The Day America Ran Out of Options
What this covers
The slow death of the dollar has already begun and the man who just took control of the Federal Reserve can't stop it. Jay breaks down the impossible choice now sitting on the desk of the new Fed Chairman, Kevin Warsh. He traces the trap back to the Panic of 1907, the run on the Knickerbocker Trust and the day J.P. Morgan saved the entire U.S. financial system out of his private library with real gold and cash, and shows how that single crisis built the Federal Reserve, and how the Fed has quietly gone from moving real money to conjuring it out of thin air on a keyboard. As foreign governments are forced to sell U.S. Treasuries to pay for oil, Warsh is cornered into one of three choices: defend the dollar and crush the economy, print to save the bond market and bleed the currency, or walk away from the war and surrender American credibility. Jay explains why every central banker in history, when forced to choose between a fast death and a slow death, makes the exact same call — every single time — and what that means for you before it arrives.
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0:00 The three doors Kevin Warsh just inherited 0:28 The trap closing around the dollar 1:30 1907: the run that built the Federal Reserve 2:49 How J.P. Morgan saved America with real money 4:24 The secret meeting that created the Fed 5:51 The day money became a keystroke 7:39 The $9.4 trillion the world could dump 9:18 The swap line "lifeline" — amend, extend, pretend 13:00 The worst job in the world lands on one desk 13:27 Door #1: Save the dollar (and break the economy) 16:30 Door #2: Save the bond market (and kill the currency) 19:10 Door #3: Walk away (and lose the world's trust) 21:38 Why there is no fourth door 22:01 The choice every central banker always makes 24:12 What you do before the slow death hits
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Kevin Warsh, the newly confirmed Federal Reserve chair, will inherit a trilemma between defending the dollar (fast economic death), saving the bond market (slow currency death), or ending the Iran war (loss of credibility), and historical precedent guarantees he will choose to save the Treasury market by creating dollars, leading to gradual currency devaluation that investors should prepare for by holding hard assets.
- The Federal Reserve's founding mission is to prevent financial system collapse through liquidity provision, a role that has evolved from Morgan's real-money triage in 1907 to keyboard-generated dollar creation since 1913
- Every central bank in history facing a fast death (immediate financial system failure) versus slow death (gradual currency erosion) chooses the slow death, and this historical pattern predicts Warsh's choice
- The current geopolitical and fiscal situation (Strait of Hormuz closure, $122% debt-to-GDP, $1 trillion annual interest bill, rising Treasury yields from foreign selloffs) makes the Fed's traditional playbook of quantitative easing inevitable
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J.P. Morgan saved the United States in 1907 with real money—gold, deposits, and hard wealth he and his peers had earned over lifetimes—and could not have imagined a system in which dollars were typed into existence on keyboards to plug holes in the bond market and certainly would not have trusted it.
“J.P. Morgan saved the United States in 1907 with real money, with gold deposits, hard wealth he and his peers had earned over lifetimes. He could not have imagined the system in which dollars were typed into existence on keyboards to plug the holes in the bond market. He would not have understood it, and he certainly would not have trusted it.”
Morgan held no charter, no mandate, and no government authority to intervene in the 1907 panic, having only cash, credibility, and the willingness to use them, and if he had been in Europe, sick, dead, or uninterested in being a hero, the United States might have crashed in a way no one in the century had ever seen.
“Morgan held no charter, no mandate, no government authority. He had cash, credibility, and the willingness to use them. If he had been in Europe, or if he had been sick, dead, or simply uninterested in being a hero, the United States might have crashed in a way no one in this century has ever seen.”
In October 1907, J.P. Morgan personally rescued the United States financial system from collapse by coordinating approximately $25 million in emergency loans and sorting troubled institutions into those solvent enough to save and those that must be allowed to fail, working from his personal library on Madison Avenue.
“He gathered the heads of all the major New York banks and trusts to his home. He locked the doors of his library and told them they weren't leaving until they had pulled enough cash to backstop the system. He personally examined the books of the troubled trusts and decided which ones were solvent enough to save and which had to be allowed to fail. He coordinated roughly $25 million in emergency loans”
The Federal Reserve creates new dollars by typing them into the accounts of commercial banks electronically, not through a printing press, and these keyboard-created dollars have no physical gold backing, resting only on the collective agreement that they will hold their value.
“When the Federal Reserve steps in to save the system, it does so by creating new dollars more or less out of thin air. And I'm not figuratively, literally. The Fed types those dollars into the accounts of commercial banks, banks that did not have the money 5 seconds earlier, and the new dollars enter circulation. There is no printing press, right? There is a keyboard. There's no vault of gold backing the new dollars. There is only the promise that they will hold their value.”
If a currency swap loan is repaid at maturity, the created dollars vanish from the system with no net growth in money supply, but historically every currency swap extended by the Fed has been repaid because the network was restricted to large, mature, stable economies like the ECB, Bank of Japan, Bank of England, and Swiss National Bank.
“If the borrower pays those dollars back at maturity, the loan comes off the Fed's books and the dollars that were typed into existence vanish from the system. So, there's no net growth in the money supply. The cycle closes cleanly. And to date, it's important to know that every currency swap line the Federal Reserve has ever extended has been paid back. But that history is built on a very specific group of borrowers.”
As the dollar supply increases through quantitative easing and Treasury purchases, each additional dollar created lowers the value of all existing dollars, causing inflation at the grocery store, gas pump, mortgage payments, and school costs, while wages don't keep up, causing savers to shrink relative to purchasing power and fixed-income retirees to see purchasing power evaporate.
“every dollar created this way is one more layer on that leaning tower. The supply of dollars goes up and the value of each dollar goes down. At the grocery store, at the gas pump, in the mortgage payment, in the price of a child's school year. Each round of printing pushes another layer of inflation through the American economy and wages, they don't keep up. Savings shrink relative to what they can buy. Fixed income retirees watch their purchasing power evaporate.”
The Federal Reserve was created in 1913 following the 1907 panic to institutionalize the emergency lending function that J.P. Morgan had performed manually, giving it the power to create new cash on demand and provide liquidity to the financial system.
“Three years after that meeting, on December 23rd, 1913, President Woodrow Wilson signed the Federal Reserve Act into law. A new institution that had the power to do, on demand, what Morgan had done by hand. When banks ran short of cash, the Fed could create new cash and lend it to them. When markets froze, the Fed could thaw them out. When the system needed liquidity, the Fed could produce it. And that is the founding mission of the Federal Reserve.”
Every panic the Fed has prevented since 1913 has added to a pile of keyboard-created dollars that has grown for over a hundred years and is now an unimaginably tall stack of paper resting on an unspoken agreement that everyone will keep accepting it as wealth.
“Every panic the Fed has prevented since 1913 has added to the pile of those keyboard created dollars. Every recession, every banking crisis, every wobble in the bond market, everyone has been met with another round of dollar creation. The pile has grown for over a hundred years. It is now an unimaginably tall stack of paper resting on an unspoken agreement that everyone will keep accepting it as wealth.”
Paul Volcker, as Federal Reserve chairman starting in 1979, raised the federal interest rate to 20% to crush double-digit inflation and strengthen the dollar, which worked but caused two back-to-back recessions, unemployment near 11%, farm bankruptcies, and intense personal threats against Volcker.
“Paul Volcker ran in 1980... he raised the federal interest rate to 20% and it worked. He crushed inflation. The dollar strengthened against every major currency on Earth. But, the cost was brutal. Two back-to-back recessions, unemployment hit nearly 11% farms went bankrupt by the thousands, home builders began mailing Volcker pieces of 2 by 4 lumber inscribed with the names of the construction workers they had laid off. And he received so many death threats that he was assigned a Secret Service protection detail.”
The Strait of Hormuz has been effectively closed since early March, resulting in approximately 20% of the world's oil being off the market for over 12 weeks, with oil rising above $100 per barrel, and inflation accelerating again with the latest core PCE print being the worst since 2022.
“Now, the Strait of Hormuz is still closed. We are now over 12 weeks and roughly 20% of the world's oil has been off the market for the entire spring. Oil is over $100 per barrel and rising and the inflation that everybody pretended was beaten last year is accelerating again. The latest core PCE print was the worst since 2022”
Door One involves stopping new dollar creation and raising interest rates to defend the dollar's value, which makes US debt more attractive to foreign buyers, reduces inflation, and preserves currency value, but crushes the economy.
“Door one, save the dollar. First of all, stop creating new dollars and raise interest rates, defend the value of the currency. Now, higher interest rates makes US debt more attractive to foreign buyers. When foreigners come back to the auctions, the Federal Reserve doesn't have to step in and create new dollars to absorb the bonds that nobody else wants because higher interest rates incentivize other foreigners to buy that debt. So, fewer dollars means less inflation and less inflation means the currency holds its value.”
In November 1910, a small group of men (Senator Nelson Aldrich, Assistant Secretary to the Treasury, and four senior bankers including representatives from the House of Morgan and what is today Citibank) boarded a private railcar from Hoboken, New Jersey, traveling under assumed first names and dressed as if going on a hunting trip, carrying drafts of Federal Reserve Act legislation to a hunting club on Jekyll Island owned by J.P. Morgan, with the actual purpose of drafting the Federal Reserve Act in secret.
“And so 3 years later, in November of 1910, a small group of men boarded a private railcar at a station in Hoboken, New Jersey. They were traveling under assumed first names, and they had been told to dress as if they were going on a hunting trip. They were carrying, however, drafts of a piece of legislation that the United States Congress had not even seen yet. The men were Senator Nelson Aldrich and Assistant Secretary to the Treasury and four senior bankers, including representatives from the House of Morgan and what is today Citibank. Their destination was a hunting club on Jekyll Island off the coast of Georgia, owned by J.P. Morgan himself. The cover story was a duck hunting trip. The actual purpose was to draft in secret what would become the Federal Reserve Act.”
The Knickerbocker Trust, the third largest trust company in New York, experienced a bank run on October 22, 1907, when frightened depositors lined up around the block at 5th and 34th Street to withdraw savings totaling the equivalent of roughly half a million dollars in modern terms, and the trust had paid out everything by 12:30 PM before locking the doors.
“On the morning of October 22nd, 1907, a line of frightened New Yorkers stretched around the block at the corner of 5th Avenue and 34th Street. They were holding bank books. They were waiting to pull their savings from an institution called the Knickerbocker Trust, the third largest trust company in New York where they had collectively deposited what would today be the equivalent of about half a million dollars. But by 12:30 in the afternoon, the trust had paid out everything that it had, roughly $8 million in cash, and then they locked the doors.”
Treasury Secretary Scott Thew testified before US senators on Capitol Hill on April 22nd confirming that many Gulf and Asian allies had requested currency swap lines of their own and defended the practice as protecting dollar liquidity in stress scenarios.
“And on April 22nd, in a testimony before the US senators on Capitol Hill, Treasury Secretary Scott the sent confirmed that many Gulf and Asian allies had requested currency swap lines of their own. And he defended the practice as protecting dollar liquidity in stress scenarios.”
The distinction between Morgan moving around existing money and the Fed creating new money is 'this whole story' because it explains why the tower of created dollars is starting to lean visibly in May 2026, forcing the new Federal Reserve chair to make an impossible choice.
“And that distinction between Morgan moving around existing money and the Fed creating new money is this whole story. Because in May of 2026, the tower is starting to lean visibly.”
Argentina, with nine sovereign defaults in 200 years of history and one of the most volatile currencies on the planet, was added to the Fed's currency swap line network last year, and the UAE was added last week, with Treasury Secretary Scott announcing that many Gulf and Asian allies have also requested swap lines.
“Argentina, a country with one of the most volatile currencies on the planet and nine sovereign defaults in 200 years of history, was added to that list. And last week, the United Arab Emirates joined them. And on April 22nd, in a testimony before the US senators on Capitol Hill, Treasury Secretary Scott the sent confirmed that many Gulf and Asian allies had requested currency swap lines of their own.”
Every central bank in history, when forced to choose between a fast death (failed Treasury market causing immediate financial system collapse in days) and a slow death (gradual currency devaluation over years), chooses the slow death without exception.
“Every central bank in history, when forced to choose between a fast death and a slow death, chooses the slow death. Every single time, without exception. A failed Treasury market is a fast death. The financial system stops working in days. The federal government cannot fund itself. So, banks fail, pensions seize up, markets reprice everything at once. But, a weakening currency, that's a slow death. That's inflation, erosion of your purchasing power. Foreigners gradually back away, asset prices climb in nominal terms while purchasing power drains away in the background. But, it plays out over years, not days.”
Kevin Warsh was confirmed by the US Senate as the next Chair of the Federal Reserve by a vote of 54 to 45 and will inherit the position within a matter of weeks, taking over from Jerome Powell.
“On Wednesday, just last week, the United States Senate confirmed Kevin Warsh by vote of 54 to 45 as the next chair of the Federal Reserve. When Kevin Warsh walks into JP Morgan's founding role, and it will be within a matter of weeks, he is going to inherit the most consequential job in global finance at the worst possible moment to inherit it. He'll be taking over from Jerome Powell.”
The new Federal Reserve chairman Kevin Warsh is about to inherit three doors: behind one is a crashed economy, behind the second is a dying currency, and behind the third is the end of American credibility, with no fourth door available.
“The new chairman of the Federal Reserve was just confirmed by the United States Senate and he is about to inherit three doors. Now, behind one is a crashed economy, behind the second is a dying currency and behind the third is the end of American credibility. And there is no fourth door.”
At excessively high interest rates, the interest bill on America's $39 trillion in debt would compound faster than the federal budget can absorb it, creating an unsustainable fiscal situation.
“If there's more sellers than buyers, the price will fall. And when the price of a US Treasury bond falls, the interest rate the United States has to pay on new debt climbs. And at too high of an interest rate, the interest bill on America's 39 trillion dollars of debt starts to compound on itself faster than the federal budget can absorb.”
The dollar's premium as the world's reserve currency rests on a single belief: that the United States can project force globally and back its commitments, and if that belief is removed, foreigners will hold fewer dollars and fewer Treasuries and demand higher returns for the ones they still buy.
“Because you have to remember something. The dollar's premium as the world's reserve currency rests in the end on a single belief. And that is that the United States can project force globally and back its commitments. But, if you take that belief away, foreigners are going to hold fewer dollars, fewer Treasuries, and demand higher returns for the ones they still buy.”
Foreign governments hold approximately 9.4 trillion dollars in US Treasury bonds, and when the Strait of Hormuz closure forced oil prices higher, some of those governments were forced to sell American Treasuries to raise money to purchase oil on the open market, causing Treasury prices to fall and interest rates the US must pay on new debt to climb.
“Foreign governments hold roughly 9.4 trillion dollars of US Treasury bonds. When the war broke out and oil ripped higher, some of those governments were forced to sell their American Treasuries to raise the money they needed to buy oil on the open market. Now, when too many holders sell, the price of those bonds falls, the same as any asset. If there's more sellers than buyers, the price will fall. And when the price of a US Treasury bond falls, the interest rate the United States has to pay on new debt climbs.”
As the list of countries borrowing emergency dollars through swap lines expands, the probability increases that the terms on those loans will be adjusted through 'amend, extend, and pretend'—amending terms to extend maturity dates and pretending everything will be fine—causing created dollars to stop vanishing and instead accumulate in the system.
“The longer the list of countries borrowing emergency dollars, the higher the probability that the terms on those loans get adjusted to meet the borrower where they're at. In banking, we call this amend, extend, and pretend. You amend the terms of the loan to extend the maturity date and pretend everything is going to be fine. Loans get extended, new ones replaced, maturity dates slide further into the future. The created dollars stop vanishing, they start accumulating.”
Door Three's cost is paid in American credibility: if the US withdraws from Iran under Iranian pressure after starting the war, the rest of the world will see the United States as forced to retreat, causing every adversary (Beijing watching Taiwan, Moscow watching NATO) and smaller powers to downgrade their estimate of what Washington can accomplish.
“Although, if the Americans were to withdraw from Iran on Iran's terms, although there would be a marketing spin back home to convince the American people that somehow this is mission accomplished, the rest of the world would see what really happened. The United States started a war and then was forced to retreat. And every adversary the United States has, Beijing watching Taiwan, Moscow watching NATO, and every smaller power watching whether American security commitments are worth the paper they're printed on updates its estimate of what Washington can actually accomplish.”
The latest core PCE print (the most recent inflation data available when this video was made) was the worst since 2022, indicating that inflation the Federal Reserve had claimed was defeated is accelerating again.
“The latest core PCE print was the worst since 2022, but the impact of 3 months of expensive oil hasn't even fully been priced in to the data yet.”
The UAE approached Washington with an implicit threat: 'Help us or we'll crash your bond market,' resulting in the United States extending an emergency currency swap line rather than allowing the UAE to liquidate its Treasuries.
“So, instead, what it did is approach Washington with a proposal. They said, 'Help us or we'll crash your bond market.' The UAE asked for an emergency short-term loan known as a currency swap line.”
A failed Treasury market is a fast death because the financial system stops working in days, the federal government cannot fund itself, banks fail, pensions seize up, and markets reprice everything at once.
“A failed Treasury market is a fast death. The financial system stops working in days. The federal government cannot fund itself. So, banks fail, pensions seize up, markets reprice everything at once.”
Americans who already own assets (stocks, homes, gold) get richer in nominal terms through Door Two's asset inflation, while Americans without assets get poorer in real terms as their purchasing power erodes, creating a hidden wealth transfer.
“The Americans who already own assets, however, stocks, homes, gold, they get richer in nominal terms, but the Americans that don't get poorer in real terms.”
Door Three involves the United States ending the war with Iran, allowing the Strait of Hormuz to reopen, letting oil prices fall back to $60, allowing inflation to cool naturally, and Treasury auctions to normalize, removing the underlying pressure on the system.
“In door three, the dark horse, the United States ends the war with Iran. They walk away. They let Hormuz reopen. They let the oil price come down. They let the pressure on the system release. Now, this is obviously, like I said, not the decision of Kevin Warsh, but it is worth covering nonetheless because this is the door where the underlying cause of the pressure goes away. If oil drops back to $60, inflation will eventually cool on its own, and the Treasury auctions might normalize.”
Door Two's slow death through currency devaluation is disguised as other causes (corporate greed, foreign competition, immigration, previous administration), and most people don't understand how inflation actually works, so they can't trace the cause back to Federal Reserve decisions months or years earlier, allowing politicians to point blame elsewhere.
“A problem for another day. A problem that can be disguised as something else. And quite frankly, that is always a politician's first choice. And because most people don't understand how inflation actually works, they don't know who to blame for it. They can feel the price of groceries climbing. They can feel the rent going up. They feel their paycheck shrinking, but they can't trace the cause back to a decision made at the Federal Reserve months or years earlier. And so, the politicians point blame. They blame corporate greed. They blame foreign countries. They blame immigration. They blame the previous administration, but conspicuously, the central bank is almost never on the bad guy list.”
If you understand the Fed's historical choice pattern, you stop being surprised by what is coming, stop trying to time the market, stop arguing about whether Hormuz will open this month or next, and instead position yourself for the slow death by holding hard assets, commodities, gold, energy, real things, and productive assets that throw off cash.
“And if you understand this, like really understand it, with the mechanics under your fingers and history at your back, you stop being surprised by what is coming. You stop trying to time the market. You stop arguing about whether Hormuz will open this month or next. And instead, you position yourself for the slow death. And that means hard assets, commodities, gold, energy, real things, productive assets that throw off cash, industries that don't depend on a strong dollar to make their numbers.”
Kevin Warsh will open Door Two because of the desk he will be sitting at—the same desk where Jerome Powell sat in 2020, Ben Bernanke sat in 2008, and Alan Greenspan sat through 1998, and every one of them faced the same choice and made the same call.
“Warsh is going to open door two. Why? It's because of the desk he'll be sitting at. It's the same desk where Jerome Powell sat in 2020, where Ben Bernanke sat in 2008, where Alan Greenspan sat through 1998. And every one of them faced a version of the same choice. Every one of them made the same call.”
The Federal Reserve has run the triage playbook (save immediate financial system, accept slower currency erosion) for over a century, and Kevin Warsh will run it again.
“The Federal Reserve has run that playbook for over a century, and it's going to run it again.”
Charles Barney, president of the Knickerbocker Trust, walked home after the bank run exhausted its cash reserves and three weeks later shot himself, illustrating the personal consequences of financial system failure in the pre-Fed era.
“The president of the Knickerbocker, a man named Charles Barney, walked home. And 3 weeks later, he shot himself.”
The United States is funded by debt in the manner of a consumer living on a credit card, making access to more debt the big determinant in the economy's trajectory.
“Now, because the United States is funded by debt, like a consumer living on a credit card, access to more debt is the big determinant in the story.”