The Fed is a winner. No one has ever seen a Federal Reserve intervention fail. But as 2020 has already shown us, there’s a first time for everything.

If this action fails, it will be because the Fed is not designed to perform it. The Fed is a central bank. A central bank is designed to defeat a liquidity crisis. The economic impact of the novel coronavirus is a solvency crisis.

If you’re like most people, even most investors, maybe even some economists, you don’t quite understand the difference between illiquidity and insolvency. That’s cool, dog. In fact, it’s a great excuse to explain these concepts— through a vaguely post-Austrian framework.

What follows is unlicensed, uncredentialed, and approved by no authority at all. Nor is it financial advice (see disclaimer at end). Sorry for all the words.

Mr. Bagehot and postmodern capitalism

The fundamental rule of Anglo-American central banking, given 150 years ago by Walter Bagehot (pronounced “badge-it”), is to “lend freely, at high rates, against good credit.”

Postmodern capitalism has already ditched a third of the Bagehot rule. Interest is finished. Nontrivial risk-free interest rates, at any duration, will never return to the Western world. This is fine! At least, anyone who equated zero interest rates with consumer-price hyperinflation was just wrong.

Now, in the coronavirus crisis, the Fed has just announced its willingness to ditch another third of the Bagehot rule — buying first investment-grade corporate debt, then high-yield (“junk”) bonds. This is fine! Or is it? (It may not even be legal; but these days there’s little reason to worry about that.)

We see two popular theories of these actions. First: the Fed is doing the right thing; it will work. Second: the Fed is doing the wrong thing; it will lead to “corporate Marxism,” the end of free markets, and a nationalized economy.

Today we’ll explore a third hypothesis: that, by rerunning its successful 2008 playbook, the Fed is doing the wrong thing (though it has no real alternative); and its bailout (specifically, of corporate bonds) may well fail.

The Fed has not (yet) gone communist — or even Japanese

In theory, it’s certainly not impossible for a central bank to achieve “corporate Marxism” — or more optimistically, Japanese corporate socialism.

Japanese socialism works well enough — in the world’s largest creditor nation. It might even work in a debtor nation with the world’s reserve currency. But as we’ll see, this is not where the Fed is actually trying to go.

The Fed could change its mind. Its mind is quite well-settled. It would have to fail dramatically, then reconsider its deepest principles. If this happens, it will not be a pretty process. It also seems unlikely to happen soon. It would also be illegal, but no one gets a speeding ticket at the Indy 500. But…

“Corporate Marxism” is contrary to the nature, purpose, habit, and history of Anglo-American central banking. Capitalism with zero interest rates is weird enough. It only bends the Bagehot rule. In an unprecedented crisis, in a tight political and bureaucratic corner, the Fed is now trying to break that rule — without turning Japanese. Everyone needs to know whether this will work.

It’s not just about moral hazard

For readers with a basic grasp of finance, a simple way to understand the difference is that central banks following the Bagehot rule stabilize the yield curve (liquidity). They do not intervene in risk spreads (solvency).

Why should a central bank lend only against good credit? It’s easy to see this as an issue of moral hazard. It seems morally wrong for the government to support insolvent zombie companies — as in Japan or the Soviet Union. (Even hyper-capitalist China still has its “iron rice bowl” state enterprises.)

Perhaps it is morally wrong — though less so in a crisis that’s no one’s fault. But Mr. Bagehot had a more practical concern — that the intervention not fail. To understand how this bailout could fail, let’s look past the dumb “money printer” memes and review its actual financial plumbing.

Special-purpose vehicles, risk backstops, and solvent entities

The 19th-century Bank of England and the 21st-century Fed have a feature in common: a limited appetite for risk. “Lombard Street” was a gold standard diluted by paper debt; the limit was imposed by the Bank’s physical gold.

The Fed has a risk limit as well — imposed by Treasury and the Congress. The latter appropriated $454 billion for the former’s Exchange Stabilization Fund, to “backstop” any potential losses of the Fed’s bailout programs. This mighty Fund already had $93 bil in the kitty — let’s just call it a round $500 billion.

A half trillion is a lot of money. It’s not infinite, though. If its finite equity is exceeded, the Fed needs to go back to Treasury and ask for more. Treasury cannot appropriate its own funds; it has to ask the Congress. This complicated bureaucratic plumbing is the fundamental reason why the bailout could fail.

As Chairman Powell has said: “[the Fed’s powers] are lending powers, not spending powers… The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid.”

Treasury, of course, has spending powers. The way the bailout facilities work: Treasury invests equity, from said Exchange Stabilization Fund, in a new special-purpose corporation, or SPV. The Fed then lends to this solvent entity.

This SPV is just a company. It does not have any magic powers. It does not have any kind of “money printer.” Nor does Treasury. Treasury can ask the Congress for more money, of course. Then again, so can you.

Leverage for beginners

You’ve probably heard much bigger numbers than this — like, $6 trillion. Like, how does $500 billion turn into $6 trillion?

Through the magic of margin, aka leverage. You too, dear reader, can buy on margin. Drop $2000 in your humble Robinhood account, and you can buy $4000 worth of hot stocks. If they go up 50%, you double your money. If they go down 50% — you lose all your money. That’s the power of 2-to-1 leverage.

Now imagine you are the Treasury, your account is the SPV, and Robinhood is the Fed. From the Fed’s term sheet for the Secondary Market Corporate Credit Facility (“SMCCF”), which buys corporate bonds on the open market:

The Department of the Treasury will make a $75 billion equity investment in the SPV to support both the SMCCF and the Primary Market Corporate Credit Facility (“PMCCF”). The initial allocation of the equity will be $50 billion toward the PMCCF [which buys bonds directly from the issuer] and $25 billion toward the SMCCF. The combined size of the Facility and the PMCCF will be up to $750 billion. The SMCCF will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds from issuers that are investment grade at the time of purchase and when acquiring ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The SMCCF will leverage its equity at 7 to 1 when acquiring corporate bonds from issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.

10 to 1 is plenty of leverage. $75 billion is plenty of scratch. But there are Americans who have $75 billion. They don’t trade on Robinhood. They can get just as much leverage — which suggests a thought-experiment.

Suppose Warren Buffett, personally, behaving like J.P. Morgan in 1907 before there was a Fed, decides to bail out the $8 trillion corporate bond market with $75 billion, levered up to $750 billion. What would happen? Would it work?

(Berkshire Hathaway has almost twice this much cash. Buffett could even borrow just as much money from the Fed — using something called “repo,” which has nothing to do with Emilio Estevez.)

Now, 10x leverage is a hell of a drug. With 10x leverage, if your portfolio drops by 10%, you’re done. Your equity is zero. Your Robinhood account is worthless. You are in fact insolvent.

And until Chairman Powell’s words become, as Nixon’s press secretary Ron Ziegler once put it, “no longer operative,” the Fed can no longer lend to you.

The SPV can call Treasury. Treasury can borrow as many dollars as it likes — at zero interest, thanks to postmodern capitalism.

But Treasury, once it burns through its mighty Exchange Stabilization Fund, needs Congressional approval to borrow that money. Imagine you need your spouse’s approval to wire more money to Robinhood.

At this point — your financial problem has become political.

The politics of leverage

Imagine a world in which the Fed has bailed out Wall Street and the bailout has failed. The line zagged where it should have zigged. The SPVs are broke — hot rolled and steeled.The optics: the Fed has poured half a trillion dollars down a hole with hungry fat cats at the bottom. Your tax dollars at work!

The money is gone. The hole is still a hole. The hedge funds are still hungry. Mansion prices in the Hamptons are crashing. Now, Nancy Pelosi is being asked to bail out Wall Street, again, before the election — to make President Trump look good? When the same money could send fat checks straight to suffering Americans? Such are the political dynamics of Treasury’s risk limits.

These same bailout facilities worked so well in 2008 that not only did they reinflate the bubble, they booked a profit. Treasury lost nothing. If both law and theory had not convinced the Fed that it can, should and must win without taking on risk of its own, and convinced Treasury that it can win and turn a profit by taking limited risk, these experiences would have. Then again — 2008 was a liquidity crisis, but 2020 is a solvency crisis.

Is there any historical precedent for a failed central-bank intervention? Sure — look at the failure of the European Exchange Rate Mechanism in 1992, or the collapse of the London Gold Pool in 1971.

In both cases, a central bank had a risk limit; the market saw this limit, and speculated against it; the bank lost and the market won. George Soros made most of his money off the failure of the ERM; he was far from the only player.

The deadly finite martingale; Treasury is just a big fish

An intervention of this kind is a betting strategy called a martingale. A martingale always wins. Yeah, really. The strategy is simple: play roulette and bet a dollar on red. If the ball lands on black, double the bet. Repeat. Eventually it will land on red, and you’ll win. Wow!

But a martingale only works if you come to the casino with infinite money — or at least, more money than the house. Half a trillion is a lot of money. It is not infinite money. It is not more money than the market has.

A variant of the martingale, beloved by “Wolf of Wall Street” penny-stock operators everywhere, is the “Texas hedge.” You buy a stock. It goes down. So you buy more — and, of course, buying a stock makes it go up. If you bring enough capital that you can overpower the market, you profit — on paper. You have cornered the market. Of course, you still need to get out by selling…

Texas hedges and finite martingales are not beloved by serious financiers. If said financiers wanted to fund these kinds of SPVs, they would. Since they don’t, the role of Treasury is by definition “dumb money” — what professional poker players call a “fish.”

Smart money eats fish. Short-term traders can profit by front-running dumb money, and selling first; medium-term traders can profit by betting on its failure. Timing is essential in the first strategy, just important in the second.

But we’ve sunk from economics to finance to mere gambling. Now that we have a clear and specific picture of how the Fed’s SPVs could fail, let’s step back and look at the whole system of postmodern capitalism. What the hell is going on here, anyway? And didn’t this same playbook work perfectly in ‘08?

The practical purpose of the Bagehot rule

We see that the core of Bagehot’s rule — that central banks should lend only against “good credit,” not rescue “bad business” — has a sound bureaucratic basis for the practical central banker. It prevents a situation in which the central bank keeps dumping money down an endless hole until someone grabs it and pulls it away from the printer (now), or it runs out of gold (then).

The yield (interest rate) of a corporate bond is set by two factors: the risk-free interest rate at the bond’s term, and the risk spread. The risk spread measures the market’s prediction of the chance that the bond will default. So the market for risk spreads is a prediction market — in Wall Street terms, a derivative.

When money with an ulterior motive (even if that motive is saving America) enters a prediction market, by definition it is trying to move that market, which means it is trying to make that market mispredict — like a rich 49ers fan making a huge bet to try and shift the Vegas point spread in the Super Bowl.

This can work if the prediction market has a reflexive effect on the game itself. Perhaps the 49ers themselves know the point spread. Perhaps if Vegas tells them they are more likely to win, they become more confident, which makes them more likely to win.

In the bond market, in the last two weeks, the mere announcement of Fed intervention worked just like this — it gave investors an excuse to start buying newly issued bonds. Unfreezing the bond market makes existing bonds less likely to fail — it lets companies sell new bonds to pay off their old bonds. (This is actually a liquidity effect, not a solvency effect — because it involves rollovers; companies that roll over their debt are maturity transformers).

But if these psychological interventions seem fragile, they are. Quite a piece of chewing gum to hold America’s engine in place.

The problem is that the virus crisis is a true solvency crisis, not a liquidity crisis. As Bagehot wrote: “The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business.” This was true enough in his day; it has become somewhat suspect in our permabubble age; but thanks to SARS-CoV-2, there is now no good credit.

No one can reliably predict the outcome of the epidemic, or the progress of any therapy. The probability that the virus will become endemic seems high. The economic consequences of the virus are not due to lost widget production from dead widgetmakers — they are due to mere human fear. This fear is rational — and even after it stops being rational, it may remain as irrational.

Solvency and liquidity

But if it’s so easy for the Fed to lose, why is it still undefeated?

To understand the difference between a solvency crisis and a liquidity crisis, we have to understand why central banks can solve a liquidity crisis, by cornering the market for duration — which is not a derivative.

As a disciple of Mises I am very far from endorsing the Bagehot system — we might even call it a “Bagehot scheme.” Although it creates constant instability and frequent calamity, it does work. Its expansionary bias may even be appropriate for a nation in the process of an expanding industrial and commercial revolution, like 19th-century England or 20th-century America.

Let’s enumerate the stages of systemic decline from a free-market hard-money economy to a full command economy. Facilis descensus Averno — it is easy to walk down this staircase, hard to climb. Heaven is the top of the stairs; hell is the bottom. But most doubts about heaven are the consequence of ugly failures to ascend — usually involving epic liquidation and depression.

Level 1: hard metal and strong accounting

The top step is a hard-metal central bank like the 17th-century Bank of Amsterdam, which does not lend or expand the money supply — it’s just a gold warehouse with tradable receipts. Like Coinbase for gold. It is difficult to claim that hard money is incompatible with capitalism, when modern capitalism was born in the Dutch Golden Age.

An ideal hard-money economy uses cashflow accounting for any financial intermediaries — meaning an entity must plan to pay off all its debts without borrowing money or selling assets. Every promise of payment must be matched by expected revenue. Crazy as that sounds!

In this hyper-Austrian financial system (which has never quite existed, though some periods have come close), the market for duration is stable and unmanipulated. The yield curve — the price of money available at a time in the future — is set by supply and demand at every maturity. To offer a 30-year mortgage to one customer, a bank needs another willing to buy a 30-year CD.

At least from our less heavenly perspective, this system would seem very different. Long-term interest rates are high; asset prices are low. Houses, for instance, are cheaper; rents are lower. Perhaps this horrifies you.

If the money supply is fixed (gold is not a perfect currency, because new gold is mined), markets are flat except in the case of real events that affect everyone. Unrelated assets are uncorrelated; the efficient market hypothesis holds true; there is no “financial weather” or “business cycle.”

If this isn’t heaven, what is? But getting to heaven is never easy.

Level 2: soft metal and weak accounting

The next step down is the Bagehot (again, pronounced “badge-it”) scheme, which has two variants: protected and unprotected.

In an unprotected Bagehot scheme, weak accounting standards let companies fund long-term loans with current money. Like your bank account. Which is no longer a Bank of Amsterdam vault receipt for cash. Now, it’s a revolving zero-term loan to the bank. (Your loan comes due every instant, and you renew it every instant that you don’t hit the ATM.)

This artificial source of demand for duration reduces the price of duration, flattening the yield curve. Flattening the yield curve means lower long-term interest rates and higher asset prices, benefiting the rich at the expense of the poor. Stocks go up, factories go up, houses go up, rents go up, line go up.

But the artificial demand isn’t real. All these zero-term loans cannot be repaid at the same time. A bank run is the collapse of a Bagehot scheme.

Everyone with no demand for duration calls their zero-term loans. The banks must sell duration to compensate. The small real demand for 30-year CDs is dwarfed by the huge artificial supply of 30-year mortgages that the Bagehot scheme has created. The yield curve skyrockets, with long-term rates higher than the hard-money rate. Asset prices crash and a “recession” strikes.

This calamity must be sold to the peasants as a causeless, inexplicable natural disaster, like a hurricane or an epidemic. A banker’s neck is soft and delicate. Anything tighter than a tie might chafe it.

But in a protected Bagehot scheme, the calamity never happens. A central bank or other cash-rich player (the first Anglo-American artists in this medium were Charles II’s goldsmiths) realizes that, by maintaining a cash buffer which can replace even a small fraction of this duration demand, it can not only stop the bank run but profit from it.

If the protector steps into the bank run and “lends freely” — by buying high-quality long-term assets — it can stably corner the market for duration. If it can “restore confidence” by bailing out the banks, it pulls off a successful Texas hedge. Buying these assets makes their price go up — and when “confidence” returns, the market can easily reabsorb them. And the central bank shows a profit. Just like in 2008!

In modern financial parlance, fake duration demand is called “liquidity.” This Orwellian confusion with the literal definition of the word (which literally refers to transaction costs; your house is an “illiquid asset” because it’s difficult and expensive to sell) is essential to the Bagehot scheme.

The fundamental nature and purpose of a Bagehot scheme is what today’s professors call financial repression. Its goal is to prevent free-market price discovery in the market for duration — that is, the interest-rate market. It works by jamming a natural price signal.

It’s essential to understand that Bagehot bailouts work because they stabilize a multiple equilibrium. The Bagehot “confidence” is an unstable equilibrium — a bubble that wants to pop. But it does not need to pop. Any shock may pop it; the protector is right there with the buffer, “lending freely.” Nice protector!

And since the unstable equilibrium is far more pleasant for all than the stable equilibrium, in which everything liquidates down to hard money and free-market interest rates, the peasants come to look on the Bagehot scheme — despite these occasional weird glitches — as good. The protector is their patron and savior. The banker unbuttons his collar and lets his neck breathe freely.

Level 3: fiat currency and the infinite martingale

But exactly how big does the protector’s buffer have to be?

The 19th-century Anglo-American financial system defined the stability of a metallic Bagehot scheme in terms of “coverage.” How much debt could a certain buffer of gold protect? Was it 2 to 1, 4 to 1, 10 to 1? Much ink was spilled on derivations of the true and proper expansion ratio.

With our modern understanding of game theory, we know that there is no mathematical formula for coverage. How much of a buffer do you need to win the finite martingale? It… depends.

The solution is to merge the protector with the state. As late as 1907, the House of Morgan acted as a private protector for a gold-based American financial system. Even the Fed, today our most important government agency (and arguably our most competent), still shows traces of its nominally quasi-private origin; its weird regional branch structure was a political device to pretend that it was not a central bank on the then-hated British pattern.

When the finite martingale goes bankrupt, the protector fails upward, and becomes a government agency. Its gold liabilities, which it cannot cover, become sovereign equity. Bankruptcy is a conversion of debt to equity; fiat currency is stock in the government.

Since the government can issue infinite equity (“money printer go brr”), the new system is protected by an infinite martingale. Much safer. Financial expansion is not limited by any silly old pile of metal or “coverage ratio.”

The country shifts seamlessly to this new monetary standard. Government stock pays no dividend and is useless — just like Bitcoin. Or even gold, for anyone who doesn’t wear tacky jewelry. The price of the old metallic standard may even fall. The banker loosens his tie, to fit his jowly new jowls.

Level 4: pushing on a rope, QE, and yield curve control

But as the debt bubble grows, new problems emerge. It turns out that fiat currency has not abolished the business cycle at all. The yield curve can still wiggle; asset prices can still crash.

Reasonably choosing to ride the rising escalator of asset prices, the peasants stop holding mere bank accounts. They buy stocks and bonds and houses and anything that goes up. Their jowls grow as well. Everything is nice. Rather than just making bankers richer, the financial system is making everyone richer — everyone with assets, that is. “Buy and hold” becomes the mantra; or “passive investing” in “index funds,” an idea as strange as “passive gambling.”

In the classic 20th-century system, the central bank — now a government agency — cannot set long-term interest rates and asset prices directly. It can only make short-term loans to private actors which buy and sell these assets. But when everyone is a bank — or at least, everyone is a financial speculator — everyone is unprotected again.

When the bubble pops, everyone is selling duration again. No one wants to lose money, so no one wants to borrow money to buy assets whose price is falling. The central bank is “pushing on a rope.” It can “lend freely” as much as it wants — it will find no borrowers.

Once private actors participate directly in the market for duration, a crash in the yield curve — which affects both stocks and bonds, since stock dividends compete with bond yields, and stocks are priced as a function of the interest rate — cannot be bailed out by lending to banks.

The solution is for the central bank to define a certain set of borrowers as “risk-free,” and effectively pull them onto its balance sheet.

Treasuries, for instance, are risk-free not because of the famous financial prudence of the US Government, but because the Fed will always buy them. And the Fed, which does not take risks, can and will always buy them — because they are risk-free. Isn’t this just beautiful? Like a diamond?

This informal guarantee is then extended by the Fed, itself a quasi-governmental corporation, to other such quasi-agencies. Nominally the Fed is not even the protector of banks; this role is performed by FDIC, which cannot issue dollars and has only a tiny and inadequate buffer.

But FDIC is risk-free, because… because its name is an acronym… because everyone knows the Fed will bail it out. So at the heart of our 21st-century First World financial system is an informal financial instrument. Dang, yo.

In 2008 this protection was extended to the strange cluster of 1930s “agencies” with weird, homey names, like “Ginnie Mae” and “Freddie Mac,” created by FDR to reward his faithful voters with cheap long-term mortgages. Before 2008 these quasi-private companies actually had shareholders, who in a rare spasm of rectitude were actually wiped out; my grandmother’s estate had a bit of preferred agency stock, which became worthless.

But their debts were guaranteed. And any finance professor will tell you that if you guarantee an entity’s debts, it belongs on your balance sheet. From a forensic accounting perspective, there is just one entity— Fed, Treasury, FDIC, GNMA and FNMA and FHLMC, even USG itself — just call it Fedland, Inc. And a dollar (“Federal Reserve Note”) is a Fedland share. If only you knew how simple things really are!

Level 5: universal speculation and the everything bubble

The inevitable outcome of direct Fed purchases and guarantees of long-term risk-free debt is, as we say, “flattening the curve” — full postmodern finance, with zero interest rates at every term. The US was the last to adopt postmodern finance, or “yield curve management” — an admission it is still rhetorically fighting. Europe and Japan were already there; Japan was first.

The peasants, long since used to the bizarre requirement that they all become financial speculators, can no longer earn any kind of risk-free yield from mere duration. Undeterred, they all pile into risk. Since all the peasants are buying, risk goes up. Fortunately, asset prices are a function of interest rates — and when interest rates are zero, that function yields — infinity.

The bankers, too, are buying. Everyone gets rich! Buy stocks, and retire at 40! And since everyone has more and more money every year, and money is made to be spent, business booms; and stocks go up. (These levels are obviously not chronological; the 2010s rhyme quite well with the 1920s.)

But when the risk market collapses — sometimes on its own, sometimes because of some external shock — the central bank is now in the position of manipulating a prediction market.

The duration market is a primary market. The bank need merely add infinite demand. Anyone looking at the Fed’s balance sheet, now stuffed with as many risk-free Treasuries and agencies as infinity can eat, can see that it will never fail in yield curve management.

A prediction market is a derivative market — one betting on something else. The Fed, bailing out risk spreads, is in the position of the rich 49ers fan.

Can big bets move the Vegas spread? Maybe a little — but big dumb bets attract big smart bets. Can moving the spread change the game? Maybe — but the fundamental solvency problem is the virus, not some postmodern shadow-bank run. The Fed lends; it does not spend; nor can it cure.

It seems unlikely to win with a finite martingale the size of the current ESF. But who knows. But if it can get the Congress, or Treasury, or its own sheer illegal gall, to let it bet infinite money, the Fed will win. Then it goes to level 6.

Level 6: Japanese corporate socialism — at best

The only further step is the end of anything that can be called capitalism. What if the Fed can manipulate risk spreads? Japan has been doing it for ages. The answer is simple: it will drive them to zero, and they will stay there.

In Japan, there are no bond risk spreads. Corporate bonds pay zero interest. All corporate bonds are rated investment-grade. What about high-yield (“junk”) bonds? Doh! There are no high-yield bonds in Japan.

And of course, the BOJ buys equities too. Has this sent Japanese stocks to the moon? Think again — the Japanese stock market peaked in the 1980s.

It is a mistake to think that a risk-asset market under the direct control of the central bank will go to the moon. The central bank entered the market as an anesthetic; animal spirits had driven Japanese assets (especially real estate) to the moon; “lending freely” is a strong drug, too; but no bureaucrat ever set out to get the world high — just to make everybody feel okay.

A deflating bubble wants to suck the money out of everything. Every bond needs to default, or be paid off. Even if the Fed buys it — the Fed does not forgive it. The US has 8 trillion dollars in corporate bonds — and 4 trillion actual dollars (M0, narrow money). That bond wants to suck all its dollars out of the world, and give them to the Fed — which does not need them.

As the everything bubble deflates, it becomes the everything run. Fiat rex! In a depression, cash is king. Everything wants to turn itself into cash, as fast as possible. And there is no cash, so nothing can turn a profit. Bummer, dude.

But if the Fed can pull FNMA and GNMA onto its balance sheet, and make their debts risk-free, why not Ford and GM and Boeing? And all other listed public companies, of course. Or at least, all of them that have issued bonds…And that’s how we would turn Japanese. And why not equities, too?

Japan has survived this phenomenon — first, by being amazing and unique and Japanese; second, by remaining the world’s leading creditor nation; third, by nationalizing its whole economy in objective financial reality, but retaining the structures, incentives, and efficiencies of capitalism; Japan is — Japan.

But if this final abandonment of free-market finance is poorly handled, the result is the Soviet Union. Or Venezuela. Or some compromise between them. But this is America, so I’m sure it will be executed well.

Getting back to level 1

Is it possible to climb the stairs? Yes — but not easy. Though far beyond our state capacity today, it is not impossible — a conversation for another time. It’s enough to say that mass liquidation, Austrian style, is definitely not the way.

Disclaimer

The author holds small put positions on various equity and bond indexes.