Asset Bubble Crescendo Until 2027 Collapse When U.S. Treasury Market Implodes, Argues Mel Mattison

The Triffin dilemma (or Triffin's paradox), predicted by John Maynard Keynes in 1944, states that a reserve currency country must feed the global economy the dollars it needs, which inevitably leads to perpetual debt accumulation that eventually becomes untenable.

“as was predicted by John Maynard Keynes in 1944 Bretton Woods, that if you put the US dollar as as a reserve currency, you get into the situation that many of your listeners may be aware of, you know, Triffin's paradox or Triffin's dilemma, where the the reserve currency country essentially to feed the global economy the amount of dollars that it needs, gets itself in perpetually untenable debt situation”

The Soviet Union, fearing US confiscation of their dollar holdings, approached London banks in the 1950s requesting they hold dollars outside the US banking system, initiating the eurodollar market with a wink-wink deal between London banks and the Bank of England.

“the Soviet Union actually was afraid that, you know, the United States could essentially confiscate their dollars. And they did not want to hold their dollars in a US bank. And they went to a London bank in the 1950s and they said, we want to hold dollars. Can you hold dollars? And a kind of wink wink nudge nudge deal was made between the London banks and the Bank of England to say, look, if you're going to hold dollars, these are not pound sterling, and we're not going to regulate it.”

The UK mortgage market, unlike the US, features primarily floating-rate and short-duration fixed-rate mortgages, meaning UK homeowners are already experiencing the impact of higher interest rates, which will crimp mortgage credit and economic activity.

“unlike in the US, in most of the rest of the world, mortgages are effectively floating rate or fixed-rate but short duration. So, there's no, 'Oh, I got a 3% mortgage at 30 years and even though mortgage rates went to 7%, I'm fine and you know, my kids could get my house'... That doesn't really exist in the rest of the world.”

The 1920s experienced a massive technological boom with RCA (radio) and General Motors (automobiles) that led to extremely high valuations, yet it took 20 years for RCA stock to recover to 1930s highs, demonstrating that even with genuine technological progress, bubbles require decades to work off.

“there was a vast technological boom going on in the 20s. RCA was one of the hottest companies with radio, General Motors. So you had cars and radio and all these amazing things that people thought were just going to be spectacular growth engines and they were, but it took you know 20 years for RCA stock to get back to the highs that it that it gotten in in the 30s.”

China has stopped buying US Treasuries (flat purchases in recent years after decades of accumulation) and is instead making arrangements to buy oil with yuan, establishing alternative currency arrangements that reduce its dependence on the dollar.

“China is the world's largest net importer of oil. Uh they're the second largest foreign holder of Treasuries. And when they need to buy oil, they're working out arrangements to buy with yuan and other things, but they they've already stopped buying Treasuries. They they were buying tons of Treasuries and now they've basically held flat”

Long periods with no real gains in equity indices are possible, as demonstrated by 1933 when it took 25 years for the market to return to positive returns, and Japan from 1989 until recently, a 34-year period of no gains.

“long periods of time with no real gains in an equity index are possible. And just two examples, 1933 it took 25 years to get back positive. And then you look at Japan, 1989 until just earlier this year, a 34-year period.”

Bretton Woods was established at a 1944 conference but was really only implemented in the 1960s after European parliaments accepted the framework in 1961, meaning the true Bretton Woods system only functioned for a brief period before becoming untenable.

“The IMF uh had certain rules instituted around it for where currencies, you know, essentially should trade. And there were wartime emergency exemptions that a lot of companies took so that they didn't have to fully, you know, embrace the the Bretton Woods IMF framework until 1961 was when different European parliaments, uh, you know, basically accepted these.”

After World War II, London bankers realized they could continue profiting in the eurodollar market rather than pound sterling by partnering with the Bank of England and using Britain's overseas territories (Cayman Islands, Bermuda, Jersey, Gibraltar) as offshore havens.

“what happened after World War II is they realized that we can still make money, we just can't do it in pound sterling. We need to do it in dollars. And this was the creation of the Eurodollar market.”

The eurodollar is the largest pool of dollars in the world, consisting of dollars held anywhere outside the United States and not under the auspices of the Federal Reserve, and London banks process over 25% of all dollar transactions through this market.

“the largest pool of dollars in the world. So, there are certain amount of dollars that are held in the United States. And then there are these, what they call, Eurodollars. And that's just a dollar held anywhere... London banks process over 25% of dollar transactions um through this eurodollar market.”

Foreign central banks' holdings of US Treasuries have declined from 25-30% of total US Treasuries 10-15 years ago to approximately 10-12% currently, meaning banks and insurance companies must absorb increasing amounts of Treasury supply.

“I think 10 15 years ago like 25 30% of US Treasuries were owned by foreign central banks and now that number is down to like 10 or 12%”

Germany faced capital flight and banking crises in the late 1920s when banks shifted from funding German industrial development at 5-6% deposit rates to funding US stock market leverage at 20% interest rates, draining German capital and destabilizing the banking system.

“Germany had wanted cap needed capital after World War I, and they had been paying higher than average interest rates on deposits. So, they'd been paying like 5, 6% interest rates on deposits, and so a lot of capital had gone into Germany. But, in the heat of the stock market bubble, what happened was people realized that they could loan brokerage cash, so that people could lever up and and charge 20% interest rates, and all this money flooded out of Germany, out of Europe, and this was part of that spiral that that began, you know, and culminated in the in the Great Crash of in October of '29.”

The Federal Reserve has three mandates: employment, price stability, and moderate long-term interest rates, though only the first two are commonly discussed, and the third mandate may force the Fed to prioritize yield curve control over inflation targets during financial stress.

“If you read the Federal Reserve web website, you know, there's three mandates listed there. It's not just unemployment and price stability. It's also long-term moderate treasury yields. Like you can read about the Fed what what is our goal”

Madison argues that in the 1930s, bank insolvencies were caused by credit losses from mortgage defaults and stock market crashes (not mark-to-market losses on government bonds), and bonds were actually appreciating (not depreciating) because interest rates fell during the Depression, meaning the current banking stress (mark-to-market losses on Treasuries) is different from 1930s dynamics.

“Wasn't Treasury yields, because there was a Great Depression, bond yields were very low. What wasn't weren't banks sitting on mark-to-market gains rather than mark-to-market losses as we have now. The way that the banks had their losses back then was that they had been loaning out a lot of what they call brokerage cash, which was to fund the the 9:1 leverage in the stock market.”

The British pound sterling was the global reserve currency pre-WWII, not due to superior economic strength but due to the British Empire's vast territorial control—at one point over 25% of the world's population lived under British rule.

“It was a pound sterling system prior to World War II... a lot of this was because of the British Empire, right? So, uh know, as the saying goes, the sun never sets on the British Empire. I believe at one point over 25% of the world's population um was under the Union Jack, and the the pound sterling was the currency.”

The Federal Reserve conducted yield curve control in the 1940s (the 1940s eras), establishing a precedent that will be revived; if Treasury yields spike and debt service becomes untenable, the Fed will explicitly cap long-end rates, similar to how it did post-WWII to manage war debt.

“it's going to enact some form of yield curve control, which it did in the 1940s.”

Politicians always have the ability to change fiscal rules through legislation, as demonstrated in the Civil War (Lincoln's greenbacks) and in World War I (countries abandoned gold convertibility to finance the war), meaning that if the government decides Social Security is essential, they can simply legislate funding rather than allowing a crisis.

“it happened during the the Civil War in the United States where you know, Lincoln issued his legal tender notes that were colloquially known as greenbacks, um which were not backed by gold and so they they they instituted this fiat currency. So the the the politicians always have in their back pocket, you know, the essentially, you know, the the military control of the state. And they they can enforce things.”

If there is a time of market stress in the future (recession, financial crisis), unlike in the 1930s, 2008, and dot-com crash when flight-to-quality sent investors into Treasuries, this time Treasuries themselves will be the problem, and investors will flee to real assets (gold, commodities) instead, creating a historic reversal where Treasuries and dollars do not rally during crises.

“in all those other instances, whether it's 1933, whether it's the S&L crisis, whether it's the dot-com crisis, whether it's the GFC with housing, is the bubble was in an asset other than treasuries. And so what happened was in a time of market stress, everybody moved into treasuries as a safe haven. What I think will be different here...when there's a time of market stress, all of a sudden the dollar and treasuries are not rallying. And that that's that's what's going to be new”

The City of London (also known as the Square Mile), where the Bank of England is headquartered, is the only area in the United Kingdom not conquered by William the Conqueror in 1066 and was given special rights and privileges that continue to this day, including having corporations rather than individuals as voters.

“The City of London, which is the term for the Wall Street of London, um is a very specific area in the center of London. It's also known as the square mile uh because it's about a mile square... this area, um this brings in a little bit of the financial history, actually was the only area in the United Kingdom that was not conquered by William the Conqueror in 1066. And it was given special rights and privileges.”

As of April fiscal year 2024, the US Treasury paid out $624 billion in gross interest on public debt, representing a 35% increase from the $460 billion paid out a year earlier, and this trajectory is unsustainable.

“this is the monthly um statement of the Treasury, and what I have circled here is gross outlays. So, this is total interest on the public debt uh fiscal year-to-date as of uh end of April, $624 billion. The United States Treasury has paid out in growth gro- gross interest. Last year at this time, it was $460 billion. So, that's a 35% increase in interest payments in 1 year.”

There have been two historical instances when the Dow Jones index equaled the gold price: during the Great Depression when the Dow traded to about 36 and gold was at 35, and in the 1980s when both were around 875.

“There have been two times when the Dow uh equaled the gold price. One of them was in the Great Depression when the Dow uh traded down to I believe about 36 and the gold price um at that time was 35. And then in the 1980s, we had gold uh at 875 and the Dow was in that neck of the woods.”

During World War I, the United States lent massive sums to Great Britain, which then loaned money to France, Belgium, and other Allied countries, resulting in Britain being in huge debt to the US and France being indirectly indebted through Britain.

“The United States during World War I lent huge amounts of money to Great Britain. Great Britain then lent money to France and Belgium and other Allied countries. And so at the end of World War I, you had Britain in huge debt to the United States. You had France indirectly in huge debt to the United States through Great Britain.”

The host argues that 120% debt-to-GDP is not inherently a magic number for fiscal collapse, and challenges Madison to explain what specific level or metric would constitute an actual tipping point beyond his subjective market psychology argument.

“What is so magical about this 120% debt-to-GDP ratio? Why can't we have, okay, if if flatlines and then it goes to 150% and then 180%.”

The host argues that even if his argument makes qualitative sense, many similar arguments have made sense for 30 years (since the mid-1990s) without coming true, suggesting that the qualitative logic alone doesn't justify confident prediction of a 2027 collapse.

“I might say, you know, in the the mid-1990s, when I was born, it might have made sense to me, too. And, you know, here we are, close to 30 years later, and it hasn't happened yet. So, you know, just cuz an argument makes sense, doesn't mean it's going to happen”

The host argues that Madison's claim that interest rates need to rise and cause recession to 'break' the system is inconsistent with 50+ years of history where rate increases reliably caused yields to fall afterwards via demand-driven 'pull to safety,' creating natural market cycles (up-down-up-down) that continue indefinitely, and no particular debt level breaks this equilibrium.

“isn't there a virtu- not a virtuous cycle, but a a a cycle and an equilibrium where, okay, a too hot economy with too hot inflation cause bond yields to rise. Bond yields rising causes the economy to slow down, it might even cause a recession, and then in a recession, bond yields should go down because if inflation's at 1%, uh a bond yield at 5% is an obvious steal, so you buy it and then it goes to 3% and then low bond yields cause the economy to recover. What you up, down, up, down, the cycle. Why can't that continue?”

FDR in 1933 considered multiple options for dealing with the banking crisis including straight haircuts on government debt and calling all US Treasuries to repay them at a loss, but was talked out of it by advisers, instead using a bank holiday and fireside chat approach, with the crisis only truly resolved by WWII spending rather than financial restructuring.

“These were the exact type of situations that FDR was wrestling with in, uh, 1932, or excuse me, 1933. He was elected in '32, he took office in March of '33, where he he sat down with his advisers and he talked about, 'What are we going to do?' And one of the things they talked about was just a straight-up, you know, haircut on, uh, uh, on government debt.”

The US and Europe both face high sovereign debt levels (~120% debt-to-GDP), while China is also approaching 100% debt-to-GDP, creating a situation where the entire developed world is in high debt and will need liquidity, similar to the post-WWII situation but without a reserve currency country with significant gold reserves.

“sovereign debt levels have reached such highs, whether you're talking about Germany, Japan, United States, even China is getting close to 100% debt to GDP”

The US federal public debt has grown from $350 billion in the 1970s to $34 trillion today, yet bond yields have declined rather than risen, indicating that the private sector and rest of the world continue to demand US Treasuries despite the debt increase.

“people talked about the debt is unsustainable in the 1970s. In the 1970s, the US federal debt, public debt, was $350 billion. Now it's $34 trillion. What has happened to bond yields? Bond yields, have they gone up? No, they've gone down, meaning the prices of have gone up.”

When the US went off the gold standard in 1971, the gold price rose 25 times over the next 10 years, from $35 per ounce to $875 per ounce, suggesting that if we use a $2,000 baseline today and apply a similar 25x multiple, gold could reach $50,000.

“if you look at when we went off the gold standard in 1971, what happened to the gold price over the next 10 years? It went up 25 times. It went from $35 an ounce to $875 an ounce in essentially a 10-year period.”

Following World War II, the United States immediately faced a dearth of dollars globally, leading to the creation of the Marshall Plan ($15 billion) to seed Europe with dollars after the initial $3 billion loan to Britain proved insufficient.

“immediately following World War II, there was a dearth of dollars. There was a starvation of dollars around the world. Um the UK in particular needed a $3 billion loan from the United States. It was a similar to a lend-lease type situation, um where Britain needed to be bailed out by the United States, but even that $3 billion loan was not enough. And so, what happened was a $15 billion um plan, uh the Marshall Plan”

The Federal Reserve held approximately 20,000 metric tons of gold after World War II, which had declined to about 8,000 metric tons by the time Nixon suspended convertibility in 1971, a level at which the Federal Reserve's holdings remain today.

“in post-World War II, the United States had about 20,000 metric tons of gold. Um Nixon sus- suspended convertibility in '71. At the same time, he also put in price controls and did a bunch of other stuff. But basically, at that point, we were down to about 8,000 metric tons, which is where the Federal Reserve's holdings sit today.”

In 1946 and 1947, the US experienced approximately 12% inflation each year, creating a 25% inflation rate over a 2-year period that was necessary to reduce debt-to-GDP from 120% to 95%, demonstrating how inflation is used to erode sovereign debt burdens.

“In 1946 and 1947, we had about 12% inflation each of those years. So, we immediately had basically a 25% uh inflation rate over a 2-year period, and then we entered into '48 and '49, which was a uh recession period... And so we had an immediate 25% inflation, and we brought that debt to GDP down from 120% to about 95%.”

Current US deficit spending is 7% of GDP, which is unsustainable when unemployment is below 4%, because in a normal economic cycle deficits should be minimal or positive when unemployment is low and employment is strong.

“When you're running a a 7% deficit, which is what we are now, that's simply unsustainable.”

A strong dollar is harmful to the rest of the world and creates problems for other economies, and the US government fears dollar strength, so when global stress forces capital to flee into dollars, the Fed must cut rates to weaken the dollar, even if inflation is sticky.

“the the issue of bond yields and you duration of owning a 10-year bond...all of them have lost money in all currencies. But when it comes to the dollar versus other currencies, the dollar's been strong, right?...the US government is afraid of a strong dollar. And and when you get a strong dollar, so if you start having distress in these other places first, like the UK or Germany or or China, and people move into dollars and you strengthen the dollar, then that is when you get, you know, yields up and you get these problems.”

In an environment of high inflation, stocks do not perform well because while revenues and profits go up nominally, costs also rise, and bond yields spike, making it harder to discount future cash flows, resulting in single-digit price-earnings ratios instead of current 25-30 multiples.

“in the 1970s the stocks do not like large amounts of inflation. Yes, profits go up, revenues go up, but so do costs and it causes bond yields to go up, which means that it's hard to discount the future. So you have price earnings ratios in this in the single digits instead of where they are now.”

The host and Madison agree that Social Security reform is fundamentally a political problem, not a financial one, and could be easily solved by treating Social Security as a general government program funded through borrowing, like any other budget line item.

“Mel, isn't the issue with Social Security entirely political? In other words, from a financial standpoint, it is ridiculously easy to solve... You borrow money and if you have a national surplus as you did in 2000, then you you'll pay it from from taxes”

The Social Security Trust Fund was running surpluses until 2020-2021, at which point it shifted to deficits and is now expected to run completely empty around 2027-2030, creating a permanent 25% funding shortfall in Social Security payments that will force the government to fund Social Security through general revenues rather than the current trust fund mechanism.

“in 2020 2021 the Social Security Trust Fund had been running a surplus and what what that enabled uh the Treasury Department to do is to take that surplus and then sell to the Social Security Trust Fund these special Treasury bonds that only Social Security Trust Fund gets to buy and it it funds the government. That extra source of funding was taken away and it's now declining rapidly.”

The US government has far more printing capacity than even Japanese government has, and the Bank of Japan can hold 100% of GDP in Japanese government bonds on its balance sheet with minimal inflation problems, suggesting the Fed could similarly hold 30 trillion in Treasuries without hyperinflation.

“if you look at the Bank of Japan, which holds 100% of GDP on its balance sheet, if you were to to do that in the United States, that would be 30 trillion and we're only at around 8 trillion. So, there's a whole lot of room on the United States balance sheet to or on the Federal Reserve balance sheet to hold US Treasuries”

Madison believes that once the S&P 500 reaches 7,000, stock market valuations at 35+ times forward earnings will trigger psychological tipping points where investors say 'I want to take my gains and go home,' initiating a cascade of selling like a game of musical chairs.

“once the stock market gets to 30 or 35 times forward earnings, there's going to be some investors that, you know, it's a tipping point and they say, you know what? I'm taking my money out and once people start running for the doors, that's that's how you're going to get the collapse, which is, by the way, the traditional um modus operandi of bubbles throughout history, whether it's tulips or anything”

Japan, as the second-largest foreign holder of Treasuries, cannot allow the yen to weaken excessively (it recently hit 160 yen/dollar), so Japan will be forced to sell Treasuries to buy yen and defend its currency, which will flood more Treasuries onto the market at the exact moment when US issuance is also skyrocketing.

“Japan um with their currency um they need to they cannot let the yen go into free fall. It hit 160 uh last week or so. Um and so they're the largest foreign holder of Treasuries. And if they sell Treasuries to essentially buy uh yen uh to strengthen the yen, um then again, you're going to have more Treasuries flooding into the market.”

Madison argues the Federal Reserve and Treasury cannot allow another significant recession (unlike 2008-2009) because deficit spending is at such high levels that a recession would cause tax receipts to collapse, forcing even larger deficits (he cites 2022: when the stock market fell, tax receipts were 'killed'), necessitating perpetual deficit spending and monetary accommodation to avoid recession.

“Because they cannot allow um there to be another significant recession. Because the deficit spending is not what it was in 2008-2009. And so, in 2022, when the stock market went down, we didn't have a recession, but tax receipts were just killed.”

Central banks, particularly BRICS nations, are pursuing gold purchases and wanting to integrate gold into a post-dollar monetary system, suggesting gold will re-enter monetary frameworks in a meaningful way not seen since the 1970s.

“there is a appetite on the part of the BRICS countries to infuse gold into whatever is going to replace this dollar-denominated system in some way... And you've seen the central bank buying. Um and these are price-insensitive buyers. They're continuing to buy.”

Capital is currently flowing into the United States stock market at elevated valuations (forward PE vastly above global peers) not because of superior fundamentals but because the US has higher interest rates and the ability to 'manufacture dollars,' and this capital flow is artificially supporting US equity prices, similar to how capital flooded into US stocks in the 1920s before the Great Depression.

“you have capital coming to the United States because we don't hold all the gold, but we do hold the the dollar manufacturing capability. And since we can manufacture dollars, capital is coming to the United States and that's why our stock market is trading at a forward PE vastly above of what China's trading at or or the European bourse are are are trading at.”

When the Bretton Woods system went into full effect in 1961-1962, the British Prime Minister requested that the gold peg be doubled from $35 to $70 per ounce due to excessive dollar demand and insufficient gold backing, demonstrating that Triffin's paradox manifested almost immediately upon full implementation of the system.

“it was only a year later in 1962 when the British Prime Minister went to the to John F. Kennedy and said, 'Hey, you know, there's so much dollars right now that are being demanded like, you know, you need to change that $35 an ounce to $70 an ounce because, you know, we need more dollars in the system'”