Fiscal Dominance and the Macro Regime Ahead with Jim Masturzo

"If you raise interest rates, it's inflationary. If you lower interest rates, it's even more inflationary. That's where you start to get into the catch-22."

— Jim Masturzo

The conventional tools of monetary policy assume the central bank is in charge. They assume raising rates cools the economy. They assume lowering rates heats it up.

Fiscal dominance is the regime where those assumptions stop holding — where the debt burden is large enough that interest expense becomes its own source of stimulus, and the Fed's playbook inverts on itself.

We recorded this conversation on February 25, 2026, days before the US-Iran war began. We weren't talking about the news. We were talking about the structure underneath it.

That structure hasn't changed. If anything, it's more visible now.

Key Takeaways

1. Fiscal dominance is the regime where the Fed loses its primary tool — and we don't know in advance when we cross into it.

In normal times, raising rates cools the economy and tames inflation. Fiscal dominance is what happens when the debt is large enough that the interest expense on that debt becomes a meaningful source of stimulus on its own. Past a certain threshold, hiking rates pushes more cash into the economy through interest payments to bondholders than it pulls out through tighter financial conditions. Cutting rates remains inflationary in the conventional way. The catch is that the threshold isn't observable in advance — economic models point to it in theory, but the only way to confirm we've crossed it is to find ourselves on the wrong side of it. That is not a discovery any policymaker wants to make in real time.

2. Starting conditions, not historical averages, set expected returns — and US equities are the most expensive piece of evidence on the board.

In 1982, a 12% bond yield meant a 12% expected return. Today's 4% yield means something very different, regardless of what bonds returned on average over the last century. The same logic applies to equities. The CAPE ratio is near 40, against a long-run average around 18 and a post-1995 average around 28. That gap implies either a price correction, a decade of fundamentals catching up, or some blend of the two. None of this is a prediction. The point is structural: the right input for building a portfolio for the next decade is what current valuations and yields imply about what assets can plausibly return from here. Non-US equities don't carry the same multiple.

3. Private credit has become the place where pricing-power risk in software meets the search for yield on insurance balance sheets.

For two decades, software was a one-way bet: subscription revenue, captive enterprise customers, low marginal cost, durable pricing power. Private equity bought into that thesis, and private credit financed it. A meaningful share of that paper has ended up on insurance company balance sheets — packaged, rated, and treated as low-risk under the regulatory framework that governs them. The threat from AI is not that vibe-coded apps replace enterprise software tomorrow. It is more subtle: AI can give CFOs leverage to negotiate a million-dollar contract down to eight hundred thousand. If that pricing power erodes even modestly, revenue and margins compress at the borrowers, and the credit gets re-rated. This is not a crisis per se. It is a trajectory familiar enough to recognize: a lot of capital, an attractive yield, a regulatory layer that treats the risk as low, and an asset class everyone has decided is unassailable.

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About Jim Masturzo

Jim Masturzo is Chief Investment Officer at Research Affiliates, the roughly $150 billion quantitative asset manager whose work underpins widely-used investment products from partners including PIMCO and Schwab. He joined the firm in 2013 to codify its capital market expectations methodology, building what became the Asset Allocation Interactive site that publishes ten-year expected returns across more than 130 asset classes. He took over the asset allocation group in 2018 and became CIO in late 2025. Jim holds an undergraduate degree in electrical engineering from Cornell and an MBA from Duke. Before finance, he wrote enterprise software for PricewaterhouseCoopers — a background that informs how he thinks about the software-and-private-credit story we get into here.

Timestamps

• 00:00 — Introduction

• 04:00 — The Asset Allocation Interactive tool and why starting conditions matter more than history

• 06:00 — 1982 bonds at 12%: what "expectations are not predictions" actually means

• 08:00 — Systematic consistency: why relative expected returns matter more than point estimates

• 11:00 — The S&P returning 15% a year for ten years as a statistical anomaly

• 12:00 — CAPE near 40: long-run 18, post-1995 28, and what the gap implies

• 16:00 — "Some Like It Hot": the 2025 turning point and what it sets up

• 17:00 — Debt-to-GDP at 120% and the four options for getting off the train

• 21:00 — Running the economy hot: 3% as the new 2%, weaker dollar, non-US tailwind

• 25:00 — Real assets and commodities as diversification in an inflation-volatile regime

• 29:00 — Fiscal dominance: when raising rates becomes inflationary

• 32:00 — Software, subscription, pricing power, and the private equity / private credit symbiosis

• 35:00 — Where the credit ends up: insurance balance sheets and a familiar repackaging

• 39:00 — AI as a pricing-power risk, not a displacement risk

• 45:00 — The Pivot Questions

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Disclaimer

The content of "Treussard Talks" is for informational and educational purposes only and should not be considered financial advice. The views expressed are those of the host and guests and do not necessarily reflect the opinions of Treussard Capital Management or its affiliates. Consult your own financial advisor before making any investment decisions. For full disclosures, visit treussard.com.