(1/7)
Liquidity Needs a Story
One of the hardest truths in financial history is that governments rarely admit when the system is breaking. Instead, they wait for a story big enough to justify the kind of intervention that would otherwise look reckless. Wars, pandemics, and national security crises often become that story.
Look closely at the past century and a pattern emerges. The financial plumbing is already strained, credit bubbles overextended, currency pegs fraying, leverage piled too high and policymakers face a problem: how to inject massive liquidity without spooking markets or losing political credibility. Then comes the event. A geopolitical shock, a war, or a health crisis gives them cover to do what they couldn’t do in calm times: flip the switch, flood the system, and rewrite the rules in the name of survival.
Think back to the great turning points. In 1914, the gold standard was already cracking before World War I gave governments the excuse to suspend convertibility and unleash bond financed spending. In 1940, the U.S. was still clawing out of depression when WWII allowed Roosevelt to blow out deficits and normalize Fed monetization of Treasury debt. In the late 1960s, Vietnam spending plus domestic programs strained the dollar, but only once the war escalated did policymakers have the justification to tear up Bretton Woods in 1971. After 9/11 and the Iraq War, the U.S. used national security spending as the story, while Greenspan’s Fed quietly opened the spigots to cushion a financial system still reeling from the dot com bust. And in 2020, COVID-19 became the perfect excuse for an unprecedented global money printing campaign, arriving just as repo markets and corporate debt were already flashing stress in late 2019.
The details differ, but the sequencing rhymes. The financial system shows cracks first. Then an event arrives that allows governments to act on a scale they otherwise couldn’t. Liquidity surges are justified as emergency responses, but in practice they are often preemptive rescues of fragile balance sheets.
This isn’t to say the events aren’t real, they are. Wars kill, pandemics devastate, geopolitical shocks reshape the world. But for students of monetary history, the question is whether the timing of interventions is driven only by the events, or also by what was already happening beneath the surface. Were the events the trigger or the excuse?
That’s the pattern I want to explore. When you line up the last century’s great liquidity waves with the geopolitical crises that accompanied them, you start to see that the narrative and the financial mechanics are inseparable. Policymakers need a cover story. And history suggests that the biggest liquidity expansions often arrive not just because of the event, but because the system was breaking beforehand.
Liquidity Needs a Story
One of the hardest truths in financial history is that governments rarely admit when the system is breaking. Instead, they wait for a story big enough to justify the kind of intervention that would otherwise look reckless. Wars, pandemics, and national security crises often become that story.
Look closely at the past century and a pattern emerges. The financial plumbing is already strained, credit bubbles overextended, currency pegs fraying, leverage piled too high and policymakers face a problem: how to inject massive liquidity without spooking markets or losing political credibility. Then comes the event. A geopolitical shock, a war, or a health crisis gives them cover to do what they couldn’t do in calm times: flip the switch, flood the system, and rewrite the rules in the name of survival.
Think back to the great turning points. In 1914, the gold standard was already cracking before World War I gave governments the excuse to suspend convertibility and unleash bond financed spending. In 1940, the U.S. was still clawing out of depression when WWII allowed Roosevelt to blow out deficits and normalize Fed monetization of Treasury debt. In the late 1960s, Vietnam spending plus domestic programs strained the dollar, but only once the war escalated did policymakers have the justification to tear up Bretton Woods in 1971. After 9/11 and the Iraq War, the U.S. used national security spending as the story, while Greenspan’s Fed quietly opened the spigots to cushion a financial system still reeling from the dot com bust. And in 2020, COVID-19 became the perfect excuse for an unprecedented global money printing campaign, arriving just as repo markets and corporate debt were already flashing stress in late 2019.
The details differ, but the sequencing rhymes. The financial system shows cracks first. Then an event arrives that allows governments to act on a scale they otherwise couldn’t. Liquidity surges are justified as emergency responses, but in practice they are often preemptive rescues of fragile balance sheets.
This isn’t to say the events aren’t real, they are. Wars kill, pandemics devastate, geopolitical shocks reshape the world. But for students of monetary history, the question is whether the timing of interventions is driven only by the events, or also by what was already happening beneath the surface. Were the events the trigger or the excuse?
That’s the pattern I want to explore. When you line up the last century’s great liquidity waves with the geopolitical crises that accompanied them, you start to see that the narrative and the financial mechanics are inseparable. Policymakers need a cover story. And history suggests that the biggest liquidity expansions often arrive not just because of the event, but because the system was breaking beforehand.
(2/7)
World War I: The Excuse to Break the Gold Standard
By 1913–14, the global financial system was already stretched thin. European powers had piled on debt through colonial competition, military buildups, and industrial expansion financed by credit. The classical gold standard, praised for its discipline, was showing cracks. Britain’s current account was slipping, Germany’s credit system was overextended, and cross border flows were fragile. Under the rules of gold, central banks had limited room to expand credit without triggering convertibility problems.
Enter World War I. Within weeks of the war’s outbreak in August 1914, nearly every major power suspended gold convertibility. The official story was that the war required extraordinary flexibility, but the financial reality was that the system had already been unsustainable. War finance provided the perfect cover. Deficits exploded, financed by bonds that central banks willingly monetized. The U.K. suspended gold redemption, the U.S. created the Liberty Loan program, and Germany relied on Reichsbank financing to a degree that would have been politically impossible in peacetime.
Liquidity was unleashed under the banner of “national survival.” Bond issuance surged, central bank balance sheets expanded, and gold discipline vanished. But this wasn’t simply about fighting a war. It was also about preserving fragile domestic financial systems that would likely have broken under their own weight. The war gave governments political legitimacy to do what the math already required, abandon the old rules and flood the system with money.
The result was a decade of distortion. Inflation surged, debts piled up, and when the war ended the attempt to restore the gold standard led to a deflationary bust and, ultimately, the conditions that produced the Great Depression. In hindsight, the war wasn’t just a geopolitical cataclysm, it was also the narrative vehicle that allowed governments to launch a liquidity regime shift they had no other way to justify.
World War I: The Excuse to Break the Gold Standard
By 1913–14, the global financial system was already stretched thin. European powers had piled on debt through colonial competition, military buildups, and industrial expansion financed by credit. The classical gold standard, praised for its discipline, was showing cracks. Britain’s current account was slipping, Germany’s credit system was overextended, and cross border flows were fragile. Under the rules of gold, central banks had limited room to expand credit without triggering convertibility problems.
Enter World War I. Within weeks of the war’s outbreak in August 1914, nearly every major power suspended gold convertibility. The official story was that the war required extraordinary flexibility, but the financial reality was that the system had already been unsustainable. War finance provided the perfect cover. Deficits exploded, financed by bonds that central banks willingly monetized. The U.K. suspended gold redemption, the U.S. created the Liberty Loan program, and Germany relied on Reichsbank financing to a degree that would have been politically impossible in peacetime.
Liquidity was unleashed under the banner of “national survival.” Bond issuance surged, central bank balance sheets expanded, and gold discipline vanished. But this wasn’t simply about fighting a war. It was also about preserving fragile domestic financial systems that would likely have broken under their own weight. The war gave governments political legitimacy to do what the math already required, abandon the old rules and flood the system with money.
The result was a decade of distortion. Inflation surged, debts piled up, and when the war ended the attempt to restore the gold standard led to a deflationary bust and, ultimately, the conditions that produced the Great Depression. In hindsight, the war wasn’t just a geopolitical cataclysm, it was also the narrative vehicle that allowed governments to launch a liquidity regime shift they had no other way to justify.
(3/7
World War II: Total War, Total Liquidity
By the late 1930s, the global financial system was already on life support. The Great Depression had broken the back of the gold standard, banks had failed across the U.S. and Europe, and deflationary pressure had crushed wages and demand. Roosevelt’s New Deal reflation, fueled by devaluing the dollar against gold and emergency public spending bought time, but unemployment remained high, corporate balance sheets were weak, and debt burdens still loomed large. The system was fragile, and traditional monetary levers had lost effectiveness.
Enter World War II. The scale of mobilization required a fiscal and monetary shift so extreme that, in any other context, it would have been politically unthinkable. From 1941 onward, the U.S. didn’t just spend, it fused Treasury and Federal Reserve policy into one machine. The government issued massive volumes of war bonds, and the Fed agreed to peg Treasury yields at artificially low levels, absorbing whatever supply the market couldn’t. Deficits soared to levels previously unimaginable, over 25% of GDP in peak war years, financed by a deliberate suppression of interest rates.
This wasn’t just about financing tanks and planes. The war created the excuse to break every constraint that had defined the pre-war system. Balanced budgets? Gone. Independent central banking? Suspended. Convertibility and gold discipline? Irrelevant. The crisis of global conflict provided the political cover to unleash what was, in essence, modern monetary fusion. Liquidity was injected into the system on a scale that dwarfed anything seen before, stabilizing banks, recapitalizing industry, and creating a permanent precedent for government and central bank coordination.
The long term impact was profound. Wartime liquidity laid the foundation for the postwar boom, but it also reshaped the architecture of the global system itself. The Bretton Woods Agreement in 1944 locked in the dollar as the anchor, with gold only partially backing it, legitimizing what was already reality, a fiat like liquidity regime under U.S. control.
In hindsight, World War II was the event that allowed governments, especially the U.S., to scrap the last pre-Depression taboos and hardwire massive fiscal monetary coordination into the global order. What had been impossible in the 1930s became unquestionable in the 1940s, because the war demanded it.
World War II: Total War, Total Liquidity
By the late 1930s, the global financial system was already on life support. The Great Depression had broken the back of the gold standard, banks had failed across the U.S. and Europe, and deflationary pressure had crushed wages and demand. Roosevelt’s New Deal reflation, fueled by devaluing the dollar against gold and emergency public spending bought time, but unemployment remained high, corporate balance sheets were weak, and debt burdens still loomed large. The system was fragile, and traditional monetary levers had lost effectiveness.
Enter World War II. The scale of mobilization required a fiscal and monetary shift so extreme that, in any other context, it would have been politically unthinkable. From 1941 onward, the U.S. didn’t just spend, it fused Treasury and Federal Reserve policy into one machine. The government issued massive volumes of war bonds, and the Fed agreed to peg Treasury yields at artificially low levels, absorbing whatever supply the market couldn’t. Deficits soared to levels previously unimaginable, over 25% of GDP in peak war years, financed by a deliberate suppression of interest rates.
This wasn’t just about financing tanks and planes. The war created the excuse to break every constraint that had defined the pre-war system. Balanced budgets? Gone. Independent central banking? Suspended. Convertibility and gold discipline? Irrelevant. The crisis of global conflict provided the political cover to unleash what was, in essence, modern monetary fusion. Liquidity was injected into the system on a scale that dwarfed anything seen before, stabilizing banks, recapitalizing industry, and creating a permanent precedent for government and central bank coordination.
The long term impact was profound. Wartime liquidity laid the foundation for the postwar boom, but it also reshaped the architecture of the global system itself. The Bretton Woods Agreement in 1944 locked in the dollar as the anchor, with gold only partially backing it, legitimizing what was already reality, a fiat like liquidity regime under U.S. control.
In hindsight, World War II was the event that allowed governments, especially the U.S., to scrap the last pre-Depression taboos and hardwire massive fiscal monetary coordination into the global order. What had been impossible in the 1930s became unquestionable in the 1940s, because the war demanded it.
(4/7)
Vietnam and Bretton Woods: War by Proxy, Money by Fiat
By the early 1960s, the U.S. was straddling two worlds: the Bretton Woods system of fixed exchange rates anchored by gold, and a domestic economy increasingly addicted to fiscal and monetary stimulus. Kennedy’s tax cuts, Johnson’s Great Society, and the accelerating cost of the Vietnam War were layered on top of one another, creating what economists later called “guns and butter” spending. The U.S. tried to fight a foreign war while simultaneously funding expansive domestic welfare programs without raising taxes enough to cover either.
The result was a quiet but relentless break in the system’s plumbing. Under Bretton Woods, foreign governments could exchange their surplus dollars for U.S. gold at $35 an ounce. But as deficits widened and U.S. gold reserves dwindled, confidence in the peg began to erode. France under de Gaulle was the most explicit, shipping boatloads of dollars back to New York Harbor and demanding bullion in return. By the late 1960s, U.S. gold coverage of foreign dollar liabilities was collapsing, signaling a classic bank run dynamic at the sovereign level.
Vietnam was the accelerant. The war forced deficits higher, and with inflation creeping into the system, the Fed accommodated by keeping rates artificially low to sustain Treasury financing. In effect, the U.S. was exporting inflation abroad, because Bretton Woods forced other countries to absorb excess dollars to keep their currencies stable. Germany and Japan, rising export powers, grew resentful, their domestic inflation rates soared, but they had no choice but to take in U.S. liquidity if they wanted to maintain the fixed system.
By 1971, the strain was unbearable. Nixon formally closed the gold window, suspending dollar convertibility into gold. Officially it was billed as a temporary measure; in reality, it was the end of Bretton Woods and the start of the fiat dollar era. What had begun as war driven fiscal excess exposed the fundamental weakness of a fixed gold exchange system in a world where governments were unwilling to impose domestic austerity.
The pattern is clear. Without Vietnam, the deficits of the 1960s might have been contained. Without Bretton Woods, foreign governments might not have held the U.S. accountable. But the combination, geopolitical conflict driving up spending, layered on a fragile monetary regime created the perfect excuse to break the old rules. Once again, crisis enabled policymakers to do what would have been politically impossible otherwise which was to detach the dollar from gold, unleash monetary sovereignty, and cement the U.S. Treasury, Fed and dollar complex as the unrivaled core of global liquidity.
From there, the playbook was established. War spending justified deficits, deficits forced monetary innovation, and monetary innovation became the new baseline. The temporary suspension of convertibility is now in its 54th year, the clearest proof that what starts as an emergency liquidity response in the name of conflict often becomes permanent architecture for the financial system.
Vietnam and Bretton Woods: War by Proxy, Money by Fiat
By the early 1960s, the U.S. was straddling two worlds: the Bretton Woods system of fixed exchange rates anchored by gold, and a domestic economy increasingly addicted to fiscal and monetary stimulus. Kennedy’s tax cuts, Johnson’s Great Society, and the accelerating cost of the Vietnam War were layered on top of one another, creating what economists later called “guns and butter” spending. The U.S. tried to fight a foreign war while simultaneously funding expansive domestic welfare programs without raising taxes enough to cover either.
The result was a quiet but relentless break in the system’s plumbing. Under Bretton Woods, foreign governments could exchange their surplus dollars for U.S. gold at $35 an ounce. But as deficits widened and U.S. gold reserves dwindled, confidence in the peg began to erode. France under de Gaulle was the most explicit, shipping boatloads of dollars back to New York Harbor and demanding bullion in return. By the late 1960s, U.S. gold coverage of foreign dollar liabilities was collapsing, signaling a classic bank run dynamic at the sovereign level.
Vietnam was the accelerant. The war forced deficits higher, and with inflation creeping into the system, the Fed accommodated by keeping rates artificially low to sustain Treasury financing. In effect, the U.S. was exporting inflation abroad, because Bretton Woods forced other countries to absorb excess dollars to keep their currencies stable. Germany and Japan, rising export powers, grew resentful, their domestic inflation rates soared, but they had no choice but to take in U.S. liquidity if they wanted to maintain the fixed system.
By 1971, the strain was unbearable. Nixon formally closed the gold window, suspending dollar convertibility into gold. Officially it was billed as a temporary measure; in reality, it was the end of Bretton Woods and the start of the fiat dollar era. What had begun as war driven fiscal excess exposed the fundamental weakness of a fixed gold exchange system in a world where governments were unwilling to impose domestic austerity.
The pattern is clear. Without Vietnam, the deficits of the 1960s might have been contained. Without Bretton Woods, foreign governments might not have held the U.S. accountable. But the combination, geopolitical conflict driving up spending, layered on a fragile monetary regime created the perfect excuse to break the old rules. Once again, crisis enabled policymakers to do what would have been politically impossible otherwise which was to detach the dollar from gold, unleash monetary sovereignty, and cement the U.S. Treasury, Fed and dollar complex as the unrivaled core of global liquidity.
From there, the playbook was established. War spending justified deficits, deficits forced monetary innovation, and monetary innovation became the new baseline. The temporary suspension of convertibility is now in its 54th year, the clearest proof that what starts as an emergency liquidity response in the name of conflict often becomes permanent architecture for the financial system.
(5/7)
9/11 and the War on Terror: Liquidity in the Shadow of Fear
By the turn of the millennium, the U.S. financial system was already wobbling. The dot com bubble had burst in 2000, wiping out trillions in paper wealth and hammering tech heavy equity markets. In early 2001, the U.S. economy slipped into recession. The Federal Reserve under Alan Greenspan began cutting rates aggressively from 6.5% in 2000 down to 3.5% by mid 2001. Even before planes struck the Twin Towers, policymakers were already leaning on monetary easing to cushion a fragile system.
Then came September 11, 2001. The attacks froze global air travel, shut down financial markets for nearly a week, and injected profound geopolitical uncertainty into an already weakened economy. It was a systemic stress event not because balance sheets collapsed overnight, but because confidence evaporated. Credit markets seized, equity investors panicked, and the prospect of cascading bankruptcies loomed.
The Fed’s response was immediate and extraordinary. It cut rates by 50 basis points the very next week, flooded the system with liquidity via repo operations, and made clear it would not allow the financial plumbing to jam. By the end of 2001, the Fed funds rate was at 1.75%, and it would keep cutting until it hit 1% by mid 2003, the lowest in half a century. These policies weren’t just about recovery from recession; they were explicitly justified by the uncertainty of the war on terror and the need to support confidence.
Meanwhile, fiscal policy went into overdrive. Military spending soared as the U.S. launched wars in Afghanistan and then Iraq. Homeland security budgets ballooned. Tax cuts were layered on top, ensuring deficits would widen. This was a textbook “guns and butter” moment: fund war abroad, subsidize consumption at home, and rely on low interest rates and foreign capital inflows (notably from China and other surplus nations) to bridge the gap.
The consequence was an ocean of cheap liquidity. Mortgage credit exploded. Financial engineering ran unchecked. By 2006–07, securitization had transformed those flows into the subprime housing bubble. In hindsight, the link is direct: 9/11 justified an unprecedented easing cycle and fiscal expansion under the guise of national emergency, and that flood of liquidity sowed the seeds of the Global Financial Crisis a few years later.
The historical pattern is clear, a geopolitical shock provided the political cover for policies that might otherwise have been criticized as reckless. Without 9/11, the Fed might still have cut rates after the dot com bust but it is unlikely it would have gone as deep, for as long, with so little resistance. Without the war on terror, deficits might have drawn more scrutiny. Instead, policymakers could frame every intervention as essential to defending freedom and securing stability in a dangerous world.
In other words, the system was already breaking after the dot com collapse. 9/11 didn’t create the fragility, but it gave Washington the excuse to open the liquidity floodgates. Once again, crisis and conflict blurred into a justification for monetary excess. And once again, the emergency measures didn’t just stabilize markets, they laid the foundation for the next, even bigger systemic failure.
9/11 and the War on Terror: Liquidity in the Shadow of Fear
By the turn of the millennium, the U.S. financial system was already wobbling. The dot com bubble had burst in 2000, wiping out trillions in paper wealth and hammering tech heavy equity markets. In early 2001, the U.S. economy slipped into recession. The Federal Reserve under Alan Greenspan began cutting rates aggressively from 6.5% in 2000 down to 3.5% by mid 2001. Even before planes struck the Twin Towers, policymakers were already leaning on monetary easing to cushion a fragile system.
Then came September 11, 2001. The attacks froze global air travel, shut down financial markets for nearly a week, and injected profound geopolitical uncertainty into an already weakened economy. It was a systemic stress event not because balance sheets collapsed overnight, but because confidence evaporated. Credit markets seized, equity investors panicked, and the prospect of cascading bankruptcies loomed.
The Fed’s response was immediate and extraordinary. It cut rates by 50 basis points the very next week, flooded the system with liquidity via repo operations, and made clear it would not allow the financial plumbing to jam. By the end of 2001, the Fed funds rate was at 1.75%, and it would keep cutting until it hit 1% by mid 2003, the lowest in half a century. These policies weren’t just about recovery from recession; they were explicitly justified by the uncertainty of the war on terror and the need to support confidence.
Meanwhile, fiscal policy went into overdrive. Military spending soared as the U.S. launched wars in Afghanistan and then Iraq. Homeland security budgets ballooned. Tax cuts were layered on top, ensuring deficits would widen. This was a textbook “guns and butter” moment: fund war abroad, subsidize consumption at home, and rely on low interest rates and foreign capital inflows (notably from China and other surplus nations) to bridge the gap.
The consequence was an ocean of cheap liquidity. Mortgage credit exploded. Financial engineering ran unchecked. By 2006–07, securitization had transformed those flows into the subprime housing bubble. In hindsight, the link is direct: 9/11 justified an unprecedented easing cycle and fiscal expansion under the guise of national emergency, and that flood of liquidity sowed the seeds of the Global Financial Crisis a few years later.
The historical pattern is clear, a geopolitical shock provided the political cover for policies that might otherwise have been criticized as reckless. Without 9/11, the Fed might still have cut rates after the dot com bust but it is unlikely it would have gone as deep, for as long, with so little resistance. Without the war on terror, deficits might have drawn more scrutiny. Instead, policymakers could frame every intervention as essential to defending freedom and securing stability in a dangerous world.
In other words, the system was already breaking after the dot com collapse. 9/11 didn’t create the fragility, but it gave Washington the excuse to open the liquidity floodgates. Once again, crisis and conflict blurred into a justification for monetary excess. And once again, the emergency measures didn’t just stabilize markets, they laid the foundation for the next, even bigger systemic failure.
(6/7)
COVID-19: A Pandemic, or a Pretext for Liquidity Floodgates?
By late 2019, the financial system was already wobbling. In September, the repo market, the plumbing that underpins short term dollar funding seized up. Overnight rates spiked to 10%, signaling that banks and dealers were unwilling or unable to intermediate liquidity. The Fed had to step in with emergency operations and then quietly restart balance sheet expansion. Policymakers called it not QE, but the reality was clear, the system was choking on collateral mismatches, balance sheet constraints, and rising Treasury supply.
At the same time, global signals were flashing yellow. Dollar funding costs were rising in cross currency swaps, U.S. manufacturing was rolling over, and corporate debt markets looked stretched after a decade of cheap money. By the end of 2019, the Fed had already cut rates three times, trying to ease pressure without admitting that the cycle was breaking down. The financial system was fragile before anyone had heard of COVID-19.
Then the pandemic hit. By March 2020, markets weren’t just falling, they were breaking. Equities collapsed, credit spreads blew out, and even Treasuries the deepest, most liquid market in the world showed dysfunction as dealers ran out of balance sheet to warehouse duration. What began as a health shock became the perfect political and institutional cover for something policymakers had already been edging toward which was unleashing unprecedented liquidity.
The Fed slashed rates back to zero, launched unlimited QE, and rolled out an alphabet soup of emergency facilities, backstopping corporate bonds, municipal debt, even ETFs. Swap lines were extended globally to prevent a dollar funding crisis. At the same time, fiscal authorities unleashed stimulus at a wartime scale: the CARES Act, direct checks, PPP loans, corporate bailouts. The U.S. deficit ballooned to nearly 15% of GDP in 2020 levels unseen outside of world wars.
This response wasn’t just about pandemic relief. It was also about patching up a financial system that had been cracking months before the virus. COVID-19 gave policymakers the why, but the what, trillions in stimulus and liquidity also fixed the repo stress, corporate refinancing cliff, and sovereign funding needs that had been building in 2019. In effect, the pandemic allowed them to do openly what they were already doing in the shadows which was flood the system with money.
Globally, the same pattern played out. The ECB expanded bond buying and loosened capital rules, the BOJ doubled down on yield-curve control, and the IMF extended lifelines to emerging markets. Central banks acted in lockstep, delivering the largest liquidity surge in modern history. Asset prices took off including stocks, housing, even crypto soared. The world was reflated by design.
The irony is that the fix sowed the seeds of the next crisis. The ocean of liquidity collided with supply chain shocks and drove inflation to multi decade highs. Asset bubbles detached from fundamentals. And when central banks finally raised rates to fight inflation, the debts backstopped in 2020 from leveraged corporates to commercial real estate to sovereign rollovers became the new fault lines.
The pattern is hard to ignore. Just as wars or geopolitical shocks have provided the excuse for massive liquidity injections in the past, COVID-19 was both a crisis and a cover. The financial system was fragile before the virus. The pandemic made the liquidity response untouchable. The short term stability it delivered came at the cost of even deeper long term instability, a bill that is still coming due.
COVID-19: A Pandemic, or a Pretext for Liquidity Floodgates?
By late 2019, the financial system was already wobbling. In September, the repo market, the plumbing that underpins short term dollar funding seized up. Overnight rates spiked to 10%, signaling that banks and dealers were unwilling or unable to intermediate liquidity. The Fed had to step in with emergency operations and then quietly restart balance sheet expansion. Policymakers called it not QE, but the reality was clear, the system was choking on collateral mismatches, balance sheet constraints, and rising Treasury supply.
At the same time, global signals were flashing yellow. Dollar funding costs were rising in cross currency swaps, U.S. manufacturing was rolling over, and corporate debt markets looked stretched after a decade of cheap money. By the end of 2019, the Fed had already cut rates three times, trying to ease pressure without admitting that the cycle was breaking down. The financial system was fragile before anyone had heard of COVID-19.
Then the pandemic hit. By March 2020, markets weren’t just falling, they were breaking. Equities collapsed, credit spreads blew out, and even Treasuries the deepest, most liquid market in the world showed dysfunction as dealers ran out of balance sheet to warehouse duration. What began as a health shock became the perfect political and institutional cover for something policymakers had already been edging toward which was unleashing unprecedented liquidity.
The Fed slashed rates back to zero, launched unlimited QE, and rolled out an alphabet soup of emergency facilities, backstopping corporate bonds, municipal debt, even ETFs. Swap lines were extended globally to prevent a dollar funding crisis. At the same time, fiscal authorities unleashed stimulus at a wartime scale: the CARES Act, direct checks, PPP loans, corporate bailouts. The U.S. deficit ballooned to nearly 15% of GDP in 2020 levels unseen outside of world wars.
This response wasn’t just about pandemic relief. It was also about patching up a financial system that had been cracking months before the virus. COVID-19 gave policymakers the why, but the what, trillions in stimulus and liquidity also fixed the repo stress, corporate refinancing cliff, and sovereign funding needs that had been building in 2019. In effect, the pandemic allowed them to do openly what they were already doing in the shadows which was flood the system with money.
Globally, the same pattern played out. The ECB expanded bond buying and loosened capital rules, the BOJ doubled down on yield-curve control, and the IMF extended lifelines to emerging markets. Central banks acted in lockstep, delivering the largest liquidity surge in modern history. Asset prices took off including stocks, housing, even crypto soared. The world was reflated by design.
The irony is that the fix sowed the seeds of the next crisis. The ocean of liquidity collided with supply chain shocks and drove inflation to multi decade highs. Asset bubbles detached from fundamentals. And when central banks finally raised rates to fight inflation, the debts backstopped in 2020 from leveraged corporates to commercial real estate to sovereign rollovers became the new fault lines.
The pattern is hard to ignore. Just as wars or geopolitical shocks have provided the excuse for massive liquidity injections in the past, COVID-19 was both a crisis and a cover. The financial system was fragile before the virus. The pandemic made the liquidity response untouchable. The short term stability it delivered came at the cost of even deeper long term instability, a bill that is still coming due.
(7/7)
Where We Are Now: Fragility Without a Cover Story (Yet)
When you strip away the headlines, the system is already flashing red. The labor marker, long the pillar of resilience, was just revised down by 911,000 jobs, the biggest downward adjustment in history. That single revision erased the illusion that employment was stable through 2024–25 and left the Fed boxed in, having paused too long on the assumption that payrolls were strong. Beneath the surface, the cracks are multiplying.
Consumer balance sheets are deteriorating at every level. Student loan delinquencies surged to 12.9% in Q2 2025 after the pandemic pause expired, with over 11% of federal balances 90+ days past due. Auto loans are running nearly 3% seriously delinquent, and in some datasets almost 5%, levels not seen since the GFC. Credit card delinquencies, at 6.9%, remain elevated even after a brief plateau, signaling households are straining under higher rates. Meanwhile, hardship withdrawals from 401(k)s are climbing, with new penalty free emergency withdrawals legalized in 2025. That change in policy itself is a tell that Washington knows liquidity stress is spreading into retirement savings.
Commercial real estate is a slow motion train wreck. Office vacancies just hit 20.7%, an all time high, with forecasts pushing toward 23–24% into 2026. More than $1.5 trillion in CRE debt is maturing between now and end 2026, forcing owners to refinance at rates double or triple their original borrowing costs. In metro cores, this is already feeding through into falling collateral values and local banking stress, an echo of the savings and loan crisis that sank hundreds of regional lenders in the late 1980s and early ’90s.
Layered on top of that, government financing needs are surging. Between April 2025 and the end of 2026, $9.2–9.3 trillion in Treasuries must be rolled. $4.2 trillion comes due in 2026 alone. This is happening while foreign central bank demand has cooled and the Fed is still shrinking its balance sheet. It means the U.S. must rely heavily on domestic absorption of supply, pulling liquidity from every other corner of the system.
And all of this is unfolding against a geopolitical backdrop that practically begs for an excuse to paper over the cracks. Israel and Iran fought a brief but intense war this summer, pulling the U.S. directly into strikes on Iranian nuclear facilities. Sanctions are tightening again, with Russia and Iran deepening their partnership, while Ukraine remains under relentless assault. In the Western Hemisphere, tensions with Venezuela have escalated into direct U.S. military strikes. And trade itself is weaponized reminiscent of the Smoot-Hawley tariffs of 1930.
This is fragility layered on fragility. Consumers are breaking, CRE is breaking, the labor market mirage has shattered, and sovereign refinancing needs loom over everything. The only thing missing is the cover story. Every time the system buckled, a narrative emerged that justified massive liquidity intervention. Right now, the intervention hasn’t come, not because the system is healthy, but because the trigger that makes liquidity politically palatable hasn’t yet arrived.
So the real question isn’t whether the U.S. will be forced to print. It’s what will the excuse be this time? A wider Middle East war? A Venezuela confrontation? An oil shock? Or something we can’t see yet? The underlying fragility is already here. What’s missing is only the spark.
Where We Are Now: Fragility Without a Cover Story (Yet)
When you strip away the headlines, the system is already flashing red. The labor marker, long the pillar of resilience, was just revised down by 911,000 jobs, the biggest downward adjustment in history. That single revision erased the illusion that employment was stable through 2024–25 and left the Fed boxed in, having paused too long on the assumption that payrolls were strong. Beneath the surface, the cracks are multiplying.
Consumer balance sheets are deteriorating at every level. Student loan delinquencies surged to 12.9% in Q2 2025 after the pandemic pause expired, with over 11% of federal balances 90+ days past due. Auto loans are running nearly 3% seriously delinquent, and in some datasets almost 5%, levels not seen since the GFC. Credit card delinquencies, at 6.9%, remain elevated even after a brief plateau, signaling households are straining under higher rates. Meanwhile, hardship withdrawals from 401(k)s are climbing, with new penalty free emergency withdrawals legalized in 2025. That change in policy itself is a tell that Washington knows liquidity stress is spreading into retirement savings.
Commercial real estate is a slow motion train wreck. Office vacancies just hit 20.7%, an all time high, with forecasts pushing toward 23–24% into 2026. More than $1.5 trillion in CRE debt is maturing between now and end 2026, forcing owners to refinance at rates double or triple their original borrowing costs. In metro cores, this is already feeding through into falling collateral values and local banking stress, an echo of the savings and loan crisis that sank hundreds of regional lenders in the late 1980s and early ’90s.
Layered on top of that, government financing needs are surging. Between April 2025 and the end of 2026, $9.2–9.3 trillion in Treasuries must be rolled. $4.2 trillion comes due in 2026 alone. This is happening while foreign central bank demand has cooled and the Fed is still shrinking its balance sheet. It means the U.S. must rely heavily on domestic absorption of supply, pulling liquidity from every other corner of the system.
And all of this is unfolding against a geopolitical backdrop that practically begs for an excuse to paper over the cracks. Israel and Iran fought a brief but intense war this summer, pulling the U.S. directly into strikes on Iranian nuclear facilities. Sanctions are tightening again, with Russia and Iran deepening their partnership, while Ukraine remains under relentless assault. In the Western Hemisphere, tensions with Venezuela have escalated into direct U.S. military strikes. And trade itself is weaponized reminiscent of the Smoot-Hawley tariffs of 1930.
This is fragility layered on fragility. Consumers are breaking, CRE is breaking, the labor market mirage has shattered, and sovereign refinancing needs loom over everything. The only thing missing is the cover story. Every time the system buckled, a narrative emerged that justified massive liquidity intervention. Right now, the intervention hasn’t come, not because the system is healthy, but because the trigger that makes liquidity politically palatable hasn’t yet arrived.
So the real question isn’t whether the U.S. will be forced to print. It’s what will the excuse be this time? A wider Middle East war? A Venezuela confrontation? An oil shock? Or something we can’t see yet? The underlying fragility is already here. What’s missing is only the spark.
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