The Fast Death and the Slow Death

Every central bank in history, when forced to choose, picks the slow death. We are about to find out what it costs.

Every central bank in history, when forced to choose between a fast death and a slow death, chooses the slow death.

Let’s get into it.

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THE LIBRARY ON MADISON AVENUE

On the morning of October 22, 1907, a line of frightened New Yorkers stretched around the block at the corner of Fifth Avenue and 34th Street.

They were holding bankbooks.

They were waiting to pull their savings from an institution called the Knickerbocker Trust, the third-largest trust company in New York, where they had collectively deposited what would today be the equivalent of about half a billion dollars.

By 12:30 in the afternoon, the trust had paid out everything it had - roughly eight million dollars in cash - and locked the doors.

The president of Knickerbocker, a man named Charles Barney, walked home. Three weeks later, he shot himself.

From the Knickerbocker, the panic spread.

Other trusts faced runs. The New York Stock Exchange nearly closed because banks ran out of cash to fund routine margin trades. The Dow Jones had already lost almost half its value over the preceding year.

And here is the part that matters. The part that built the world we are living in right now.

There was no Federal Reserve. There was no central bank.

There was no entity in the entire United States whose job it was to step in and stop the financial system from collapsing on itself.

So one man did it.

John Pierpont Morgan was seventy years old, semi-retired, and one of the wealthiest men alive. When the panic broke, he was at a church convention in Virginia. He cancelled his plans, boarded a special train back to New York, and went to work.

For the next two weeks, he ran the rescue of the United States financial system out of his personal library on Madison Avenue.

He called the heads of every major New York bank to his home. He locked the doors of the library and told them they were not leaving until they pooled enough cash to backstop the system.

He personally examined the books of the troubled trusts and decided which ones were solvent enough to save and which had to be allowed to fail.

He coordinated roughly twenty-five million dollars in emergency loans - a staggering sum at the time.

He sorted the wreckage in front of him into two piles. The patients he could save, he saved. The patients he could not save, he let die.

It worked.

The panic was contained.

The financial system survived.

But take a step back and look at what had just happened.

The largest economy on Earth had just been saved from collapse by an elderly private banker performing triage in his own library.

Morgan held no charter, no mandate, no government authority. He had cash, credibility, and the willingness to use them. If he had been in Europe, sick, dead, or simply uninterested in being a hero, the United States might have crashed in a way no one in this century has ever seen.

The country drew the obvious conclusion.

It could not keep relying on one rich man to save it.

POST MORGAN

Three years later, in November 1910, a small group of men boarded a private railcar at a station in Hoboken, New Jersey. They were travelling under assumed first names. They had been told to dress for hunting.

They were carrying drafts of legislation that the United States Congress had not yet seen.

The men were Senator Nelson Aldrich, an assistant secretary of the Treasury, and four senior bankers - including representatives of the houses of Morgan, Kuhn Loeb, and what is today Citibank.

Their destination was a hunting club on Jekyll Island, off the coast of Georgia, owned by Morgan himself.

The cover story was a duck-hunting trip.

The actual purpose was to draft, in secret, what would become the Federal Reserve Act.

Three years after that, on December 23, 1913, President Woodrow Wilson signed the Federal Reserve into law. A new institution that had power to do, on demand, what Morgan had done by hand.

When banks ran short of cash, the Fed could create new cash and lend it to them.

When markets froze, the Fed could thaw them.

When the system needed liquidity, the Fed would produce it.

That is the founding mission of the Federal Reserve.

It exists, in its bones, to prevent another Knickerbocker.

To do triage on the financial system in the moments when no one else can.

For over a century, it has done that job well.

We have not had another 1907. And the panics of 1987, 1998, 2008, and 2020 have been met with the same medicine.

The Fed steps in, creates dollars and buys what no one else will buy.

The patient stabilizes.

But there is a question Morgan never had to ask in his library. And it is the question that defines our entire present moment.

What does the medicine cost?

A FEW CLICKS HERE AND A FEW CLICKS THERE

Morgan saved the financial system in 1907 using existing cash.

Gold. Deposits. The wealth he and his peers had already earned.

He moved real money around. He did not invent any.

The Federal Reserve does not work that way. When the Fed steps in to save the system, it does so by creating new dollars out of thin air. Not figuratively.

Literally.

The Fed types those dollars into the accounts of commercial banks - banks that did not have the money five seconds earlier - and the new dollars enter circulation.

There is no printing press. There is a keyboard.

There is no vault of gold backing the new dollars. There is only the promise that they will hold their value.

Every panic the Fed has prevented since 1913 has added to the pile of those keyboard-created dollars.

Every recession, every banking crisis, every wobble in the bond market - every one has been met with another round of dollar creation.

The pile has grown for over a hundred years.

It is now an unimaginably tall stack of paper resting on an unspoken agreement that everyone will keep accepting it as wealth.

That distinction - between Morgan moving existing money and the Fed creating new money - is the whole story.

Because in May of 2026, the tower is starting to lean visibly.

And the man about to inherit Morgan’s role is a name I will come back to in a moment. But first, we need to understand the trap closing around him.

THE DOMINOES

For three weeks, I have been walking you through a sequence of events. If you have been with me, the next two sections will be familiar - but stay with me, because we need the full picture loaded before we get to the choice ahead.

In Two Wars, we laid out the visible war and the invisible one.

The visible war is the one filling cable news - missiles, carrier groups, and a Strait of Hormuz that has been effectively closed since early March.

The invisible war is happening in a place nobody films.

Foreign governments hold roughly $9.4 trillion of U.S. Treasury bonds.

When the war broke out, and oil prices rose, some of those governments were forced to sell their American Treasuries to raise the money they needed to buy oil on the open market.

When holders sell, the price of those bonds falls.

And when the price of U.S. bonds falls, the interest rate the United States must pay on new debt rises.

At too high an interest rate, the interest bill on America’s $39 trillion of debt starts to compound on itself faster than the federal budget can absorb.

Because the United States is funded by debt, like a consumer living on a credit card, access to more debt is the big determinant in this story.

In The First Domino, we looked at the first piece of real-world validation for that prediction.

Here is what happened.

The United Arab Emirates’ economy is heavily dependent on selling oil through the Strait of Hormuz. With no oil exports for over ten weeks, the UAE’s cash flow has been shut off.

Now, the UAE is far from broke.

It holds roughly $95.6 billion in U.S. Treasury bonds alone, plus trillions more in its sovereign wealth funds.

So it has not run out of money in the conventional sense. But as anyone understands, when your income stops, you must dip into your savings.

If the UAE had sold its U.S. Treasuries to raise the cash it needed, that would have meant unloading tens of billions in bonds onto the open market during an already-stressed moment.

An oversupply of U.S. bonds would force interest rates higher to attract new buyers. And the exact spiral I just described would have begun. The UAE would have been the country that started it.

So instead, the UAE did something different.

It approached Washington with a proposal:

We did not ask for this war. We were dragged into it. If we run short on cash and you do not help us, we will have no choice but to raise it ourselves - and you know what that means for your bond market. Let’s avoid this.

The UAE asked for an emergency short-term loan known as a currency swap line.

WHAT IS A CURRENCY SWAP LINE?

In its simplest form, it is a short-term loan between two central banks.

The U.S. Federal Reserve agrees to lend dollars directly to the UAE central bank.

The UAE agrees to repay those dollars on a fixed date, in the same dollar amount, regardless of what has happened to its own currency in the meantime.

Simple enough on the surface.

But it raises a question I want you to sit with for a moment.

How does a country whose own government runs entirely on borrowed money - a country that requires other countries to lend it dollars every quarter to fund its own operation - suddenly turn around and lend another country tens of billions of those same dollars on demand?

The answer is simple.

Keystrokes.

When the Federal Reserve extends a swap line to a foreign central bank, the dollars on the U.S. side of the trade are not pulled from a vault.

They are not taken from taxpayers.

They are typed into existence on a keyboard at the Federal Reserve in Washington.

One moment, they do not exist.

The next moment, they sit in an account at the central bank of the United Arab Emirates, ready to be spent.

No printing press. No physical paper. A keystroke.

That is how every swap line in modern history has been funded. The Fed conjures the dollars on demand, lends them out, and the leaning tower of all the dollars ever created grows by exactly that much.

Now here is the catch.

If the borrower pays those dollars back at maturity, the loan comes off the Fed’s books and the dollars that were typed into existence vanish from the system.

No net growth in the money supply.

The cycle closes cleanly.

To date, every swap line the Federal Reserve has ever extended has been paid back.

But that history is built on a very specific group of borrowers.

Until recently, the Fed’s swap-line network was restricted to a small list of qualified economies - the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank.

Large, mature, stable institutions, backed by countries that actually earn the dollars they borrow.

Then last year, the wall came down.

Argentina - a country with one of the most volatile currencies on the planet and nine sovereign defaults in two hundred years of history - was added to the list.

Last week, the United Arab Emirates joined them.

And on April 22, in testimony before U.S. senators on Capitol Hill, Treasury Secretary Scott Bessent confirmed that many Gulf and Asian allies have requested currency swap lines of their own - and defended the practice as a way to protect dollar liquidity in stress scenarios.

This matters for a reason most people will miss.

The longer the list of countries borrowing emergency dollars from the United States, the higher the probability that the terms of these loans will be adjusted to meet borrowers where they are.

In banking, they call this amend, extend, and pretend.

Amend the terms of the loan.

Extend the payment deadline.

Pretend everything is fine.

Loans get extended. New ones replace old ones. Maturity dates slide further into the future.

The created dollars stop vanishing. They start accumulating.

And that brings us to the question for this week’s essay.

Will Washington keep extending these band-aids indefinitely to mask the fact that every major holder of American debt suddenly needs its cash back at the same time?

That decision is now arriving.

WHY DOES THIS MATTER TODAY?

Here is the picture as I write to you this Sunday.

Hormuz is still closed. We are now over ten weeks in. Roughly twenty percent of the world’s oil has been off the market for the entire spring. Oil is over $100 a barrel and rising.

Inflation that everyone pretended was beaten last year is accelerating again. The latest core PCE print is the worst since 2022, and the impact of three months of expensive oil has not even fully shown up in the data yet.

The Fed’s job - its founding job, the one we just walked through - is to keep the financial plumbing working through exactly this kind of pressure. But the tools it has to do that job all point in the same direction.

Creating more dollars to absorb the bonds that nobody else wants. Lowering rates to keep the leveraged American economy from imploding. Lending dollars to foreign allies so they do not have to dump their Treasury holdings into the market.

Every one of those moves is dollar creation. Every one of them adds to the pile.

And every one of them works only as long as the dollar’s value holds.

In late March, three back-to-back U.S. Treasury auctions went badly. We talked about it in Two Wars. Foreign demand has continued to fade. The UAE has come hat in hand. Kuwait and Saudi Arabia are next in line.

Japan, with a quarter of a trillion dollars in Treasuries and an energy crisis of its own, is openly intervening to defend the yen at 160 to the dollar and threatening to short oil futures to manage its import bill - moves that would have been unthinkable two years ago.

The trap I described three weeks ago is not theoretical. It is binding. And it lands on one man’s desk.

His name is Kevin Warsh.

On Wednesday of this week, the United States Senate confirmed him by a vote of 54 to 45 as the next Chair of the Federal Reserve.

When Warsh walks into JP Morgan’s founding role - and it will be within a matter of weeks - he is going to inherit the most consequential job in global finance at the worst possible moment to inherit it.

He will have to walk the United States through one of three doors.

All three cost the country something it cannot afford to lose.

THREE DOORS

Because Hormuz remains closed, oil and inflation are climbing, foreign creditors are walking away from American debt, and the swap-line band-aids will eventually run out, Warsh now faces a decision he cannot avoid.

He must walk the United States through one of three doors.

Door One - Save the dollar. Stop creating new dollars and raise interest rates to defend the currency, at the cost of crushing the bond market and the economy underneath it.

Door Two - Save the bond market. Create enough new dollars to absorb the bonds that no one else wants, at the cost of debasing the currency.

Door Three - End the war in Iran on Iran’s terms. Let oil come down and the pressure on the system release, at the cost of American credibility.

You might be asking: only three? Raising taxes, defaulting, restructuring - every alternative is a sub-variant of one of the three above. Every move the Federal Reserve and the Treasury can make either creates dollars, destroys them, or removes the pressure, forcing the choice. There is no fourth door.

The million-dollar question, therefore, is: which one will Warsh choose? Let’s run through each one individually, and the answer will become clear.

DOOR ONE: SAVE THE DOLLAR (Cut spending, fight inflation)

The Game Plan: Stop creating new dollars. Raise interest rates. Defend the value of the currency.

Why?

Higher interest rates make US debt more attractive to foreign buyers. With more foreign buyers, the Federal Reserve does not have to step in and create new dollars to absorb the bonds nobody else wants. Fewer new dollars mean less inflation. Less inflation means the currency holds its value.

A currency’s value, like the value of anything else, is set by supply and demand. Scarce, expensive money holds its value better than abundant, cheap money.

That is the textbook play for any central bank facing a weakening currency and rising inflation.

It has only one drawback. It crushes the economy underneath it.

Remember from last week’s essay:

Treasury yields (interest rates) set the baseline for borrowing costs across the entire economy: Mortgages, car loans, corporate debt, and government refinancing. So when the government raises interest rates, in a debt-based economy, everyone gets hit.

This is exactly the playbook Fed Chairman Paul Volcker ran in 1980.

Volcker walked into the Federal Reserve in August 1979 with American inflation above eleven percent and climbing. The dollar had been losing value for a decade. Washington had been printing money to pay for the Vietnam War. The Middle East had delivered two oil shocks in six years. Americans were losing faith in their own currency.

Sound familiar?

Volcker decided the only way out was to defend the dollar and break the inflation spiral. He raised the Fed interest rate to twenty percent. He crushed inflation. The dollar strengthened against every major currency on Earth.

But the cost was brutal. Two back-to-back recessions. Unemployment hit nearly eleven percent.

Farms went bankrupt by the thousands. Homebuilders mailed Volcker pieces of two-by-four lumber inscribed with the names of construction workers they had laid off.

He received so many death threats that he was assigned a Secret Service protection detail.

Hard as it was, the economy could afford the cost.

American federal debt in 1980 was only 30% of GDP.

Today, it is 122%.

The annual interest bill on existing U.S. debt is already over a trillion dollars. If Warsh raises rates the way Volcker did, that interest bill does not double.

It quadruples.

And that is just the federal piece.

The American public in 2026 is far more sensitive to interest rates than it was in 1980. Today, housing is leveraged. Commercial real estate is leveraged. Private equity is leveraged. Corporate America has trillions of dollars of debt coming due over the next three years that has to be refinanced at whatever rate Warsh lets the system find on its own.

So, Door One, “saving the dollar” by making rates high and dollars scarce, triggers a fast death of the American economy.

I would guess he is probably not going to choose Door One.

Let’s have a look at Door Two.

DOOR TWO: SAVE THE BOND MARKET (Keep funding (printing) the government’s credit card)

The Game Plan: Create enough new dollars to absorb the bonds that no one else wants, keep the government funded, and the economy running.

This is the playbook the Fed has been running, in different costumes, since 2008. It is the playbook behind every round of quantitative easing. It is the playbook behind every swap line, every emergency facility, every dollar typed into a bank’s reserve account to soak up Treasuries no foreign creditor will buy at today’s prices.

It works. Rates don’t have to climb to the true market value because the US prints money and buys its own surplus debt. The interest bill stays manageable. The lights stay on.

But… every dollar created this way is one more layer on the leaning tower.

The supply of dollars goes up → and the value of each dollar goes down - at the grocery store, at the gas pump, in the mortgage payment, in the price of a child’s school year.

Each round of printing pushes another layer of inflation through the American economy. Wages do not keep up. Savings shrink. Fixed-income retirees watch their purchasing power evaporate. The Americans who already own real assets - stocks, homes, gold - get richer in nominal terms. The Americans who do not get poorer in real terms.

Door Two “saves the bond market” by killing the currency.

If Door One is a fast death, Door Two is a slow death. A problem for another day. A problem that can be disguised as something else - and this is always a politician’s first choice.

And because most people do not understand how inflation actually works, they do not know who to blame for it. They feel the price of groceries climbing. They feel the rent going up. They feel their paycheck shrinking. But they cannot trace the cause back to a decision made at the Federal Reserve months or years earlier. So the politicians blame corporate greed. They blame foreign countries. They blame the previous administration. The mob always finds a scapegoat. The central bank is almost never on the list.

I think we know which door Chairman Warsh will choose - but just for fun, let’s look at the dark horse, Door Three.

DOOR THREE: END THE WAR WITH IRAN - ON IRAN’S TERMS

The Game Plan: Walk away from the war. Let Hormuz reopen. Let oil come down. Let the pressure on the system release. This is the only way we avoid the NACHO (Not A Chance Hormuz Opens) trade at this point.

Now, this is obviously not the decision of the Federal Reserve, but it’s worth covering nonetheless, because it is the door that could cause the underlying cause of the pressure to go away.

If oil drops back to sixty dollars, inflation will (eventually) cool on its own. The Treasury auctions might normalize.

But the price of Door Three is not paid at the Fed - It is paid in American credibility.

Although there would be marketing spin at home to convince the American people that it was “mission accomplished”, the rest of the world would see what really happened - The United States started a war and was forced to retreat.

Every adversary the United States has - Beijing watching Taiwan, Moscow watching NATO, every smaller power watching whether American security commitments are worth the paper they are printed on - updates its estimate of what Washington can actually accomplish.

The dollar’s premium as the world’s reserve currency rests, in the end, on a single belief:

The United States can project force globally and back its commitments.

Take that belief away, and foreigners hold fewer dollars, fewer Treasuries, and demand higher returns for the ones they still hold.

Door Three saves the dollar in the technical sense and destroys the foundation it stands on.

THE FAST DEATH AND THE SLOW DEATH

So three doors.

One of them - Door One (the fast death) - breaks the bond market and the economy in weeks.

Two of them - Doors Two and Three (the slow deaths) - weaken the dollar over years.

Here is the rule I want you to remember, because it is the most useful single piece of knowledge I can give you for the decade in front of us:

Every central bank in history, when forced to choose between a fast death and a slow death, chooses the slow death.

Every time.

Without exception.

A failed Treasury market is a fast death. The financial system stops working in days. The federal government cannot fund itself. Banks fail. Pensions seize up. Markets reprice everything at once.

A weakening currency is a slow death. Inflation. Erosion. Foreigners gradually backing away. Asset prices climbing in nominal terms while purchasing power drains away in the background.

It plays out over years, not days.

It hurts everyone, but it does not happen all at once.

When JP Morgan sat in his library in 1907, he made the same choice. He saved the institutions whose failure would have crashed the system next week, and he let weaker institutions fail in slow motion over the months that followed.

That is what triage is.

You treat the fast threat first and accept the slow loss as the price.

The Federal Reserve has run that playbook for over a century.

It will run it again.

Warsh is going to open Door Two.

Why?

Because of the desk he will be sitting at. It is the same desk where Jerome Powell sat through 2020, where Ben Bernanke sat through 2008, and where Alan Greenspan sat through 1998.

Every one of them faced a version of the same choice. Every one of them made the same call.

They saved the patient bleeding out in front of them and pushed off the patient with the slow disease.

The dollar is the patient with the slow disease.

Kevin Warsh may dress it up. He may call it something else. He may stretch out the timing. But when forced to choose between a failed Treasury market and an unfunded government, or a dollar that loses thirty percent of its purchasing power over five years, he will save the Treasury market.

The question is not which door he opens. We already know.

The question is what you do with the knowledge.

WHAT’S THE POINT, JAY?

If you understand this - really understand it, with the mechanics under your fingers and the history at your back - you stop being surprised by what is coming.

You stop trying to time the market. You stop arguing about whether Hormuz will reopen this month or next.

You position yourself for the slow death.

Hard assets, commodities, gold, energy - real things. Productive assets that throw off cash. Industries that do not depend on a strong dollar to make their numbers.

The boring stuff I have been writing about.

J.P. Morgan saved the United States in 1907 with real money - gold, deposits, hard wealth he and his peers had earned over lifetimes.

He could not have imagined a system in which dollars were typed into existence on keyboards to plug the holes in a bond market.

He would not have understood it. He certainly would not have trusted it.

A hundred and nineteen years later, that is the system we have.

And the man at the top of it is about to make the only choice central banks ever make.

The question is not what he will do.

The question is whether you saw it coming.

Honest question - what am I missing? Let me know in the comments.

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That’s it for today,

Jay Martin

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