Yeah, this reeks of another DODGE narrative. I don't see the government allowing millions of zombie companies, over leveraged private and corporate creditors going bust. They will all be bailed out.
I get the sentiment but realise that unlike the DOGE nonsense, this has been policy since 2022 - QT, higher rates, stressing excess leverage and unproductive debt. Look at the unwind of the carry trade, private credit, commercial real estate, private landlords, stalling housing markets as clear examples.
Not necessarily zeroed out. What creditors always do - write them down, so the dbet as an asset is less valuable, restructured - lower payments over longer time period and demand for more collateral to be pledged.
If you see major QE resume or markets not maintain volatility, I am wrong.
Good observation, but what about the mounting private debt that absolutely will not, and cannot, be repaid because the borrowers simply lack the means? No amount of restructuring will solve that problem when people or institutions lack any means to pay. Somebody will be forced to eat that debt.
Housing debt is probably the largest looming problem in this regard. Climate change is driving fierce drought across the southwest, much of the Great Basin, and parts of California. And there appears to be no mechanism that will bring back long-term, steady return to previously favorable climactic conditions. Where there is no water, nobody can live. Nor can existing residents sell their homes. Their collateral goes to zero, and the homeowners will be unable (or unwilling) to restructure mortgages on domiciles they cannot ever occupy again.
What will the banks and mortgage companies and private credit do if “the great internal migration” leaves hundreds of thousands of partially paid homes to rot, literally, while cash strapped families with no more home equity try to find housing in wetter parts of the country? Unless somehow everybody can find ways to just permanently ignore the water stress (or adjust to actual abject lack of water, period)? What will happen to the banks and private equity when mortgaged farmland goes under because farmers can’t produce adequate crops under deepening drought and increasingly volatile weather conditions?
IMO, the plans you’ve described, as conceived by the masters of the currency, are deviously brilliant, but they appear to not be taking the increasingly obvious climate change wildcard into consideration. The next few years are likely to start a climate-related housing crisis. The alarm is already spreading among the farmers and residents in parts of the worst affected states. Do you think this will throw a wrench into the Treasury’s plans? If so, how, and if not, why not?
Thank you for your thoughts. I enjoy your analyses.
That's the best objection I've had to everything I have outlined. Some "assets" are badly impaired. But, this is also an asset selection process where assets get triaged. Take housing which has been one of the cleanest forms of collateral. Some is uninhabitable, uninsurable, older, in low-liquidity locations and not energy performance supported. That all gets discounted. For some assets somebody needs to take the loss whether that be the household, creditors, insurers or commonly the taxpayer.
The observation that lands hardest is the one you stated plainly: the system replaces one dependency for another. The old system depended on the Fed's willingness to print. The new one depends on the market's willingness to treat T-bills as pristine collateral. Everything downstream, the stablecoin reserves, the tokenised Treasuries, the programmable settlement layer, all of it rests on one assumption: that US sovereign credit is unquestionable.
The same week Warsh removed forward guidance, the president admitted the US was four weeks from running out of oil reserves and the SPR hit its lowest level since 1983. The government issuing the base collateral for this new financial architecture just publicly confessed to being weeks from an energy cliff. That doesn't mean T-bills stop being collateral tomorrow. It means the system is being rebuilt on a foundation at the exact moment the foundation's credibility is under the most stress it's faced in decades. A collateral-based system is only as stable as the collateral's perceived quality, and perceived quality is a confidence game that can shift overnight if the issuer keeps telling the world it nearly ran out of the one resource that keeps everything running.
Creating an entire economy dependent on one resource should have never been allowed to happen. No more than a quarter of an economy should be reliant on oil, for national security reasons.
Thanks much for this analysis and not for it to be behind a paywall; this is very pertinent
Pleasure
Brilliant peice again, Thankyou Miles for your insight.
Evil genius
Warsh is caught between a rock and a hard place. Currency reset coming
Yeah, this reeks of another DODGE narrative. I don't see the government allowing millions of zombie companies, over leveraged private and corporate creditors going bust. They will all be bailed out.
I get the sentiment but realise that unlike the DOGE nonsense, this has been policy since 2022 - QT, higher rates, stressing excess leverage and unproductive debt. Look at the unwind of the carry trade, private credit, commercial real estate, private landlords, stalling housing markets as clear examples.
What do you think will happen to the old debts in the old system that were unproductive and unrepayable? How would those get zeroed out?
Not necessarily zeroed out. What creditors always do - write them down, so the dbet as an asset is less valuable, restructured - lower payments over longer time period and demand for more collateral to be pledged.
If you see major QE resume or markets not maintain volatility, I am wrong.
Good observation, but what about the mounting private debt that absolutely will not, and cannot, be repaid because the borrowers simply lack the means? No amount of restructuring will solve that problem when people or institutions lack any means to pay. Somebody will be forced to eat that debt.
Housing debt is probably the largest looming problem in this regard. Climate change is driving fierce drought across the southwest, much of the Great Basin, and parts of California. And there appears to be no mechanism that will bring back long-term, steady return to previously favorable climactic conditions. Where there is no water, nobody can live. Nor can existing residents sell their homes. Their collateral goes to zero, and the homeowners will be unable (or unwilling) to restructure mortgages on domiciles they cannot ever occupy again.
What will the banks and mortgage companies and private credit do if “the great internal migration” leaves hundreds of thousands of partially paid homes to rot, literally, while cash strapped families with no more home equity try to find housing in wetter parts of the country? Unless somehow everybody can find ways to just permanently ignore the water stress (or adjust to actual abject lack of water, period)? What will happen to the banks and private equity when mortgaged farmland goes under because farmers can’t produce adequate crops under deepening drought and increasingly volatile weather conditions?
IMO, the plans you’ve described, as conceived by the masters of the currency, are deviously brilliant, but they appear to not be taking the increasingly obvious climate change wildcard into consideration. The next few years are likely to start a climate-related housing crisis. The alarm is already spreading among the farmers and residents in parts of the worst affected states. Do you think this will throw a wrench into the Treasury’s plans? If so, how, and if not, why not?
Thank you for your thoughts. I enjoy your analyses.
That's the best objection I've had to everything I have outlined. Some "assets" are badly impaired. But, this is also an asset selection process where assets get triaged. Take housing which has been one of the cleanest forms of collateral. Some is uninhabitable, uninsurable, older, in low-liquidity locations and not energy performance supported. That all gets discounted. For some assets somebody needs to take the loss whether that be the household, creditors, insurers or commonly the taxpayer.
Many thanks for such an intelligent comment
The observation that lands hardest is the one you stated plainly: the system replaces one dependency for another. The old system depended on the Fed's willingness to print. The new one depends on the market's willingness to treat T-bills as pristine collateral. Everything downstream, the stablecoin reserves, the tokenised Treasuries, the programmable settlement layer, all of it rests on one assumption: that US sovereign credit is unquestionable.
The same week Warsh removed forward guidance, the president admitted the US was four weeks from running out of oil reserves and the SPR hit its lowest level since 1983. The government issuing the base collateral for this new financial architecture just publicly confessed to being weeks from an energy cliff. That doesn't mean T-bills stop being collateral tomorrow. It means the system is being rebuilt on a foundation at the exact moment the foundation's credibility is under the most stress it's faced in decades. A collateral-based system is only as stable as the collateral's perceived quality, and perceived quality is a confidence game that can shift overnight if the issuer keeps telling the world it nearly ran out of the one resource that keeps everything running.
Creating an entire economy dependent on one resource should have never been allowed to happen. No more than a quarter of an economy should be reliant on oil, for national security reasons.