I learned something significant today. The currency swap line to the UAE is likely the first in a series, and the idea of a prolonged war or permanently altered ability for oil revenue to repay the currency swap could trigger unknown results. I'll be following this to gain insights as this evolves.
Honestly, the details of economics make my head hurt. This is a great explanation, and I thank you for that. But, simple as I am and anchored in the hard sciences, the economic system we have seems like it flies in the face of the constraints of the physical world. It will have to change.
"...the economic system we have seems like it flies in the face of the constraints of the physical world".
Exactly. And that, together with the very important fact that most people either do not understand it or could not be bothered to think about it, is why a few people get very rich and others lose everything.
The catch is that, once money is acquired, there is a ratchet effect. The money can be spent to buy durable assets - especially land. Or gold.
The economic process can't go on indefinitely. So the "smart money" (whom I detest) time their buying and selling, extract cash and assets, then convert them into real permanent wealth.
Although of course no wealth is permanent. It can always be stolen or robbed. And the long run isn't really so long:
"And he said unto them, Take heed, and beware of covetousness: for a man’s life consisteth not in the abundance of the things which he possesseth. And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully: and he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits? And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods. And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry. But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided? So is he that layeth up treasure for himself, and is not rich toward God".
Yes, land is the foundation of our survival. But gold? Nah. Even money in general. Because it’s only valuable if there’s something to buy with it. The only permanent wealth lies in knowledge and skills, and cooperation. People who only have money are doomed.
Yes. Because this time, we’re in danger of collapsing the ecosystem we have always depended on. You can’t eat gold, or money. And when you’re more focused on growing food than on making jewelry, gold is useless. We didn’t even have money as a medium of exchange until something like 500 BCE. We survived for millennia without it, and we may have to do so again. You are trapped in the technological paradigm, and can’t see how fragile it is.
That’s because it’s a ponzi scheme dressed as a pseudoscience. So capitalism and the banking system are not tethered to science, democratic governance, social well being or environmental sustainability
All sciences, physical, social and economical are underpinned by the theory of complexity.
Which among other things say that things always spiral. Economies goes boom and bust, mountains grow and get subsumed in plate tectonics, stars from from stardust, only to collapse, explode and give rise to new first for new stars.
Well written. Good job of stooping to explain in simple terms to those less knowledgable than yourself on financial instruments. Question: If you were made King of the World tomorrow and could rule by edict, A) How would you get out of the current predicament with the least amount of pain, and B) How would you reform or replace this system to end the vulnerability that it creates for the US?
Fun question! But my answer might disappoint you...
Reserve currencies rotate through history with cyclic regularity. The Portuguese, the Spanish, the Dutch, the British, and now the Americans - all in just the last 600 years.
Each of them looked permanent at its peak. None of them was. The cycle runs roughly 80 to 110 years, and each time, the ruling empire convinces itself it has discovered some unique exception to a pattern that has held for millennia.
So no king can "fix it" - because what is happening isn't a problem to be solved, it is a cycle to be recognized.
Our job is to figure out where we are in the cycle and how to position accordingly.
"The cycle runs roughly 80 to 110 years, and each time, the ruling empire convinces itself it has discovered some unique exception to a pattern that has held for millennia".
Perhaps nobody cares for the first 50-80 years, because - as Keynes observed - in the long run we are all dead.
And after that there may not be anything that can be done.
I have gradually been realising how many aspects of our glorious industrial civilisation are essentially Ponzi schemes made possible by the shortness of human life.
Thank you Jay for acknowledging that this is part of a cycle! I've felt for years now that it was time for the U.S. to take a step down. It's been fascinating watching my country's demise. This is just part of the process. Being grateful for all that I have and staying grounded is the only way to fly for me:) Oh and thanks for adding another piece to the puzzle of how we're going down, and in a big way. I had an a-ha moment!
Is it really "cyclic regularity"? It sounds more like just a few hundred years of maritime colonialism, in which different powers pursued dominance and engaged in constant violence. You aren't looking for other examples that would be instructive, such as debt jubilees of yore.
Fortunately for most of us, the cyclic regularity sequence that you refer to seems to be coming to an end, and we are embarking on a multipolar world. Not sure if there are any more maritime colonial powers that can or want to swoop in to take on reserve currency status.
So the question still stands. If you have a magic wand, what spell are you going to cast to shift the world to a better position with the least amount of pain? What are you going to replace this system with? When you say "each time, the ruling empire convinces itself it has discovered some unique exception to a pattern" what you mean is that "each time, the ruling empire hopes it has figured out a way to extend its dominance, but it can't." That doesn't mean a better system isn't possible. Just that this system can't be extended as is.
It's time for a fundamental change to the system - debt jubilee, multiple currencies, local and debtor primacy (instead of creditor primacy and unsustainable compound interest). Time for money to stop being considered a store of value (asset) and simply be a unit of account (utility). With periodic write-downs. That’s the cyclic pattern regularity we’re looking for. But then, that wouldn't result in advantageous positions for those who like to play financial games.
Also what happens if this doesn't stop and keeps on happening? US avoids the rush sell of treasuries but has these "loans" out, what does that mean for the US economy, our assets, Bank accounts, the dollar?
Significant dollar devaluation. It would probably be the second worst outcome behind breaking the petrodollar. If future oil contracts start getting priced in yuan, that will remove huge amounts of liquidity from U.S. equities and make current deficit spending unsustainable.
history tells us that the answer to your question is inflation. until there comes a new regime with new currency and because most people do not understand macro economics, will think they are saved. And they are, as long as the then current regime does not destroy the new currency or is not taken over by an adversary with their own currency.
Yes, but not inflationary as long as they are paid back. Think of it as short-term credit extended and then withdrawn. If they become permanent or are defaulted on, then yes, inflationary.
Absolutely, but we create between $200M and $4B out of thin air every single day. Everyone talks about inflation but it was dollar devaluation that really hurt Americans last year.
Super interesting Jay and correct. It caused me to think about this and here is another impact to consider.
What we have happening with the oil draw down, and inventories of other goods, is physical assets (commodities), being converted to financial assets (currency, mainly USD, and swap-lines, T-bills etc.). This is increasing the demand for dollars to buy those commodities, while increasing financial assets and liquidity conditions as the storehouse for those dollars, instead of tanks full of oil.
Is this impact also showing up in the big rally in S&P etc. as financial conditions ease? Will this reverse when oil supply resumes? What will be the dollar demand and swap line repayment impacts aa oil markets starting to normalize?
So if the reports of the Leader of the Revolution (who, unlike Trump has the intelligence and education AND military experience to not just understand a coherent strategy, but craft one, and therefore the ability to modify it to take advantage of unforseen developments) has given the IRGC commanders (with whom he has the sort of deep mutual trust and respect relationship that develops between those who've fought on the front lines of the same war) new instructions, there could be a major development in the offing.
What if the Iranian government proposes a peace deal that Trump can spin as total victory:
Hormuz reopened, the 'highly enriched material' removed from the equation (whether it remains in Iran under the guard of Pakistan’s military, or moved to Pakistan be remains officially Iran's property, having it controlled by a nuclear weapon power can be spun as no longer nuclear weapons material)
But EXCLUDES ISRAEL FROM THE PEACE DEAL AND THE CEASEFIRE
Remember that while the CHRISTIAN ZIANIST influence inside the American and similar GOVERNMENTS, the public opinion polls are showing the deep shift that turned 'Segregation Forever' from an appeal to the center to a declaration of extremism in a single election cycle.
Like it’s done you any good. My goodness. You are the problem that is destroying this country. Your lack of knowledge for sight and this lack of ability to think. Think for yourself professor. Or someone will think for you without thinking of you. Or this is an exactly what you perpetuate. None thinking.
Very interesting analysis. I couldn't agree more with the idea that these loans are a bailout of the US. The US is too big to fail, and all countries know that. These loans are similar to what private credit is doing with their PIK loans. "It’s all good, nothing to see here".
A couple of points:
1. During a crisis, the US has always been the safe haven. That will not change in this crisis, so demand for US treasuries should remain buoyant should it not? That would keep interest rates in check.
2. The US will print the money to lend, but because it will be mostly spent outside of the US, I am thinking that the inflationary effects will be small for the US itself.
3. These loans are still a win for the US because they get income from the loans. I doubt the US will bailout countries that are not backed by assets. These will not be unsecured loans, unless it materially affects the US directly.
I don't think we are at crisis point yet. For that to occur, there will need to be a massive increase in rates and a run. The US government isn't usually the source of a crisis, it starts in some areas of the economy outside of their control. This engineered bailout if it occurs on mass will be yet another way of kicking the can down the road and deferring the consequences. I would say, that most likely scenario is a recession, which will require stimulus, on top of the loans the US is making. Now, that combination, is what will make a recession into a severe depression.
I think recession is a valid scenario. No one gains selling Treasuries in large amounts. It’s a lose-lose and everyone knows it. Appreciate you offering this up.
The problem with dominos is they can fall in so many different ways and directions.
Even if you get the first domino right how people react from there is difficult to predict because human behavior has many nuances and differing incentives that can weigh and split in different directions.
Domino's can fall lots of ways, and history says that even the experts don't see it coming. Best we can do is probe the weak points. Private credit is an interesting one. I was reading that just about every pension fund in the world is heavily exposed to private credit (as in invested in the funds that lend to private equity). Supposedly not the biggest player, but if a pension fund has 25% of its fund invested in a 'dog' of a fund that is not marking the adjusted value of their fund because they don't want to reveal the true state of the books, and they default, that is not a good scenario. Also, non-banks are heavily exposed to this sector. A cursory look at those private credit funds that are listed shows a massive bear market underway. I suspect that inflation and interest rates are going to be the catalyst with non-bank defaults beginning the crisis if dominos. The usual response from the fed is to QE, but my question is how much more money can they print if interest rates rise to curb inflation? The inability to easily borrow more money from buyers of US debt, combined with excessive money printing, and bad economic news may be a catalyst as well. If you look at the 10 year bond, it is on the rise, whereas the 2 year is not. That is a bear steepening, which is very bad news because it implies risk premium if the future is higher. This combined with the fact that when the 10yr/2yr spread is inverted, which it was in 2022/2023, usually results in a recession, and we haven't seen that yet, makes me nervous as an investor. I'm watching for the Semiconductor bubble to burst, followed by manufacturers in that space and then AI, then broader tech. Precious metals are looking good!
Really good thoughts because this war isn’t happening in a vacuum. There are all sorts of U.S. economic worries that include what you list and shaky consumer confidence.
The pension fund scenario you pointed out has been a worry of mine for some time now. I think you pinpointed some really great detail there I wasn’t seeing not to mention non banks which is a good catch I wasn’t seeing.
The bear steepening as you call it has been going on and I am astounded that we haven’t seen that hit yet. The last thing I read on this threw a dart and said recession probabilities looked prime by the end of May. We will see.
I think the markets are largely under the control of institutional investors and the billionaires too much and they prop up those markets artificially. That said, if a black swan event hits at the wrong time, or the current risks pointed out in this article trigger, then the large investors won’t be able to hold things up.
Really nice work! I learned some things on top of the commercial loans and commercial real estate I have been worried about.
Here is little tidbit you might find interesting. I haven’t researched it. Just landed in my feed, but it speaks to other aspects of this oil issue that are beyond financial instruments. So many dominoes.
Yes that is interesting. I suspect that oil issue is a two tiered problem. Those countries that can afford to buy it will, and those who can't won't be able to. Australia, where I am from has piss all reserves, but we can afford to buy at a high price, and we have been. We also supply a lot of natural gas to the world, so we are using it as leverage to ensure we get access to diesel and petrol. Some won't be so lucky. Of course, the high price will flow through to prices soon enough. Our inflation rate is already heading to 5%.
So, is it fair to say that had the U.S. (Trump) not started this war and closed the strait and is keeping it closed for no good reason the UAE, Kuwait and others would not have this cash flow problem?
One thing that I immediately thought of is that if they sell those bonds, who is the buyer? China!!! They will print as many Yuan as will be needed to gain control of the US. I think a worse problem for Trump would be for China to loan to all of these countries thereby gaining increased control of the oil supply. Mr Trump went to war, ok, but his short term thinking was and seems to always be he has little to no concept of long term impacts, and spends 0 time in planning. If he was going to war, hit fast, hit hard, weather the international storm and open the strait. He has allowed this to dither o,n to the point it has impacted not only all of the neighboring community but his own economy. Xi is sitting back having a chuckle.
I don't think that will work. These countries will need US dollars to spend, not Yuan. Nobody uses Yuan to transact, not even China. Everybody uses US dollars in global transactions. Even China holds a truckload in their reserves.
I just did a search and over 40 countries now trade in Yuan and more coming. Are you American? Have a search in AI alone and see what is going on out there
No. Not American - what has that got to do with it anyway. Dude. It is not even close. Global Trade: Yuan 8% of global trade v US 50%. Payments: Yuan 3% v US 65%. Share of Central Bank Reserves: Yuan 2% v USD 57%. FX Transactions: USD 90%. The main countries trading in Yuan are the QUAD. Trust me - it is nothing to be concerned about. The Yuan is attached to an authoritarian regime, which is known for coercion, has weak capital markets, capital flight controls because money is exiting. No one wants to make the Yuan the dominant currency. Given that China is the second biggest economy in tje world, and their presence of Yuan is extremely low, does not paint a rosy picture.
The issue is the increasing significance of the Yuan in international trade. The use of the Yuan increased from 14% in 2019 to 30% in 2025.
I even have to look at my own Country (Canada). As of January 1, 2026 the Yuan is now accepted as a trade settlement currency between the Bank of Canada and the People's Bank of China. I agree, there is no fear of it becoming the World's reserve in the near future but is increasingly become a major player and has surpassed the Euro now. It is the sanctions and weaponization of the USD that is motivating countries like Saudi, Brazil and Canada to move away from the USD when trading with China. It bothers me but, nothing I can do about it except to recognize the trend and facts.
Not sure where you are getting your figures from, but they are way off. Yuan is used in 3% of global trade, and 6% of global finance. It has increased, and no different to other currency being used for trade. I think what you meant to say was that the Yuan increased in usage by 30% over its baseline....not it is used in 30 percent of transactions. That is just not the case.
The way governments play with money is sickening. The losers in all these games have always been the common person just working to make ends meet. These money changers are exactly the kind of people whose tables were overturned by Jesus. This has got to stop.
Wow! Great explanation. First time I’ve understood what’s the importance of 10-year Treasuries.
Yeah, same here.
Likewise
Very helpful explanation. And alarming. We know that we can neither afford higher rates, nor ultimately avoid them. Which means dollar debasement.
I learned something significant today. The currency swap line to the UAE is likely the first in a series, and the idea of a prolonged war or permanently altered ability for oil revenue to repay the currency swap could trigger unknown results. I'll be following this to gain insights as this evolves.
🙌
Read my post.
Honestly, the details of economics make my head hurt. This is a great explanation, and I thank you for that. But, simple as I am and anchored in the hard sciences, the economic system we have seems like it flies in the face of the constraints of the physical world. It will have to change.
"...the economic system we have seems like it flies in the face of the constraints of the physical world".
Exactly. And that, together with the very important fact that most people either do not understand it or could not be bothered to think about it, is why a few people get very rich and others lose everything.
"Bullshit baffles brains".
But only temporarily. They can’t fool physics, chemistry and biology.
The catch is that, once money is acquired, there is a ratchet effect. The money can be spent to buy durable assets - especially land. Or gold.
The economic process can't go on indefinitely. So the "smart money" (whom I detest) time their buying and selling, extract cash and assets, then convert them into real permanent wealth.
Although of course no wealth is permanent. It can always be stolen or robbed. And the long run isn't really so long:
"And he said unto them, Take heed, and beware of covetousness: for a man’s life consisteth not in the abundance of the things which he possesseth. And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully: and he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits? And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods. And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry. But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided? So is he that layeth up treasure for himself, and is not rich toward God".
- Luke 12:15-21 (Authorised Version)
Yes, land is the foundation of our survival. But gold? Nah. Even money in general. Because it’s only valuable if there’s something to buy with it. The only permanent wealth lies in knowledge and skills, and cooperation. People who only have money are doomed.
Gold has been used as money in some form for over 2,500 years. But this time is different???
Yes. Because this time, we’re in danger of collapsing the ecosystem we have always depended on. You can’t eat gold, or money. And when you’re more focused on growing food than on making jewelry, gold is useless. We didn’t even have money as a medium of exchange until something like 500 BCE. We survived for millennia without it, and we may have to do so again. You are trapped in the technological paradigm, and can’t see how fragile it is.
That’s because it’s a ponzi scheme dressed as a pseudoscience. So capitalism and the banking system are not tethered to science, democratic governance, social well being or environmental sustainability
All sciences, physical, social and economical are underpinned by the theory of complexity.
Which among other things say that things always spiral. Economies goes boom and bust, mountains grow and get subsumed in plate tectonics, stars from from stardust, only to collapse, explode and give rise to new first for new stars.
Well written. Good job of stooping to explain in simple terms to those less knowledgable than yourself on financial instruments. Question: If you were made King of the World tomorrow and could rule by edict, A) How would you get out of the current predicament with the least amount of pain, and B) How would you reform or replace this system to end the vulnerability that it creates for the US?
Fun question! But my answer might disappoint you...
Reserve currencies rotate through history with cyclic regularity. The Portuguese, the Spanish, the Dutch, the British, and now the Americans - all in just the last 600 years.
Each of them looked permanent at its peak. None of them was. The cycle runs roughly 80 to 110 years, and each time, the ruling empire convinces itself it has discovered some unique exception to a pattern that has held for millennia.
So no king can "fix it" - because what is happening isn't a problem to be solved, it is a cycle to be recognized.
Our job is to figure out where we are in the cycle and how to position accordingly.
"The cycle runs roughly 80 to 110 years, and each time, the ruling empire convinces itself it has discovered some unique exception to a pattern that has held for millennia".
Perhaps nobody cares for the first 50-80 years, because - as Keynes observed - in the long run we are all dead.
And after that there may not be anything that can be done.
I have gradually been realising how many aspects of our glorious industrial civilisation are essentially Ponzi schemes made possible by the shortness of human life.
"Apres moi le deluge".
Thank you Jay for acknowledging that this is part of a cycle! I've felt for years now that it was time for the U.S. to take a step down. It's been fascinating watching my country's demise. This is just part of the process. Being grateful for all that I have and staying grounded is the only way to fly for me:) Oh and thanks for adding another piece to the puzzle of how we're going down, and in a big way. I had an a-ha moment!
Is it really "cyclic regularity"? It sounds more like just a few hundred years of maritime colonialism, in which different powers pursued dominance and engaged in constant violence. You aren't looking for other examples that would be instructive, such as debt jubilees of yore.
Fortunately for most of us, the cyclic regularity sequence that you refer to seems to be coming to an end, and we are embarking on a multipolar world. Not sure if there are any more maritime colonial powers that can or want to swoop in to take on reserve currency status.
So the question still stands. If you have a magic wand, what spell are you going to cast to shift the world to a better position with the least amount of pain? What are you going to replace this system with? When you say "each time, the ruling empire convinces itself it has discovered some unique exception to a pattern" what you mean is that "each time, the ruling empire hopes it has figured out a way to extend its dominance, but it can't." That doesn't mean a better system isn't possible. Just that this system can't be extended as is.
It's time for a fundamental change to the system - debt jubilee, multiple currencies, local and debtor primacy (instead of creditor primacy and unsustainable compound interest). Time for money to stop being considered a store of value (asset) and simply be a unit of account (utility). With periodic write-downs. That’s the cyclic pattern regularity we’re looking for. But then, that wouldn't result in advantageous positions for those who like to play financial games.
Also what happens if this doesn't stop and keeps on happening? US avoids the rush sell of treasuries but has these "loans" out, what does that mean for the US economy, our assets, Bank accounts, the dollar?
Significant dollar devaluation. It would probably be the second worst outcome behind breaking the petrodollar. If future oil contracts start getting priced in yuan, that will remove huge amounts of liquidity from U.S. equities and make current deficit spending unsustainable.
history tells us that the answer to your question is inflation. until there comes a new regime with new currency and because most people do not understand macro economics, will think they are saved. And they are, as long as the then current regime does not destroy the new currency or is not taken over by an adversary with their own currency.
Where do the swap funds that the US extends to UAE come from? Is it printed out of thin air and therefore inflationary?
Yes, but not inflationary as long as they are paid back. Think of it as short-term credit extended and then withdrawn. If they become permanent or are defaulted on, then yes, inflationary.
The swap line used was the Treasury’s Exchange Stabilization Fund (ESF), rather than a traditional Federal Reserve swap line.
it would seem that the US administration made this decision from a political perspective and did not include the Federal Reserve in its calculations.
Got it, thanks...
Absolutely, but we create between $200M and $4B out of thin air every single day. Everyone talks about inflation but it was dollar devaluation that really hurt Americans last year.
Are dollar depreciation and inflation not linked at the hip?
Yes. That’s a good way to describe it. They move independently but over time tend to push and pull each other.
Super interesting Jay and correct. It caused me to think about this and here is another impact to consider.
What we have happening with the oil draw down, and inventories of other goods, is physical assets (commodities), being converted to financial assets (currency, mainly USD, and swap-lines, T-bills etc.). This is increasing the demand for dollars to buy those commodities, while increasing financial assets and liquidity conditions as the storehouse for those dollars, instead of tanks full of oil.
Is this impact also showing up in the big rally in S&P etc. as financial conditions ease? Will this reverse when oil supply resumes? What will be the dollar demand and swap line repayment impacts aa oil markets starting to normalize?
So if the reports of the Leader of the Revolution (who, unlike Trump has the intelligence and education AND military experience to not just understand a coherent strategy, but craft one, and therefore the ability to modify it to take advantage of unforseen developments) has given the IRGC commanders (with whom he has the sort of deep mutual trust and respect relationship that develops between those who've fought on the front lines of the same war) new instructions, there could be a major development in the offing.
What if the Iranian government proposes a peace deal that Trump can spin as total victory:
Hormuz reopened, the 'highly enriched material' removed from the equation (whether it remains in Iran under the guard of Pakistan’s military, or moved to Pakistan be remains officially Iran's property, having it controlled by a nuclear weapon power can be spun as no longer nuclear weapons material)
But EXCLUDES ISRAEL FROM THE PEACE DEAL AND THE CEASEFIRE
Remember that while the CHRISTIAN ZIANIST influence inside the American and similar GOVERNMENTS, the public opinion polls are showing the deep shift that turned 'Segregation Forever' from an appeal to the center to a declaration of extremism in a single election cycle.
How will Trump react?
How will MAGA react?
How will Democrats react?
How will other governments react?
And how will the MARKETS react
You if you think that
Like it’s done you any good. My goodness. You are the problem that is destroying this country. Your lack of knowledge for sight and this lack of ability to think. Think for yourself professor. Or someone will think for you without thinking of you. Or this is an exactly what you perpetuate. None thinking.
Helpful article. Thank you. This is also very alarming situation.
This seems like a short term dollar strengthening policy of desperation.
Very interesting analysis. I couldn't agree more with the idea that these loans are a bailout of the US. The US is too big to fail, and all countries know that. These loans are similar to what private credit is doing with their PIK loans. "It’s all good, nothing to see here".
A couple of points:
1. During a crisis, the US has always been the safe haven. That will not change in this crisis, so demand for US treasuries should remain buoyant should it not? That would keep interest rates in check.
2. The US will print the money to lend, but because it will be mostly spent outside of the US, I am thinking that the inflationary effects will be small for the US itself.
3. These loans are still a win for the US because they get income from the loans. I doubt the US will bailout countries that are not backed by assets. These will not be unsecured loans, unless it materially affects the US directly.
I don't think we are at crisis point yet. For that to occur, there will need to be a massive increase in rates and a run. The US government isn't usually the source of a crisis, it starts in some areas of the economy outside of their control. This engineered bailout if it occurs on mass will be yet another way of kicking the can down the road and deferring the consequences. I would say, that most likely scenario is a recession, which will require stimulus, on top of the loans the US is making. Now, that combination, is what will make a recession into a severe depression.
I think recession is a valid scenario. No one gains selling Treasuries in large amounts. It’s a lose-lose and everyone knows it. Appreciate you offering this up.
The problem with dominos is they can fall in so many different ways and directions.
Even if you get the first domino right how people react from there is difficult to predict because human behavior has many nuances and differing incentives that can weigh and split in different directions.
Domino's can fall lots of ways, and history says that even the experts don't see it coming. Best we can do is probe the weak points. Private credit is an interesting one. I was reading that just about every pension fund in the world is heavily exposed to private credit (as in invested in the funds that lend to private equity). Supposedly not the biggest player, but if a pension fund has 25% of its fund invested in a 'dog' of a fund that is not marking the adjusted value of their fund because they don't want to reveal the true state of the books, and they default, that is not a good scenario. Also, non-banks are heavily exposed to this sector. A cursory look at those private credit funds that are listed shows a massive bear market underway. I suspect that inflation and interest rates are going to be the catalyst with non-bank defaults beginning the crisis if dominos. The usual response from the fed is to QE, but my question is how much more money can they print if interest rates rise to curb inflation? The inability to easily borrow more money from buyers of US debt, combined with excessive money printing, and bad economic news may be a catalyst as well. If you look at the 10 year bond, it is on the rise, whereas the 2 year is not. That is a bear steepening, which is very bad news because it implies risk premium if the future is higher. This combined with the fact that when the 10yr/2yr spread is inverted, which it was in 2022/2023, usually results in a recession, and we haven't seen that yet, makes me nervous as an investor. I'm watching for the Semiconductor bubble to burst, followed by manufacturers in that space and then AI, then broader tech. Precious metals are looking good!
Really good thoughts because this war isn’t happening in a vacuum. There are all sorts of U.S. economic worries that include what you list and shaky consumer confidence.
The pension fund scenario you pointed out has been a worry of mine for some time now. I think you pinpointed some really great detail there I wasn’t seeing not to mention non banks which is a good catch I wasn’t seeing.
The bear steepening as you call it has been going on and I am astounded that we haven’t seen that hit yet. The last thing I read on this threw a dart and said recession probabilities looked prime by the end of May. We will see.
I think the markets are largely under the control of institutional investors and the billionaires too much and they prop up those markets artificially. That said, if a black swan event hits at the wrong time, or the current risks pointed out in this article trigger, then the large investors won’t be able to hold things up.
Really nice work! I learned some things on top of the commercial loans and commercial real estate I have been worried about.
Here is little tidbit you might find interesting. I haven’t researched it. Just landed in my feed, but it speaks to other aspects of this oil issue that are beyond financial instruments. So many dominoes.
https://substack.com/@collapse2050/note/c-257045086?r=4lqjfm&utm_medium=ios&utm_source=notes-share-action
Yes that is interesting. I suspect that oil issue is a two tiered problem. Those countries that can afford to buy it will, and those who can't won't be able to. Australia, where I am from has piss all reserves, but we can afford to buy at a high price, and we have been. We also supply a lot of natural gas to the world, so we are using it as leverage to ensure we get access to diesel and petrol. Some won't be so lucky. Of course, the high price will flow through to prices soon enough. Our inflation rate is already heading to 5%.
Having read this - the book 'Iceland's secrets' comes to mind.
So, is it fair to say that had the U.S. (Trump) not started this war and closed the strait and is keeping it closed for no good reason the UAE, Kuwait and others would not have this cash flow problem?
One thing that I immediately thought of is that if they sell those bonds, who is the buyer? China!!! They will print as many Yuan as will be needed to gain control of the US. I think a worse problem for Trump would be for China to loan to all of these countries thereby gaining increased control of the oil supply. Mr Trump went to war, ok, but his short term thinking was and seems to always be he has little to no concept of long term impacts, and spends 0 time in planning. If he was going to war, hit fast, hit hard, weather the international storm and open the strait. He has allowed this to dither o,n to the point it has impacted not only all of the neighboring community but his own economy. Xi is sitting back having a chuckle.
I don't think that will work. These countries will need US dollars to spend, not Yuan. Nobody uses Yuan to transact, not even China. Everybody uses US dollars in global transactions. Even China holds a truckload in their reserves.
I just did a search and over 40 countries now trade in Yuan and more coming. Are you American? Have a search in AI alone and see what is going on out there
No. Not American - what has that got to do with it anyway. Dude. It is not even close. Global Trade: Yuan 8% of global trade v US 50%. Payments: Yuan 3% v US 65%. Share of Central Bank Reserves: Yuan 2% v USD 57%. FX Transactions: USD 90%. The main countries trading in Yuan are the QUAD. Trust me - it is nothing to be concerned about. The Yuan is attached to an authoritarian regime, which is known for coercion, has weak capital markets, capital flight controls because money is exiting. No one wants to make the Yuan the dominant currency. Given that China is the second biggest economy in tje world, and their presence of Yuan is extremely low, does not paint a rosy picture.
The issue is the increasing significance of the Yuan in international trade. The use of the Yuan increased from 14% in 2019 to 30% in 2025.
I even have to look at my own Country (Canada). As of January 1, 2026 the Yuan is now accepted as a trade settlement currency between the Bank of Canada and the People's Bank of China. I agree, there is no fear of it becoming the World's reserve in the near future but is increasingly become a major player and has surpassed the Euro now. It is the sanctions and weaponization of the USD that is motivating countries like Saudi, Brazil and Canada to move away from the USD when trading with China. It bothers me but, nothing I can do about it except to recognize the trend and facts.
Not sure where you are getting your figures from, but they are way off. Yuan is used in 3% of global trade, and 6% of global finance. It has increased, and no different to other currency being used for trade. I think what you meant to say was that the Yuan increased in usage by 30% over its baseline....not it is used in 30 percent of transactions. That is just not the case.
If you are interested: https://www.bbvaresearch.com/wp-content/uploads/2025/02/Riding-the-waves-Stocktaking-RMB-Internationalization-Development_edi.pdf?utm_source=copilot.com
You seem to have a rather narrow, typically US, view of the world. And you said "Dude". 8-)
You might want to check that out as several countries trade and sell oil in Yuan.
The way governments play with money is sickening. The losers in all these games have always been the common person just working to make ends meet. These money changers are exactly the kind of people whose tables were overturned by Jesus. This has got to stop.