station.

This adage has layers to it. First, it implies that the thing you’re trying to control has already gotten loose. It also raises the question as to whether the train is running away, or, is a runaway train.

The running train is inflation. The Fed’s interest rate tools won’t make a dent because it takes months, perhaps more than a year in “normal times,” to have a chilling effect on prices. The runaway train drives toward the brick wall of deflation, the worst-case scenario for an economy because it means that everything has already collapsed in the goods and services industries.

Here’s a caveat, or a hedge: If you see in the coming months that prices have begun to come down or even collapse, that’s not a sign of relief. And it won’t be because of some Trump election season conspiracy either. It means that we will have entered an economic free fall known as demand destruction. And it won’t be unique to the United States, it will be a global phenomenon.

In other words, if prices come down it means that it will be preceded by a spike in unemployment. We’re not there yet because corporate earnings have been solid this year so there isn’t a signal that they’re about to take a howitzer to the labor market. But there are other factors related to the run-up in inflation that could get us there very quickly and that’s what I’m most afraid of.

For one thing, it’s the trajectory of these Treasury yields. As I said last year, the pressure will show up first at the long end of the yield curve—meaning the 30-year Treasury—and then at the short end, the 2- to 10-year Treasuries. Now, if you’re a regular, then you’re probably sick of me talking about the yield curve, so I won’t belabor this, but I do want to make the connection to inflation and how it ultimately impacts jobs.

The 30-year is over 5% and holding.

The 10-year is approaching 5%. This one is significant to the average consumer because it’s the official/unofficial baseline for things like mortgages and auto loans. So the higher this one goes, loan rates typically follow suit.

The 2-year is supposed to be the lowest of the bunch somewhere slightly above the Fed’s 2% target. It’s at almost 4.5%.

The last time we tested these levels was 2007, and that’s why economists are taking note. Remember, these are just reflections of sentiment on top of the cost of capital and inflation expectations. How much does money cost today, how much will it be worth tomorrow and what’s my spread relative to how risky things are? In 2007, the markets knew before everyone else, but we weren’t listening.

They are listening now.

They’re listening because these are the new floors and the floor keeps rising. They’re listening because the PPI is screaming at them that this is about to get a whole lot worse. And the reason the Fed’s policy tools aren’t going to work against this tide is because it’s coming in from a tsunami rather than normal cycles of the moon.

In “normal” periods, there is a tidal flow and energy to the markets. Boom and bust. Early-, mid-, and late-cycle stages that have predictable rhythms. So when we talk about inflation during these periods we characterize it either as cost-push or demand-pull. Cost-push comes from things like lower crop yields, rising energy prices, supply shortages, etc. Demand-pull comes when things are running hot and there’s more demand than there is supply. So producers raise their prices. There are myriad factors involved but that’s the gist of it.

In this case we have everything, everywhere all at once. People are behaving normally because the cycle hasn’t broken yet. They’re going to work, paying the mortgage or rent, buying food and trying to keep up. There’s real demand-pull remaining in the economy because we haven’t fully come to terms yet with how bad things are and how much worse they’re going to get.

We’re putting the difference on credit. Consumer behavior is a huge influence on these in-between phases. And that’s not to say people are spending carelessly. They’ve cut back on trips and vacations and other items higher up the luxury chain. The problem is that their essentials simply cost a great deal more due to the cost push side of the equation.

Importantly, little has changed in the luxury market itself because the high-end consumer is still doing great and sitting on both cash and confidence. Cash because they’ve been killing it in the K-shaped economy and confidence because the stock market refuses to bend. So these consumers are doing fine.

But those yields are a big problem. And so is that PPI. Because they both show that the factors for inflation are already in the numbers. High yields mean high cost of capital. You’re not the only one with a variable rate loan like a mortgage or a personal loan. Tens of thousands of corporations that are funded by those private credit firms we talked about all year are also tied to these yields. The reason the private credit market hasn’t collapsed entirely isn’t because the underlying investments are okay, it’s because they have a cap on redemptions. These products are structured to prevent runs so only a certain small percentage of investors can get their money out at a time.

Troublingly, for the first time since these products came into fashion after the Great Financial Crisis, there are now more redemptions than net new inflows. Meaning, there’s more money leaving the credit market than coming into it for those tens of thousands of companies. The ones that are in are paying a tremendous amount to service their loans and lines of credit. Or they’re restructuring them. Or they’re giving up equity instead. And there’s less and less capital available now which means companies looking for fresh capital are less and less likely to find it. And if they do, it won’t be cheap.

So money is going to keep getting more expensive, and we know that goods and services are as well because the PPI increased indiscriminately.

Deep breath.

The reason all of this was predictable is because of everything else they said they were going to do. I just took them at their word. They said they were going to cut the flow of immigration. Slash taxes on corporations and wealthy people. Be generally more aggressive on the world stage. Threaten Iran specifically. Implement punishing tariffs. And most importantly—this was the big tell—they were going to rally around the unitary executive theory and put as much power into the tiny hands of the most insane person in the country. I mean, what other outcome could we possibly have had?

A word about the flip side of the inflation coin before we ponder motives for a minute.

The flip side is deflation. The disaster scenario where prices begin to crater because the economy collapses. If we continue on this path, we’ll most certainly get there, and you’ll know it when it happens because unemployment will be close to financial crisis levels, the private credit market will have imploded and there will be calls for Fed intervention and money printing to backstop the economy.

Oh. And then there’s AI. Not the promise that it will take everyone’s job. The fact that it has siphoned off an inordinate amount of investment capital that would otherwise be floating around the rest of the economy. We have historic concentration risk in a technology that has already demonstrated that it cannot achieve economies of scale. There is no known scenario in which artificial intelligence becomes profitable, at least for the companies that have soaked up all the money. There might be companies that increase profitability by leveraging AI, but the companies that produce AI technology will continue to hoover up cash until we stop giving it to them.

I’m not done.

There’s a debt market piece to this as well. More and more of the big tech firms that have scaled thus far through cash flow and equity markets are turning to debt. They’re issuing so much debt, in fact, that it’s beginning to crowd out other issuances. This is a huge red flag. Even in the best-case scenario where companies finally find uses for AI beyond research, graphics and coding, if the companies that leverage it can’t sell their products and services because no one has any money, then what’s the point?

It all points to recklessness and an absence of a genuine economic plan and industrial policy. Or does it?

Now we can talk motive.

If the goal is to burn the barn then perhaps everything is falling into place. I know how crazy and conspiratorial that sounds but, again, take them at their word—right?

So far we’ve talked about the economic part of their project. (And by “them” I do mean the people behind this administration like Russell Vought, the author of Project 2025.) But if these economics are designed to fundamentally alter our politics to kick Brown people out of the country, put women back in the home, deregulate entire industries, traumatize bureaucrats and make the government so inefficient in order to return to a pre-industrial framework where capitalists and white Christian industrialists made and implemented policy then…well…you’d have to break it all.

The only saving grace then is that we still hold elections in this country and we have a chance to push pause at the midterms. Then we would have to prepare for a complete reimagining in 2028 because things would still be very badly broken.

As gross as this sounds, try to think like Russell Vought.

If you’re Vought, you know you might not be able to completely influence the midterms. You tried, but it didn’t happen fast enough. But you still have a great deal to accomplish before Trump leaves office. So you know you’re probably going to lose the midterms. Hopefully you’ve set enough in motion that the government continues to deteriorate as the economy melts. The most destructive changes happen under the cloak of darkness and despair.

In the event we still hold elections in 2028, you’ll need to win those as well. You have to somehow demonstrate that Republicans can actually fix the mess they created. How would you do it?

Well, for starters, you need Democrats to continue eating their own. So you let them be and allow the DNC to murder progressive movements in the crib. Check that box. Then you’ll have to start slowly distancing from Trump and boost someone on the inside to look like the only sane choice. Also done. It’s JD all the way.

JD Vance isn’t just a product of Peter Thiel’s brain as a former employee of his, he was the choice for the VP slot from none other than Russell Vought.

Expect Vance to begin moving away from Trump. It will be at Vought’s direction. They’ll leak bits to the press about Vance as the voice of reason in the administration and that he was always against the war in Iran. And it will look something like the recent New York Times “exclusive,” “Behind the Scenes, Vance Gathered Unvarnished Views of the Iran War.”

These “exclusives” in establishment media don’t come from Deep Throat in a garage. They’re leaked by “White House insiders” and people who “suggest things” off the record. I’ve said that Bessent wants to be president, and I believe that. I also believe Rubio thinks the job is his. But it’s Vance. It’s always been Vance. But they knew the only way that could work is if he was already in the house and everything had ironically fallen to pieces. And the best way to make things come tumbling down is inflation. Always has been.

Just ask Jimmy Carter.