The liquidity slowdown is not because the Fed is tightening aggressively, but because the real economy is so strong and consuming available liquidity, crowding out financial markets.

Global liquidity peaked in late 2025 and has been slowing down, which matters critically because liquidity is the marginal price of assets in financial markets.

The US economy likely avoids recession despite oil price shocks and rising rates because the Federal Reserve is not tightening with the same alacrity as in past oil shock cycles, combined with underlying momentum from the fiscal deficit and capex spending, which are both resilient to rate increases.

Short-term government debt funding represents monetization, which historically leads to Main Street inflation; this is what Milton Friedman would object to, as the banking system becomes compelled to purchase government debt rather than extending credit to the real economy.

Global deficits are exploding primarily due to aging demographics in the West requiring higher welfare, social security, and Medicare spending; governments cannot reduce spending (Democratic preference) or raise taxes (Republican preference), so deficits are compelled to widen.

Global liquidity is the starting point that drives everything else; it precedes what happens in the real economy, which is downstream of liquidity, and geopolitics is downstream of economics; money drives markets and money flows through global financial markets is the foundation of economic dynamics.

Deglobalization and trade protectionism require massive duplication of supply chains and defense systems globally, creating substantial new investment spending (capex) that will drive commodity demand and inflation in the medium term.

Normal US GDP growth (inflation plus growth combined) is likely to be between 6-7% going forward, which implies a target of about 6% for the 10-year Treasury yield, with only temporary respite from Treasury/Fed efforts to keep yields down.

Bitcoin is an excellent barometer of US liquidity conditions, reacting closely to Fed liquidity growth; when Fed liquidity slows, Bitcoin suffers correspondingly.

A steeper yield curve is required for commercial banks to continue lending at rates similar to previous periods; if the Fed raises rates but the curve remains flat or inverted, banks will face margin compression and may reduce lending volumes.

This money reallocation from financial to real economy creates warning signals for Wall Street; asset price sequences matter, and gold/Bitcoin weakness historically precedes broader equity market stress.

The US dollar trade-weighted index has been in an uptrend since the Global Financial Crisis, underpinned by capital flows driven by two factors: enthusiasm about US tech leadership and post-GFC banking/insurance regulations that made US assets more attractive to international financial institutions.

The 2-year Treasury yield is a superior predictor of actual short-term interest rates (specifically SOFR) compared to Fed funds rate expectations, as demonstrated by its track record correctly predicting rate rises in 2021-22 well in advance, and currently the 2-year is signaling that rates must go up.

In 2021-2022 when the Fed tightened, Wall Street declined 25% and Bitcoin fell 75%, demonstrating the asymmetric impact of tightening cycles on different asset classes.

The UK welfare state has become fiscally unsustainable with welfare spending now exceeding tax receipts; this represents a cautionary tale and laboratory experiment showing how to destroy an economy through excessive welfare spending.

Central banks globally are moving toward tightening because most have pure inflation remits, and as inflation picks up, they are compelled to tighten.

Repo market stress and bond volatility spikes are symptoms of a collateral-based financial system under strain; the Treasury attempts to control bond volatility through buyback operations that swap illiquid off-the-run bonds for liquid on-the-run bonds, which correlates with MOVE Index movements.

The Fed will not be able to shrink its balance sheet in the short term because previous attempts at quantitative tightening in late 2015 caused repo market problems; longer-term balance sheet reduction would require banking system reforms to reduce required liquidity holdings, which could push liquidity out of banks into markets.

Higher interest rates combined with higher debt and widening deficits create a compounding debt trap where debt grows exponentially, and this is being funded through short-term treasury bills at the front end of the curve, which requires banks to continuously roll over and purchase short-duration debt.

The Treasury yield curve is flattening despite consensus expectations at the beginning of the year for steepening, and this flattening is a reliable indicator of tightening liquidity conditions that the Fed and Treasury do not want but cannot easily engineer differently because markets set interest rates.