Fed set to allow free-rein inflation to deal with Elon Musk's 'defacto bankruptcy' claims

The Federal Reserve is expected to maintain interest rates in its meeting this week, amid fears of runaway inflation and spiraling national debt. According to the Wall Street Mav, a US economic watch group on X, 25% of the taxes collected in America are used to pay the interest accrued from the government debt. 

Tesla CEO and billionaire entrepreneur Elon Musk said America is “de facto bankrupt” due to the burden of interest payments on the federal government’s $36.2 trillion debt.

“If this continues,” Musk wrote on X Monday, “America goes de facto bankrupt and all tax revenue will go to paying interest on the national debt with nothing left for anything else.”

In response, economist Peter Schiff added that the situation is already beyond the point of recovery. “We already are bankrupt,” Schiff said, predicting the Fed would “unleash runaway inflation” as a last-ditch attempt to manage interest costs before they exceed the total tax revenue.

Interest payments eclipse defense spending, debt still rising

According to Treasury Department data, the U.S. government spent approximately $1.2 trillion on interest payments in the 2024 fiscal year, nearly a quarter of its total $5 trillion in tax revenue. Total federal spending also exceeded $7 trillion, with interest payments now outpacing even national defense expenditures.

If this continues, America goes de facto bankrupt and all tax revenue will go to paying interest on the national debt with nothing left for anything else. https://t.co/lJ1RgywhGG

— Elon Musk (@elonmusk) June 16, 2025

In what Havard Historian Niall Ferguson calls the “Ferguson’s Law,” if a country spends more on debt interest than on military defense, it risks losing its global financial standing.

The U.S. is now in violation of that rule. Defense spending for 2024 stood at $883.7 billion, trailing the $1.1 trillion interest bill. Ferguson asserted that most global powers who “recklessly borrow” and have crossed this threshold eventually faced a national financial collapse.

“Any great power that pursues a reckless fiscal policy by allowing the cost of its debt to exceed the cost of its armed services is opening itself up to challenge.” Ferguson continued, “The US is just the latest great power to find itself in this fiscal jam.”

Fed eyes inflation expectations

Interest rates will more than likely remain unchanged at Wednesday’s Federal Open Market Committee (FOMC) meeting. However, Fed officials are still monitoring inflation expectations against the backdrop of tariff hikes and consumer unease.

Since March, the Trump administration has implemented several tariff increases, prompting some businesses to preemptively raise prices. Residents expect landlords to push up rents, and workers could demand higher wages in the coming months. 

“If everybody expects inflation to go up, then it goes up. And that’s what the Fed is worried about,” said Alan Detmeister, an economist at UBS.

Though recent inflation readings have been relatively mild, per economists, inflation expectations are now back up again.

Ray Farris, chief economist at Eastspring Investments, warned that many Americans are now more sensitive to price hikes after living through the 2021–2023 inflation surge.

“The Fed is right to sit on its hands and do nothing here,” Farris explained. “But it should be uncomfortable with any of the increase in inflation expectations that some of the surveys have shown.”

Consumers, he added, don’t believe inflation is under control, even if recent data suggests otherwise. “There’s a greater willingness to accept that prices are going up, and that makes it easier for businesses to charge more,” Farris concluded.

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