Analyst Expects Persistent Deficits and 3% Baseline Inflation
Economist Lyn Alden stated that large U.S. fiscal deficits are a persistent feature of the economy and an imminent crisis is unlikely in the next 3-10 years. Speaking on the *Thoughtful Money* podcast, she projected that money supply growth of 7% against productivity growth of 4% will result in a structural baseline inflation rate of around 3%. Alden noted these fiscal conditions are driving political polarization and a K-shaped economic recovery.
The Congressional Budget Office (CBO) projects the U.S. fiscal deficit will reach $1.9 trillion in fiscal year 2026, equivalent to 5.8% of Gross Domestic Product (GDP). This is significantly higher than the 3.8% average deficit-to-GDP ratio recorded over the past 50 years. Projections show this gap widening to $3.1 trillion, or 6.7% of GDP, by 2036. A primary driver of the increasing deficit is the rising cost of servicing the national debt. For fiscal year 2025, net interest payments on the debt totaled $961.7 billion, accounting for 14% of all federal spending. The CBO forecasts that by 2036, interest costs will be nearly double the entire defense budget. On the revenue side, the federal government collected $5.23 trillion in fiscal year 2025, with individual income and payroll taxes being the largest sources. Federal revenue is projected to be around 17.5% of GDP in 2026, slightly above the 50-year average of 17.3%. However, spending is expected to reach 23.3% of GDP, well above its 50-year average of about 21%. Recent data on the money supply shows the M2 measure at $22.7 trillion, with a year-over-year growth rate of 4.59% as of early January 2026. This is below the long-term average growth of 6.82%. Meanwhile, U.S. labor productivity has shown recent strength, with a 4.9% increase in the third quarter of 2025, higher than the long-term average of 2.20%. The "K-shaped" recovery describes a post-recession environment where different segments of the economy recover at vastly different rates. This divergence is evident as higher-income households benefit from rising asset values, while lower-income groups face stagnating wages and increased financial strain, a trend that intensifies wealth inequality. This economic divergence is a contributing factor to political polarization. Studies show a strong correlation between rising income inequality and increased hostility between political parties. Frustration with the economy and a sense that the government is unresponsive to the needs of all citizens can fuel partisan division.
