Thread by @maxjanderson

For anyone who still believes the narrative that this inflation was an accident

Or some kind of "policy error"

Here's a brief reminder about how sovereign debt bubbles work 👇

First, a yucky situation:

🚨 Debt/GDP > 100%

If your economy is capable of growing ~2% per year, and your debt becomes bigger than your GDP

Then you are heading into a runaway death spiral ☠️🌀

*Unless* you can somehow keep the growth rate of your debt below 2%...

Which means bond yields PLUS deficit % below 2%

Not an easy thing to do

Especially if you like your deficit spending, as most governments do

You are in quite a nasty pickle

You have 3 options:

1️⃣ Drastically cut spending + simultaneously raise taxes

And pray to god the resulting surplus can somehow erode the numerator of Debt/GDP...

faster than those austerity measures attack the denominator of Debt/GDP

Not fun, nor good for getting re-elected

2️⃣ Go bankrupt

3️⃣ Print sh*tloads of $ anytime there's a crisis, and gradually inflate the debt away over the course of a decade

Hmm.... yeah

We like option #3 😁

But before you get too far ahead of yourself, you've got to go about option #3 the right way

You can't just start printing money out of nowhere. That might raise some questions

Questions you'd really rather not have to answer

What you need, is a ✨crisis✨

Any old crisis should do the trick

War, pandemic, natural disaster, etc. You get my drift

If you're lucky, you can just wait around until a big beautiful crisis lands on your doorstep

If you're unlucky, and no crisis seems to be showing up on its own, you'll have to create one

Either way, once you have your crisis, here's the secret:

Big spikes of inflation 🔴
... above prevailing interest rates 🟢
... drive big drawdowns in Debt/GDP 🔵

You can use the 1940s & 50s as a textbook example 👇

Coming out of WWII, we found ourselves in a similarly nasty debt-pickle, with ~120% debt/GDP

But we ran the playbook, and it worked beautifully

2-3 big spikes of inflation, and debt/GDP quickly came back down to a healthy ~50%

It's remarkably simple

Just generate some inflation, allow it to run hot for a year or two, and then hold bond yields below CPI

Repeat a few times (preferably spaced out inconspicuously over a decade), until Debt/GDP comes back down to target, something manageable like ~50%

Voilà 🪄

Your horrifying, potentially empire-toppling, civilization-ending clusterf*ck of a debt bubble miraculously disappears 🥳

❤️ or RT 👇

How financial markets work during sovereign debt bubble unwinds

Why liquidity becomes the #1 driver

And how to set yourself up to benefit from it: