On Friday, Bill Pulte (Director of the Federal Housing Finance Agency and chairman of both Fannie Mae and Freddie Mac) announced that America’s two government sponsored housing finance giants are exploring equity stakes in technology companies.

Speaking at the ResiDay conference in New York, Pulte described potential partnerships where tech firms would offer Fannie and Freddie equity positions, explicitly citing the Trump administration’s recent investment in Intel as a model.

I’m reminded of the American baseball legend Yogi Berra’s famous quip: “It’s like déjà vu all over again.”

What we’re witnessing here is the American government (through Fannie Mae and Freddie Mac, state owned mortgage institutions) once again heading down a path that bears a disturbing resemblance to the past.

The 2008 playbook

Leading up to the 2008 financial crisis, Fannie and Freddie played a central, though unfortunate, role.

These two institutions were designed to make home loans cheaper and more accessible by purchasing loans from banks and reselling them as securities to investors.

However, to keep pace with private competitors, they began taking on increasingly risky mortgages.

When housing prices fell, the losses were enormous, and in 2008 the American government had to take control to prevent a total collapse in the housing and financial sectors.

And now we see Bill Pulte (Trump’s handpicked chief of the powerful regulatory body, the Federal Housing Finance Agency) openly discussing how these state backed mortgage institutions should invest money in American technology companies.

Pulte stated that he views Fannie and Freddie somewhat differently because they operate as actual businesses, albeit private ones. He indicated that the GSEs will likely take ownership stakes in various companies as those firms offer equity in exchange for business partnerships with Fannie and Freddie.

More tellingly, Pulte acknowledged the coercive nature of these arrangements, explaining that major technology and public companies are offering equity to Fannie and Freddie in exchange for business partnerships. He noted that the GSEs are considering taking these equity stakes because of the substantial power Fannie and Freddie wield over the entire housing finance ecosystem.

Crony capitalism comes to Silicon Valley

I must be frank: this is beginning to stink.

Over the past week, we’ve received a series of signals that the American government now intends to directly support American technology companies through precisely the kind of arrangements that characterise crony capitalism, where political connections and government favour, rather than market competition, determine winners and losers.

On Monday, the Wall Street Journal reported that OpenAI’s CFO, Sarah Friar, hinted that government guarantees could cut AI funding costs – later backtracking to say they weren’t seeking a bailout. But the message was clear: tech giants now assume taxpayer backing, just like banks did before 2008.

So if you’re asking yourself why American tech giants (particularly the so-called “Magnificent Seven”) are trading at the extraordinary valuations we see today, you likely have part of the explanation here: investors aren’t just pricing in technological progress or profit growth. They’re pricing in implicit government guarantees.

They’re pricing in the expectation that the Trump administration will support these companies, that losses will be socialised whilst gains remain private, that these firms have effectively become “too big to fail.”

This is moral hazard on a grand scale, but now applied to an entire sector rather than just individual institutions. The market isn’t valuing these companies based on discounted future cash flows. It’s valuing them based on the anticipated probability of state intervention to prevent failure.

And the connections between political donations and government favour are becoming impossible to ignore.

Elon Musk, who contributed hundreds of millions of dollars to Trump’s campaign (making him the largest individual political donor in the 2024 election cycle), now wields extraordinary influence over government policy.

Marc Andreessen and Ben Horowitz, whose venture capital firm has invested heavily in OpenAI, together donated over $5 million to Trump aligned political action committees.

Peter Thiel, the co-founder of Palantir, spent $15 million to elect JD Vance to the Senate in 2022. Vance is now vice president.

These aren’t coincidences. They’re investments with expected returns.

But to my mind, this is also a very clear signal that shouldn’t be ignored: all is not as it should be with the tech giants. Over the past few weeks, we’ve seen turbulence surrounding share prices in the sector, but perhaps more worryingly, also rising tensions in credit and money markets.

It’s simply about nervousness that some AI companies potentially face liquidity problems, and ultimately whether this might infect the banking sector.

The market is already showing cracks

And these aren’t just theoretical concerns. Over the past fortnight, we’ve seen concrete signs of stress in American credit and money markets.

The Federal Reserve has been forced to inject substantial liquidity into the system to prevent tensions in the repo market from escalating.

On 31 October, the Fed injected $50.35 billion into the system (the largest single day operation since 2021), followed by an additional $22 billion on 3 November.

The Secured Overnight Financing Rate has shown unusual volatility, with repo rates spiking to their highest levels relative to the Fed funds rate since 2020, precisely the kind of pressure that typically precedes broader credit events.

Major Wall Street banks, including JPMorgan and Deutsche Bank, have warned that money market stress could flare up again.

Dallas Fed President Lorie Logan has suggested the central bank might need to begin purchasing assets if the rise in rates proves more than temporary, echoing the kind of emergency measures deployed during previous crises.

More tellingly, major international banks are taking defensive positions. Deutsche Bank, which has extended billions in loans to data centre firms powering the AI boom, is now reportedly exploring hedging strategies including shorting baskets of AI related stocks and purchasing credit protection to offset potential losses if the current pricing regime collapses.

When one of Europe’s largest banks starts hedging against its own AI lending book, that tells you something important about where sophisticated risk managers think we are in the cycle.

JPMorgan’s Jamie Dimon warned in October about a probable market decline of 10 to 20% within the next 6 to 24 months, citing concerns about overheating in the technology sector that could trigger a correction similar to the dotcom crash of 2000.

Goldman Sachs’ David Solomon echoed these concerns this week, stating that a 10 to 20% drawdown in equity markets within two years appears likely due to AI related risks and trade tensions.

Even the Bank of England’s Andrew Bailey has warned of “growing risk of a sharp correction” if AI expectations falter, with “alarm bells ringing” over private credit and AI concentration in major indices.

Regional American banks have already begun reporting losses on loans to distressed investment funds, and credit default swap spreads on major banks have risen to elevated levels.

And I’m hardly the only one concerned. I’m completely convinced that credit and risk management departments in all the major global banks are worried about precisely this right now. The parallels to 2007 (when credit markets began showing stress months before the broader crisis became apparent) are uncomfortably clear.

The Intel precedent: when subsidies become equity

To understand what Pulte is proposing, we must first examine the model he explicitly referenced.

In August 2025, the Trump administration took a 9.9% equity stake in Intel Corporation worth $8.9 billion, converting previously awarded CHIPS Act grants and Defence Department funds into common stock ownership. The government purchased 433.3 million shares at $20.47 per share.

Commerce Secretary Howard Lutnick justified this approach by arguing that the government should receive equity stakes in exchange for the funding that had already been committed under the previous administration.

But Intel was only the beginning.

The Trump administration has also taken equity stakes in MP Materials (rare earth mining, 15%), Lithium Americas (lithium production, 5-10%), and Trilogy Metals (copper zinc mining, 10%). Reports emerged in October that the administration was exploring similar arrangements with quantum computing firms including IonQ, Rigetti Computing, and D-Wave Quantum, though the Commerce Department subsequently denied “currently negotiating” such stakes (language that leaves ample room for future deals).

This represents an extraordinary shift in American economic policy and a troubling embrace of what can only be described as crony capitalism.

Unlike previous government equity stakes during financial crises (TARP in 2008 or airline support during COVID-19), the Trump administration has taken these positions without any financial emergency.

The ideological precedent is clear: converting government grants and subsidies into equity ownership across strategically important industries, creating an intertwined relationship between state power and private profit that undermines market discipline.

Now Pulte wants to extend this model to Fannie and Freddie. According to Pulte’s statements from May, Fannie Mae has approximately $4.3 trillion on its balance sheet, whilst Freddie Mac holds over $3 trillion.

The scale of what’s at stake

Fannie Mae and Freddie Mac don’t just participate in America’s housing market; they effectively are the housing market. They guarantee roughly half of all outstanding U.S. residential mortgages (the largest share of the approximately 70% of American home loans that receive some form of federal backing, including FHA, VA, and other programmes).

When institutions of this size and systemic importance start deviating from their core mission, the consequences ripple through the entire financial system.

My friend and Richmond Fed veteran economist Bob Hetzel wrote in his seminal 2009 analysis of the financial crisis about how financial safety nets inevitably create moral hazard by increasing incentives for risk-taking.

The critical mechanism he identified: financial institutions receive implicit subsidies from safety nets that grow larger as their portfolios become riskier, as they increase leverage, and as their capital buffers decline.

2008: when mission drift became catastrophic

The last time Fannie and Freddie strayed from their mandate, it ended catastrophically. In September 2008, both institutions collapsed under the weight of massive losses and required a government takeover that has lasted 17 years. At the time of conservatorship, they held or guaranteed about $5.2 trillion of home mortgage debt.

The scale of the losses was staggering. About 80% of Fannie and Freddie’s combined $213 billion in credit losses between 2008 and 2011 involved mortgages that were either Alt-A, interest only, or both. These were loans made to borrowers with relatively high credit scores but featuring riskier structural characteristics. The critical error wasn’t the specific loan types. It was the strategic decision to chase market share by expanding into riskier segments well outside their traditional remit.

Starting in 2006 and 2007, just as the housing market reached its peak, Fannie and Freddie increased their leverage and began investing heavily in subprime securities and Alt-A loans in an ill-fated effort to win back market share from private competitors. This is textbook mission drift: institutions designed for one purpose (providing liquidity to mortgage markets) taking on unrelated risks with predictably disastrous results.

Hetzel understood the fundamental problem.

Writing specifically about the GSEs, he noted that understanding the subprime crisis required grasping how Fannie and Freddie had increased demand for housing stock, pushed homeownership rates to unsustainable levels, and thereby contributed to sharp rises in housing prices given the relatively inelastic supply of housing due to land constraints.

Perhaps most damningly, Treasury Secretary Timothy Geithner told the Financial Crisis Inquiry Commission in a private interview that moral hazard was pervasive throughout the system, with the GSEs representing the single largest source of this problem.

The new mission drift: from mortgages to tech equity

Now we’re watching a remarkably similar pattern emerge, only this time the target isn’t housing. It’s technology.

Pulte indicated at the conference that “one of many companies” seeking equity arrangements with Fannie and Freddie is a firm whose involvement would leave observers “blown away with how much money is involved,” though he declined to name it.

Fannie Mae has already signed a partnership agreement with Palantir for fraud detection efforts, though financial terms weren’t disclosed (precisely the kind of opacity that should alarm anyone concerned with accountability).

The Palantir connection is particularly revealing. Since Trump took office, Palantir has secured large federal government contracts. Peter Thiel, Palantir’s co-founder, spent $15 million electing JD Vance to the Senate.

Vance is now vice president. Joe Lonsdale, another Palantir co-founder, contributed $1 million to Elon Musk’s America PAC supporting Trump. This isn’t a market economy. This is a system where government contracts and partnerships flow to companies whose founders financed the campaigns of those now in power.

The proposed model is seductive in its simplicity: tech companies offer Fannie and Freddie equity stakes in exchange for access to the GSEs’ enormous housing finance ecosystem.

But consider Pulte’s own reasoning: the GSEs are considering taking equity stakes in companies specifically because of the substantial power Fannie and Freddie exercise over the entire ecosystem.

This isn’t market allocation. This is using control over critical infrastructure to extract equity positions from private companies. This is crony capitalism at its most transparent.

Moral hazard at scale: the implicit guarantee premium

The fundamental problem here isn’t just about Fannie and Freddie taking equity stakes in a few tech companies.

It’s about what those stakes signal to the broader market about the existence and scope of implicit government guarantees.

Hetzel identified the core mechanism with precision: financial safety nets (including deposit insurance, too-big-to-fail protections, Federal Home Loan Banks, and the Fed’s discount window) allow banks to access funding at costs that don’t rise with the riskiness of their portfolios.

The same logic applies when government backed entities like Fannie and Freddie take equity positions in private companies.

That government guarantee (now explicit after 17 years of conservatorship) means US taxpayers ultimately backstop losses whilst any gains accrue to whom exactly? The Treasury? Tech companies?

This creates a fiscal time bomb where downside risk is socialised whilst upside is privatised.

But the effects extend far beyond the specific companies receiving these investments.

When the market observes the government taking equity stakes in Intel, exploring partnerships with OpenAI, and now planning to inject Fannie and Freddie capital into technology firms, investors rationally update their beliefs about which companies enjoy implicit state backing.

The extraordinary valuations we observe across the Magnificent Seven and related AI companies aren’t just about technological optimism. They reflect the market pricing in an implicit guarantee that these firms are “too big to fail.”

This is moral hazard pricing on a sectoral scale. And it raises a troubling question: if these companies are indeed “too big to fail,” are they also becoming “too big to save”?

Too big to fail or too big to save?

Consider the arithmetic. The combined market capitalisation of the Magnificent Seven alone now exceeds $20 trillion. Add in the broader ecosystem of AI related companies, data centre operators, and semiconductor firms, and you’re looking at market value that’s at least partially predicated on the assumption of government support.

Now place that against America’s fiscal position. U.S. national debt stands at $38 trillion (more than 100% of GDP). Interest payments reached $841 billion in just the first ten months of fiscal year 2025, already exceeding Medicaid.

The Congressional Budget Office projects debt will reach 156% of GDP by 2055, with interest payments hitting $1.8 trillion annually by 2035.

Here’s the uncomfortable arithmetic: when the next crisis comes (and it will come), can the American government actually afford to bail out a technology sector whose market capitalisation approaches half the entire national debt? The fiscal buffer that existed in 2007, problematic as it was, has completely evaporated. We may be creating a class of companies that markets believe are too big to fail, but which the American government is quite possibly too indebted to save.

And this is before considering the international dimension.

When Fannie and Freddie (institutions with explicit government backing) take equity positions in tech companies, it sends a signal to foreign holders of U.S. Treasury securities that America is extending its contingent liabilities even further into speculative territory.

For a Chinese central bank holding a trillion dollars in Treasuries, or a Japanese or Scandinavian pension fund with massive exposure to American debt, this doesn’t look like prudent fiscal management.

It looks like the American government is systematically increasing the risk that it will face multiple, simultaneous calls on its financial resources that it cannot meet without inflating away its debts or defaulting.

The conservatorship paradox and regulatory capture

Pulte confirmed on Friday that Fannie and Freddie will remain in government conservatorship whilst potentially conducting an IPO of up to 5% of their shares this quarter or early next year.

He indicated that he anticipates the president will make a decision on the IPO timing either this quarter or in early 2026.

Think carefully about what this means: these institutions remain under explicit government control because they’re deemed too important and too risky to operate independently in housing markets, yet they’re simultaneously being encouraged to speculate in technology equity markets.

The conflicts of interest are staggering. Pulte runs the agency that regulates Fannie and Freddie whilst simultaneously chairing both companies.

If those companies become equity investors in major tech firms, he’ll effectively be regulating entities in which his institutions have direct financial stakes.

This is regulatory capture taken to its logical extreme: the regulator, the regulated entities, and the companies receiving investment all bound together in a web of mutual dependency that eliminates any possibility of arms length oversight or genuine market discipline.

If Fannie and Freddie aren’t trustworthy enough to exit conservatorship after 17 years of profitability in their core business, what possible justification exists for expanding their mandate into tech investment?

What should happen instead

The solution is straightforward but politically difficult: complete the mission Fannie and Freddie were designed for, then either privatise them fully or wind them down entirely.

If conservatorship is necessary because these institutions require close government supervision, keep them focused exclusively on their housing mandate with strict limits on portfolio composition and leverage.

If they’re healthy enough to take tech equity positions, they’re healthy enough to exit conservatorship and face genuine market discipline.

What should not be accepted is this worst of all worlds hybrid: government guaranteed institutions with neither proper oversight nor proper market discipline, now venturing into speculative investments far beyond their expertise or mandate, at a time when the U.S. government’s own fiscal position is already unsustainable, all whilst creating a sectoral moral hazard problem that may prove impossible to resolve when the inevitable repricing occurs.

Hetzel proposed a radical but coherent alternative: eliminating the Fed’s legal authority to make discount window loans, suggesting instead that the central bank should flood markets with liquidity during panics through open market operations whilst maintaining its policy rate through interest on reserves.

The core principle: creditors and debtors will restrain financial system risk-taking only if they face genuine losses when financial institutions fail.

Every expansion of the safety net (whether through TBTF, discount window lending, government equity stakes in strategic companies, or now equity investments linking government backed housing finance to private tech firms) undermines this crucial disciplining mechanism.

Every implicit guarantee extended, every equity stake taken, every suggestion that politically connected companies will receive state support, moves us further from a market economy and deeper into crony capitalism where success depends not on serving customers but on securing government favour.

Conclusion: echoes from 2008

Seventeen years after Fannie and Freddie’s collapse nearly took down the global financial system, the same structural errors are being repeated, but this time with different assets, weaker fiscal foundations, and potentially far graver consequences.

The 2008 crisis taught us that Fannie and Freddie represent “entirely moral hazard” when they deviate from their core mission, as Geithner observed. Fannie and Freddie needed a $191 billion taxpayer bailout because they deviated from their core mission, driven by the same toxic combination of implicit government guarantees, inadequate oversight, and mission drift that is re-emerging today.

Now, under political pressure to “do something” about housing affordability and tech competitiveness, they’re being pushed down the same path again, only this time explicitly following the Trump administration’s model of crony capitalist equity stakes, at a time when U.S. federal debt stands at 100% of GDP, interest payments exceed defence spending, and the fiscal buffer to absorb another systemic crisis no longer exists.

But this time there’s an additional, more troubling dimension. This isn’t just recreating the moral hazard of 2008. This is creating it at sectoral scale across technology companies whose combined market capitalisation may literally be too large for the American government to backstop.

The stress in credit markets, the Federal Reserve’s emergency liquidity injections totalling over $70 billion in early November, the defensive hedging by major banks like Deutsche, the warnings from JPMorgan, Goldman Sachs, and the Bank of England—these aren’t abstract concerns. They’re happening right now, and they’re happening for a reason.

The market is beginning to ask the question that should terrify policymakers: what happens when companies that everyone believes are too big to fail turn out to be too big to save?

The next crisis won’t announce itself with sirens and flashing lights. It will begin, as the last one did, with seemingly reasonable people making seemingly reasonable arguments about expanding mandates, capturing growth opportunities, and using “power over the whole ecosystem” for strategic purposes. It will involve the gradual extension of implicit guarantees until the market prices them in as explicit. And this time it will happen in a context where U.S. federal debt is at historically high levels, the fiscal capacity to absorb losses has evaporated, and the companies that need saving may be orders of magnitude too large for the government’s balance sheet.

The lesson from Washington in 2008 was clear. Apparently, it needs to be learned once more, and this time, the tuition fees may be higher than ever, both for the financial system and for U.S. sovereign creditworthiness itself.

The only question is whether this administration is creating companies that are too big to fail, or too big to save.

I fear the answer will reveal itself soon enough.

Lars Christensen
LC@paice.io
+45 52 50 25 06

The Paradox of Preppers Who Want Stock Tips

I’ve had some rather paradoxical conversations in recent weeks. One second, I’m standing there talking to people about prepping—buying water, hand-crank radios, and whatnot. Then two minutes later, they’re asking me, “Lars, which shares should I buy?” There’s something deeply contradictory about that, isn’t there?

This captures the strange moment we find ourselves in. Drones are flying over Copenhagen, jet fighters are scrambling over Danish airspace, and yet many Danish investors have made substantial money on their shares in recent years. The disconnect between our anxieties and our investment behaviours has never been more pronounced.

We’re facing what I’d characterise as three dark clouds hanging over the investment landscape. These aren’t merely theoretical concerns—they’re real, measurable risks that could fundamentally alter the investment environment we’ve grown accustomed to over the past decade.

Three Dark Clouds Over the Financial Markets

The Sovereign Debt Crisis: My Greatest Concern

Let me be absolutely clear: the sovereign debt crisis is my greatest concern. The United States has public debt exceeding 100% of GDP. Britain faces similar challenges. We’re seeing massive deficits—in America, it’s somewhere between 6 and 8% of GDP this year, depending on how you calculate it. France has major problems. Japan has major problems. Italy has major problems.

The American federal government’s interest payments will soon reach 5% of GDP. That’s more than the Americans spend on defence. Think about that for a moment—roughly a quarter of all federal tax revenues will go to servicing debt. If interest rates rise, you can see how this becomes extremely difficult to manage.

Here’s the crucial calculation: if interest rates are higher than nominal GDP growth, you get an explosive development in debt as a percentage of GDP. Let’s say the American economy grows at 2% in real terms with 2% inflation—that’s 4% nominal GDP growth. If the interest rate on government debt is 5%, the debt burden will simply grow and grow and grow.

Donald Trump has talked extensively about growing out of the debt problems with all his brilliant ideas that will boost growth. Unfortunately, there’s little evidence this is happening. We got labour market figures last week that further confirm the American labour market is cooling, and GDP growth in the first half of the year is below one and a half percent annualised. The economy isn’t booming.

But there’s another way to get nominal growth up—create inflation. Every Danish homeowner who owned property in the 1970s can tell you this story. The high inflation of the 1970s ate away homeowners’ debt. And if you’re a government that creates inflation, perhaps by ringing up the central bank and saying “print some money,” well, that solves one problem whilst creating another.

The temptation to let the printing press run becomes greater and greater if you don’t want to make difficult decisions. We’ve seen Donald Trump at war with the Federal Reserve. He’s talked about firing Lisa Cook, who sits on the Federal Reserve Board—though last week the American Supreme Court told him, “You can’t do that, Donald. You need to argue your case better.” That’s been kicked to the corner for now. But the pressure is there. He’s said he won’t reappoint Jerome Powell when his term expires next year. He’s appointed Stephen Rennenkampf to the FOMC, the leading monetary policy body at the Federal Reserve. Rennenkampf, you’ll recall, voted for a half-percentage-point rate cut rather than the quarter-point cut we got at the last FOMC meeting. These are all signs of politicisation.

Geopolitical Uncertainty: The Highest in 35 Years

The geopolitical situation must be described as unstable and frightening—probably the highest level of uncertainty in at least 30 to 35 years. We’ve had the drones over Copenhagen, the entire situation in Europe, and recently there’s been speculation about whether the Chinese might make moves regarding a possible invasion of Taiwan. We have the conflict in the Middle East—Iran, Israel, Gaza—which creates concerns.

As I write this, we’re not far from Forum Copenhagen where we recently had a major European summit. I must be honest there was a lot of police around. Many helicopters in the air. We’ve heard a jet fighter or two. I have children asking about all this. What’s all this about? It’s rather uncomfortable on a practical level.

When this starts affecting air traffic, potentially sea transport, our supply chains, company earnings, and economic development, it becomes negative for markets. So far, markets have taken it remarkably calmly, but the threat is there.

We’ve agreed in Europe that we need to increase our defence spending because there’s a genuine threat from Putin’s Russia. There’s much talk about why there wasn’t drone defence around Copenhagen Airport and other Danish airports. Because there hasn’t been a need for it – it was completely unthinkable just a few years ago, but suddenly it’s something we must consider.

Drone defence isn’t free. I don’t know what it costs to send an F-16 fighter jet up to fire missiles at drones over Copenhagen Airport, but it’s not cheap. And whilst I hope it doesn’t come to that, it’s a stark illustration that we need to spend more on defence in Denmark and Europe in general.

If we already have weak public finances in Europe (much less so in Denmark), this pushes the problem further. We need more money, which pushes interest rates up. More government bonds need to be issued, and governments must pay those interest costs. If doubts arise about their willingness to pay, inflation expectations start rising too.

The Ukrainians are currently having some success pressuring the Russian economy by hitting oil refineries, oil storage, and other targets that push up petrol prices. Russian petrol prices have risen 40% this year. Petrol rationing has been introduced in many parts of Russia. We’re seeing images from Russia of kilometre-long queues because of rationing. It’s hitting the Russian economy.

There are probably quite a few Russians who are thoroughly fed up with this. We’re talking about Russian losses on the front over the past three years approaching a million men dead or wounded. So it’s not certain the war is quite as popular as some might wish. Perhaps someone would like to remove Putin. And let’s say that happens, and there’s a positive regime change in Russia. The geopolitical situation would change immediately, and perhaps we could reduce our fear that we need to spend 3-4-5% of GDP on defence. That picture changes if we’re facing a different Russia.

The Tech Concentration Risk

If we look at how the global equity market is constructed, somewhere between 70 and 80 percent of the global equity market – perhaps even more – consists of American shares. And a very large portion of that is just six or seven tech shares that dominate to an enormous degree.

So in reality, when you think you’re buying the whole world, you’re perhaps getting massive exposure to Nvidia, for example, or Tesla, or Microsoft. You’re exposing yourself enormously to American technology shares. And then you haven’t spread your risk—you think you have, but you haven’t really done so.

If these shares are overvalued – and it’s my personal opinion that they appear to be – then you haven’t spread your risk. You’ve actually taken on relatively high risk.

Let me give you an example of the timing problem. If we look at the situation in 1998 and examine the American stock market, we can see that American technology shares were extremely expensive at some point. If we look forward five years, we can see that was correct, and technology shares actually fell significantly during that period.

But here’s the problem: we need to find indicators that get us in and out of markets at the right time. I’ve done this exercise many times. Could we find indicators, such as price-earnings ratios—the share price relative to company earnings? Could we say that if price-earnings rises above a certain level, we should sell, and when it falls below another level, we should buy?

If we do this in connection with the tech bubble in the late 1990s, you’ll see it’s nearly impossible to find an indicator that would have got you out of the market at the right time and back in at the right time in real-time. The problem is that most indicators were already telling you to leave the market from 1995-1996. But if you left the market then, you’d have missed the entire upswing, and you’d be sitting there waiting for the market to come back down to where you started.

The best would be to stay in the market, even though it’s become too expensive, and then exit at the top. But if you don’t have an indicator for that, it’s useless. And so whilst I can sit here and say I think tech shares are really, really expensive now, and they’ve become very concentrated, that makes it very difficult to act on.

Governance as an Investment Strategy

When I talk about governance, it’s really about what we want when there’s uncertainty—trust. Something we can rely on. Perhaps in 2018 or 2019 or 2020, Russian shares looked very attractive. They were cheap, and there were some good stories. But there was also a dictator in Russia. A dictator who could suddenly just invade a neighbouring country and essentially confiscate all businesses. Hardly anyone would want to have invested in Russian shares today.

This governance theme has been really important in recent years. Countries where there’s respect for property rights, where there’s press freedom, where there’s a low level of corruption, where agreements are honoured, where the legal system ensures agreements are honoured—these are countries that have performed relatively better than those where we think, “Hmm, perhaps there’ll be a military dictatorship tomorrow, or the military dictator might confiscate some businesses.”

We can think of countries like Turkey, Russia, China. We’ve seen very clearly that this theme has dominated the pricing of Chinese shares. President Xi might decide to confiscate a business or introduce capital controls. And some of the things we’ve talked about regarding Donald Trump—that’s what we could broadly call governance. Because Donald Trump has said, “I didn’t write the rulebook. It doesn’t apply to me.” And something happens there.

Donald Trump constantly tests these checks and balances. He’s done it in trade, with the central bank, with defence, with states’ autonomy. He’s sent the National Guard into various states. He constantly tests this. And something we’ve talked about in various forms—whether we believe in these checks and balances—that there’s no problem, he can’t do anything. But he tests it. And he tests it extensively.

The countries that score highly on governance include lovely, peaceful, beautiful Denmark. If we look at various measures of economic and political freedom, all the Nordic countries, but especially Denmark, score very highly on economic freedom. We have relatively low levels of regulation, which might surprise some people. We have well-protected property rights. What pulls us down when we talk about economic freedom is that we have high tax levels in Denmark. But overall, we have relatively unregulated product markets, relatively unregulated labour markets.

Other countries could be Ireland, Singapore, Switzerland, the Netherlands—they typically score highly on these measures. These are countries where we’d also feel safe if we flew there. We won’t just be arrested on the street for nothing. That’s a large part of European countries, but not all of them.

There are also countries that have clearly moved in the right direction. If we look at all countries in Central and Eastern Europe, 35-36 years ago we had communist dictatorships in Poland, in the Baltics, for example. And we must say they’ve moved enormously regarding these governance questions, becoming free, democratic nations with respect for property rights.

If we look at emerging markets over the past five years, it’s been very clear that the emerging markets with most respect for institutions, property rights, contractual freedom, and free trade are the ones that have performed well. That could be Poland, the Baltics. But countries that have moved away from this—Russia, China, Turkey—have taken proper beatings in the stock market.

Chile and Uruguay are countries in the emerging markets world that belong at the top of the class. Botswana is interesting—I believe Botswana gained independence in 1966 and has been a democracy since independence. It’s actually the only country in Africa that can boast of this. It’s had enormous economic and political stability, democracy, and well-protected property rights. It’s a fantastic success story that we don’t talk much about.

The All-Weather Portfolio

What we need to consider is what’s sometimes called an all-weather portfolio – an investment portfolio that performs well in different weather conditions. When the economy is doing well, when it’s doing poorly, when there’s inflation, deflation, stable inflation, high growth, volatile growth. How do you manage?

It’s about spreading risk, of course. It’s also about having shares or assets that can handle these scenarios. My encouragement to investors sitting out there having made really good money on their shares would be: perhaps you should sit down and say you haven’t spread your risk. You thought you had because you just bought the S&P 500 index. But now you’ve become enormously exposed to basically five or eight American tech shares.

Perhaps you should reduce that exposure, buy some bonds, buy some commodities. It could be gold. It could be gold mining shares. It could be different types of bonds. It could be focusing on inflation risk—buying inflation-indexed bonds to remove some of that inflation risk. Spread the risk.

Saying “I have five different shares” isn’t enough if you’ve bought five different shares within the same sector—you haven’t spread the risk. You need different countries, different assets, bonds, shares. In reality, what you should do if you’re sitting there thinking you’re a bit worried things have become expensive, or you’re considering spreading risk, is to spread it across many more assets.

For the average Dane (or anybody else globally), the most significant exposure in their portfolio is the property or flat they own. It’s interesting that whilst we sit here with drones over Copenhagen, uncertainty, trade wars, and all sorts of things worrying us, Copenhagen property prices are up 20% over the past year. That tells a story about how the property market and stock market are insurance – partial insurance – against high inflation.

Where it’s not insurance is if central banks do something about inflation. If they say inflation is rising too much and we need to kill it by raising interest rates sharply, then the property market dies, the stock market dies. So we can’t just say we shouldn’t worry and should buy shares and bonds. What I’m trying to say is that when we start getting high inflation expectations, some of these markets begin to behave differently than we’re used to.

My Final Message: Don’t Panic, But Do Check Your Risk

My main message is: don’t panic. Use these crisis considerations to sit down calmly. Whether you’re an institutional investor, pension fund, or individual investor, sit down and ask: how am I actually exposed? Have I really achieved the risk diversification I think I have?

Because there are people who don’t need risk diversification. But sit down and do a crisis check, a risk diversification check on your portfolio. Don’t do anything desperate. Don’t think you know which crisis share or weapons share will rise. Don’t try to beat the market, but sit down and consider whether you have the risk diversification you think you have.

If you think you’ve spread your risk by just buying a global equity index, my message is: you haven’t spread your risk. You might feel like you have, and it’s actually performed really well. But this crisis might be a good reason to take that check. And don’t rush it. You never get anything good from that.

I’d like to be in a situation where I’d want to buy weapons shares because I’m worried—yes, there’s that too. I’m probably in the worried camp relative to how the market is. But if I’m constructing a portfolio, I need to create one where I don’t constantly have to time things correctly.

If your portfolio has risen 30% annually for the past three years, perhaps it might be good to spread some risk, get some bonds, get some commodities. That’s not investment advice in the sense that I don’t know what individuals have as exposure. I don’t know individual private economics, but this is what economic and financial theory textbooks say: spread your risk, consider the correlation between assets.

Sometimes you think, “I’m in this and I’m in that—they’re completely different things.” But if you see that nine out of ten days these two assets move in the same direction, you’ve essentially bought the same thing. So consider that. I think this is a healthy opportunity to do a reality check on your portfolio.

This article is based on the latest episode (“Investering i en krisetid) of my podcast “Makropuls” (in Danish). See links to the podcast here (Spotify and Apple podcast). The podcast is produced in cooperation with Howden Denmark.

Another day, another politically motivated attack in the United States.

This morning’s shooting at a Dallas ICE detention facility – where a sniper killed two detainees and wounded another before taking his own life prompted me to revisit a question that’s been troubling me: Is political violence actually increasing in America, or does it just feel that way?

To explore this, I’ve conducted what I’ll call a methodological experiment.

Rather than relying on traditional datasets, I’ve used ChatGPT and Claude to construct a synthetic index of political violence in the US since 1945. Let me be absolutely clear: this isn’t conventional data. It’s data generated through language models, with all the limitations that implies.

The Methodology (and Its Limitations)

Here’s what I did: I asked both ChatGPT and Claude to generate lists of politically motivated violent incidents since 1945, then had them score each incident’s severity on a scale where 50 represents a “normal” level.

The models assessed both casualties and symbolic significance, and I used them to cross-check each other’s work. I then quality-checked the output myself and categorised perpetrators by political affiliation where this was clearly established.

This approach is, admittedly, unorthodox. Language models are trained on existing texts and may reflect biases in their training data. They might overweight highly publicised events or recent incidents that featured prominently in their training corpus.

The “data” we’re looking at is essentially a structured synthesis of what these models have absorbed about American political violence.

Yet there’s something intriguing here. These models have processed vast amounts of information about political violence – news reports, academic studies, government documents. Their output might capture patterns that traditional datasets miss, though it might also amplify certain narratives or blind spots.

What the Synthetic Data Reveal

With those caveats firmly in mind, the patterns that emerge from this exercise are concerning. The model-generated index shows a clear upward trend in political violence over the past decade.

Looking at the breakdown by perpetrator ideology (where clearly established), the data suggest that right-wing extremist groups have been responsible for the majority of incidents in recent years, though we cannot draw conclusions about today’s attack whilst investigations are ongoing.

The synthetic data align with some empirical observations. Princeton’s Bridging Divides Initiative recorded over 600 incidents of threats and harassment against local officials in 2024 – a 74% increase from 2022. The University of Maryland found that in the first half of 2025, 35% of violent events targeted U.S. government personnel or facilities – more than twice the rate in 2024.

The Charlie Kirk Assassination and Recent Patterns

The September assassination of conservative activist Charlie Kirk marked a particularly dark moment.

The incident followed numerous recent acts of political violence, including the murder of Minnesota Democratic state Rep. Melissa Hortman and her husband, and two assassination attempts on President Trump in 2024.

What the synthetic data reveal is not just increased frequency but a shift in patterns. While overall levels of physical political violence remained low in 2024 compared to years prior, acts of vigilante violence grew as a proportion of all reported incidents.

We’re seeing less organised group violence and more lone-wolf attacks – a pattern that’s harder to predict and prevent.

The Epistemological Challenge

When we use language models to generate “data” about social phenomena, what exactly are we measuring? We’re essentially extracting structured information from the collective corpus of human writing about these events. It’s aggregating distributed information, but through an AI intermediary rather than traditional data collection methods.

This raises fascinating questions.

The models suggest that right-wing extremist violence has been responsible for a fairly large majority of U.S. domestic terrorism deaths since 2001. But how much of this reflects actual patterns versus the way these events are covered and discussed in the sources the models were trained on?

The synthetic data are, in a sense, a mirror of our collective discourse about political violence. They reflect not just what happened, but how we’ve talked about what happened. That’s both a limitation and, potentially, a feature – understanding the narrative landscape around political violence might be as important as counting incidents.

An Experimental Tool

I’ve built an interactive app (using the AI coding tool Lovable) based on this language model-generated violence index.

Users can explore the synthetic data, examine patterns across different time periods and perpetrator groups, and understand the methodology behind it. Think of it as an experiment in using AI to structure historical information rather than a definitive dataset.

The value isn’t in treating this as gospel truth, but in what it reveals about how these events are recorded, remembered, and synthesised in our collective digital memory.

When language models trained on our civilisation’s text output show rising political violence, it tells us something – even if that something is as much about narrative as about underlying reality.

This morning’s tragedy in Dallas reminds us that behind every data point – whether traditionally collected or AI-generated – there are real victims and real consequences. Understanding the patterns, however imperfectly, is the first step toward addressing them.

Try the tool here.

The Argentine markets took a beating last week, but US Treasury Secretary Scott Bessent has rushed to the rescue with a remarkable promise: America will provide what amounts to unlimited support to prop up Argentina. His declaration that “all options for stabilization are on the table” – including swap lines, direct currency purchases, and buying Argentine government debt – represents an extraordinary blank check.

But here’s the real kicker: Bessent claims Argentina is “systemically important” to the United States. This is financial fiction at its finest.

The Systemic Importance Fairy Tale

Let’s be brutally honest: Argentina poses zero systemic risk to the US financial system. US banks have minimal exposure to Argentine debt. Trade between the two countries is negligible in the context of the US economy. If Argentina defaulted tomorrow, would Bank of America collapse? Would JPMorgan need a bailout? Of course not.

The “systemically important” label is being stretched beyond recognition. If Argentina qualifies, then virtually every country in Latin America – including those the Trump administration just hit with massive tariffs – should qualify too.

This isn’t about systemic risk; it’s about political preferences dressed up as financial necessity.

The Moral Hazard Machine

By offering essentially unlimited support to Argentina, the US is creating a massive moral hazard problem.

The message to Milei’s government is clear: Don’t worry about the hard work of building political coalitions or passing sustainable reforms through parliament. Uncle Sam will catch you if you fall.

This is precisely the wrong incentive structure. Argentina has defaulted on its sovereign debt nine times since independence. Nine times!

The country’s political economy is fundamentally broken, cycling through periods of populist spending followed by crisis and austerity. US financial support doesn’t fix this cycle – it enables it.

The Real Threat to US Financial Stability

Here’s the irony: While Argentina poses no systemic risk to the US, this bailout policy might. Not directly through financial contagion, but through the precedent it sets.

If the US Treasury is willing to provide unlimited support to a serial defaulter like Argentina simply because its president is friendly with Trump and speaks the MAGA language, what’s to stop other countries from playing the same game? Elect a Trump-friendly president, make the right noises about being an ally, and wait for the bailout when things go south.

This transforms the US Treasury into a global lender of last resort – not for genuine systemic crises, but for politically favored regimes. That’s a commitment the US cannot afford, especially when federal debt is already approaching dangerous levels.

The Buenos Aires Reality Check

The timing of Bessent’s announcement is telling. It comes right after Milei’s party got hammered in regional elections in Buenos Aires. The political message from Argentine voters was clear (rightly or wrongly): Milei’s policies aren’t working, and he lacks popular support for his reforms.

Rather than forcing Milei to build political consensus and pursue genuine institutional reforms, the US bailout allows him to double down on rule by decree. This is not sustainable governance. It’s political theater subsidized by American taxpayers.

Where’s the “America First”?

This is where the contradictions become absurd. The Trump administration came to power promising “America First” – putting American workers and taxpayers first, being tough on countries that don’t pay their fair share, and ending the era of the US playing global policeman.

Yet here we are, with a Trump-appointed Treasury Secretary promising unlimited support to a country that has stiffed international creditors nine times. How exactly does bailing out Argentine bondholders put American workers first? How does propping up a foreign government that can’t even win local elections serve US interests?

The Unlimited Commitment Problem

Perhaps most troubling is the open-ended nature of Bessent’s commitment. “All options are on the table” with no conditions, no limits, no requirements for structural reform. This isn’t a rescue package – it’s a blank check.

What happens when Argentina needs another injection in six months? Another one in a year? At what point does the US Treasury say “enough”? And when that moment comes as it inevitably will won’t the withdrawal of support trigger an even bigger crisis?

The Alternative Nobody Wants to Discuss

Here’s what should happen: Argentina should be allowed to face the consequences of its political and economic choices.

Yes, this means potential default. Yes, this means economic hardship. But it also means the country would finally be forced to confront its fundamental problems rather than papering them over with foreign money.

The IMF learned this lesson the hard way after multiple failed bailouts. Now the US seems determined to repeat the same mistakes, but with even less conditionality and oversight.

Conclusion

This isn’t about whether one likes or dislikes Milei. It’s about the dangerous precedent of the United States providing unlimited financial support to a country that poses no genuine systemic risk to the US financial system (or to the global financial system).

The moral hazard is obvious: Why should any country pursue painful but necessary reforms when they can simply wait for a bailout? Why should Argentina fix its institutional problems when the US Treasury stands ready to finance its dysfunction?

Ultimately, this policy doesn’t just threaten US financial stability through the direct cost of supporting Argentina.

It threatens the entire architecture of international financial responsibility. When “systemically important” becomes a political designation rather than an economic reality, and when bailouts come with no strings attached, we’re not promoting stability. The US taxpayers will be subsidizing instability.

The world is indeed upside down when an “America First” administration puts Argentine bondholders before American taxpayers.

PS Back in July I warned about Milei not being the miracle maker that some was making him up to be in my blog post Classical Liberals, Let’s Be Honest About Milei

The Federal Reserve cut rates by 25 basis points yesterday, bringing the fed funds rate to 4.00-4.25%, exactly as markets had expected. Stephen Miran – Trump’s recently appointed member to the FOMC- dissented, preferring 50bp.

Notably, the two other known “doves” on the committee, Christopher Waller and Michelle Bowman, voted with the majority rather than joining Miran’s call for more aggressive easing.

Markets barely moved, with for example the CME FedWatch tool continuing to price another 100-125bp of cuts by September 2026, unchanged from before the announcement. The immediate question isn’t whether the cut was justified. It’s a lot more fundamental: What exactly is the Fed’s nominal anchor?

Looking at the data, it appears the Fed has lost the nominal stability framework that served it well throughout the 2010s.

Without a clear nominal anchor, monetary policy risks becoming increasingly discretionary, politicised, and most dangerously subordinate to fiscal imperatives.

The Decade of Accidental Success

From 2010 to 2019, the United States enjoyed remarkable nominal stability. Few recognised it at the time (I how did – for example in this blog post in 2014) but the data tells a clear story.

Let me explain what we’re looking at. NGDP (Nominal Gross Domestic Product) is the total value of all goods and services produced in the economy, measured in current prices not adjusted for inflation. It’s the sum of real economic growth plus inflation, making it the best measure of total nominal spending in the economy.

PCE (Personal Consumption Expenditures) represents consumer spending, which accounts for roughly 70% of GDP. Since PCE data comes monthly while NGDP is only reported quarterly, I use PCE as a high-frequency proxy for NGDP trends.

The chart above shows an almost perfectly straight line at roughly 4% growth throughout the 2010s. The 3m/3m annualised growth rate fluctuated around its mean of 3.9% within a tight ±1 standard deviation band. This was, whether intentional or not, de facto NGDP level targeting.

The results were precisely what theory would predict. With trend real growth around 2%, that 4% nominal growth path delivered 2% inflation, confirming the basic identity: π ≈ g_NGDP – g_RGDP.

The Fed achieved its inflation target not through complex Phillips Curve calculations, but through stable nominal spending growth.

The Fed never acknowledged targeting NGDP.

They continued to emphasise their dual mandate and inflation target, conducting policy through the lens of unobservable variables like r* and u*. But regardless of the stated framework, the results were clear: stable nominal growth, on-target inflation, and no need for dramatic policy adjustments.

The Real Economy Normalised Quickly—As I Predicted

The COVID shock severely disrupted the real economy in 2020. But real shocks, by their nature, are temporary.

Back in May 2020, when most commentators were predicting a prolonged depression, I wrote on this blog that US unemployment would drop below 6% by November.

The reasoning was straightforward: this was a supply shock, not a demand shock, and market economies recover quickly from supply disruptions when monetary policy maintains nominal stability.

I was right. The labour market recovery was swift, just as economic theory predicted it would be.

By the end of 2021, the real economy had essentially normalised.

The unemployment rate had returned to NAIRU, and the output gap had closed. According to any standard framework (including the Fed’s own models) this is when monetary policy should return to neutral settings. The emergency had passed.

Yet policy remained highly accommodative well beyond this point.

From Deflation Fighter to Inflation Denier

My views on monetary policy rules have remained consistent. I’ve always advocated for rule-based policy targeting nominal stability.

What changed dramatically was my assessment of where the US economy stood relative to that rule.

From 2008 through 2020, I consistently argued that US monetary policy was less expansionary than widely believed – that we were below the optimal nominal path.

I welcomed the Fed’s initial response to the lockdown crisis, fearing a repeat of the 2008-9 deflationary shock.

However, by April 2021, the data forced me to completely reverse my assessment. In a blog post titled “Heading for double-digit US inflation,” I warned that we had swung from being below the optimal nominal path to being dramatically above it.

Using the P-star model and observing the massive growth in broad money supply, I predicted that inflation would surge far above the Fed’s target- potentially reaching double digits.

That forecast proved directionally correct, though inflation peaked at around 9% rather than breaking into double digits. The key insight was recognising that the Fed had allowed a massive ‘liquidity overhang’ to build up, and this would inevitably feed through to prices once the real economy normalised.

The Persistent Nominal Overshoot

Instead of returning to the pre-2020 trend after the real economy normalised, the nominal level shifted permanently upward. The PCE chart above shows this clearly.

Even if we generously re-anchor a new 4% trend from mid-2024, the level remains well above where it should be. This isn’t just about growth rates. It’s about the accumulated overshoot that hasn’t been corrected.

Only in 2025 has nominal growth finally begun to slow toward rates consistent with 2% inflation. But under proper level targeting, this isn’t sufficient.

When you overshoot the level target, you need a period of below-trend growth to return to the path. That’s the “make-up” principle that distinguishes level targeting from growth rate targeting. Instead, the Fed is cutting rates, effectively validating the higher nominal level.

Inflation: Still Closer to 3% Than 2%

The inflation picture confirms this diagnosis:

Since early 2021, core PCE has run persistently above the Fed’s 2% target. Even as it has moderated from its peaks, the trend remains closer to 3% than to 2%. With unemployment still relatively low, this pattern is consistent with excess nominal demand rather than supply disruptions. The supply shock excuse had validity in 2021-22, but not in 2025.

This persistent above-target inflation, combined with low unemployment, indicates that NGDP growth has been too high for too long. The Fed’s 2% target isn’t being achieved because nominal spending growth hasn’t been calibrated to deliver it.

The Elephant in the Room: Fiscal Dominance

What makes yesterday’s cut particularly troubling is the fiscal context. With US public debt-to-GDP above 100% and deficits running close to 6% of GDP, we’re approaching territory where the fiscal theory of the price level (FTPL) becomes relevant.

When markets doubt that future primary surpluses will back current debt levels, the price level must adjust upward regardless of central bank actions.

The Fed appears to have already surrendered to fiscal dominance. Rather than acting as a counterweight to fiscal excess, they’re accommodating it. This isn’t just poor monetary policy; it’s an abdication of institutional responsibility that risks far more than near-term inflation.

The Dollar’s Ticking Clock

Throughout 2025, I’ve warned that we’re witnessing the early stages of a potential challenge to the dollar’s reserve currency status (see here).

This “exorbitant privilege”—which allows the US to finance deficits cheaply and conduct monetary policy with unusual freedom depends entirely on foreign confidence.

As I noted in February when Trump announced his tariff plans, the combination of weaponising trade policy, political pressure on the Fed, and ballooning fiscal deficits creates precisely the conditions that historically have preceded reserve currency transitions.

We saw it with the Dutch guilder giving way to sterling, and sterling eventually ceding to the dollar.

Markets Expect Substantial Further Easing

The CME FedWatch tool shows the modal expectation for September 2026 remains centred around 3.00-3.25%, implying another 100-125bp of cuts from current levels—essentially unchanged from before yesterday’s announcement. Markets assign essentially zero probability to rates being higher than today.

This market pricing suggests the 25bp cut was so thoroughly anticipated that it contained no new information.

The real signal is what this persistent expectation of further easing implies: markets believe the Fed will continue accommodating the elevated nominal level regardless of inflation dynamics. If this occurs alongside continued fiscal deficits and no correction to the nominal overshoot, we could see:

• Long-term yields disconnecting from short rates as term premia explode
• Dollar weakness despite interest rate differentials
• Commodity price surges as investors seek real assets

The Case for NGDP Level Targeting

NGDP level targeting would address all these challenges simultaneously. With a 4% NGDP level target (consistent with 2% inflation given 2% trend real growth), policy would aim to run nominal growth at or slightly below 4% until the level gap closed. This is the systematic “make-up” strategy that level targeting requires – no bygones being bygones.

Moreover, NGDP level targeting elegantly handles supply shocks – a particularly relevant consideration given potential tariff changes ahead.

Under a nominal spending target, relative prices adjust to supply shocks while total spending remains stable. Temporary inflation from tariffs wouldn’t trigger monetary tightening that could cause an unnecessary recession. The central bank would focus on its proper role: providing nominal stability, not trying to offset relative price changes.

As I’ve argued since 2011, the implementation could be straightforward:

• Announce a public NGDP level path
• Use market expectations (potentially NGDP futures) to gauge whether policy is on track
• Adjust policy systematically when expectations deviate from the target path
• No need to estimate unobservable variables like r* or the output gap in real-time

This framework would also provide crucial resistance to fiscal dominance.

With an explicit nominal target, the Fed would have clear justification for tightening when fiscal policy threatens to push nominal spending above the target path. It transforms monetary-fiscal coordination from a political negotiation into a rule-based interaction.

The Risk of Policy Drift

Yesterday’s decision reflects a deeper problem: monetary policy lacks a systematic rule.

Miran’s isolated dissent for 50bp is particularly telling. Here’s Trump’s newest appointee to the FOMC – who co-authored a paper last year calling Fed independence an outdated “shibboleth” and advocating that Fed governors “serve at the will of the U.S. president” standing alone in pushing for even more aggressive easing.

That even the traditional doves Waller and Bowman didn’t join him suggests they recognise some limits to accommodation, but Miran apparently does not.

When each meeting becomes a negotiation rather than a rule-based decision, and when political appointees push for ever-easier policy regardless of economic conditions, the door opens wide to political influence and short-term thinking.

The Fed successfully delivered nominal stability from 2010 to 2019, even without explicitly targeting NGDP. That framework whatever we call it worked. It kept nominal growth stable, delivered on-target inflation, and avoided both deflation and overheating.

Since 2020, that implicit framework has been abandoned. We’ve moved from rule-like behaviour to increasingly discretionary decisions.

The result is persistent above-target inflation, an elevated price level, and markets expecting accommodation regardless of nominal conditions.

Learning from Past Mistakes

My evolving views on this crisis offer a lesson in the importance of nominal anchors. In 2020, I correctly identified this as a supply shock and predicted a rapid labour market recovery. By 2021, I warned about surging inflation when the Fed maintained emergency policies too long. Both predictions stemmed from the same insight: without a clear nominal anchor, policy errors compound.

The Fed had a framework that worked whether they admitted it or not from 2010 to 2019. They delivered stable 4% NGDP growth that translated into on-target inflation.

That framework didn’t require perfect foresight about r* or NAIRU. It’s just a commitment to stable nominal spending growth.

Conclusion: More Than a Missing Anchor

The Fed’s rate cut yesterday reveals multiple layers of institutional failure.

The de facto NGDP stability of the 2010s has given way to discretionary policy that validates whatever nominal path emerges from fiscal and political pressures.

The US is facing not just above-target inflation and an elevated price level, but potentially epochal challenges: fiscal dominance overtaking monetary independence, and the gradual erosion of dollar hegemony. These aren’t distant risks. They are unfolding now, hidden in plain sight behind market complacency.

The solution remains straightforward: commit to a nominal level target and stick to it. But yesterday’s cut suggests the Fed lacks either the understanding or the courage to do so. The anchor isn’t just drifting. It may already be lost. And with it, potentially, goes American monetary exceptionalism.

Looking back at my predictions from 2020 and 2021, the lesson is clear: get the nominal anchor right, and the real economy largely takes care of itself. Get it wrong, and you don’t just get inflation or recession. You risk the entire monetary architecture that has underpinned American prosperity for generations.

The coming months will be critical. If the Fed continues down the path markets expect another 100-125bp of cuts by this time next year – without addressing the nominal overshoot, we’ll know the answer: there is no anchor, only drift.

And a final warning: Once the markets realise that the nominal anchor is broken then US Treasury bond yields might explode.

Many economists and market observers have expressed surprise at the apparent absence of inflationary effects from President Trump’s economic policies.

I find this a bit puzzling, as I believe the inflationary impact is already clearly visible if one examines the data properly.

In this post, I will demonstrate why I’m convinced we’re seeing the beginning of a rather significant inflationary episode in the US economy.

After Donald Trump’s return to office, three major policy changes have occurred that I believe are significantly impacting US inflation dynamics. First, fiscal policy has been substantially eased through the “Big Beautiful Bill.” This is you might say be some unpleasant monetarist arithmetics.

Second, tariff rates have increased dramatically to nearly 20% on average for all American imports.

Third, the Trump administration has placed extraordinary pressure on the Federal Reserve to ease monetary policy. I have earlier warned to watch for a credibility (or lacks of) related spike in money-velocity.

The reason many observers haven’t noticed these inflationary effects in headline figures is primarily due to sticky prices, base effects and transitory effect of prices declines in some sectors of the economy. But as I’ll show, a more careful analysis reveals the troubling trend.

My Methodological Approach: Looking Beyond Surface-Level Data

To properly understand what’s happening with US inflation, I’ve examined three different price indices – the Consumer Price Index (CPI), the Personal Consumption Expenditures (PCE) deflator, and the Producer Price Index (PPI).

For each index, I’ve analyzed both the headline figures and the core measures that exclude food and energy prices, giving me six distinct metrics to work with.

I then calculated the median of these six indices and indexed this composite measure to 100 as of April 2025, represented by the blue line in my graph. I’ve also included a band representing ±1 standard deviation across the price series to capture statistical uncertainty.

I chose April 2025 as my indexation point because it coincides with President Trump’s announcement of substantial tariff increases on what he termed “Liberation Day.” Many of these tariff implementations were delayed until August, which means we have yet to see their full inflationary impact.

The Evidence: Inflation Is Already Accelerating

When I compare the actual inflation trajectory (blue line) with the pre-April trend (green line), which assumes continuation of the growth rate observed in the first four months of the year, I find that actual price increases have significantly exceeded projections.

Both these rates surpass the red line representing the Federal Reserve’s 2% inflation target.

What I find most concerning is the clear acceleration in monthly price increases. The monthly annualised growth rates since April tell the story:

• May 2025: 1.8% p.a.
• June 2025: 3.7% p.a.
• July 2025: 3.0% p.a.
• August 2025: 4.9% p.a.

These numbers reveal what headline year-on-year figures obscure – inflation is not only increasing but accelerating at a troubling pace. This is the key insight that many commentators are missing.

Recent Inflation Data Confirms My Analysis

The latest inflation data further validates my concerns. The Consumer Price Index for August 2025 increased 0.4% on a seasonally adjusted basis, after rising 0.2% in July. Over the last 12 months, the all items index increased 2.9%, up from 2.7% in July. The core CPI (excluding food and energy) rose 0.3% in August and stands at 3.1% over the last 12 months.

The PCE price index, which is the Federal Reserve’s preferred inflation gauge, shows a similar trend. The July PCE price index increased 0.2% month-over-month and 2.6% year-over-year. More concerning is the core PCE price index, which rose to 2.9% on an annual basis in July, up from 2.8% in June. This is the highest level since February 2025 and significantly above the Fed’s 2% target.

Producer prices present a more mixed picture, with the PPI for final demand edging down 0.1% in August after advancing 0.7% in July.

However, on an unadjusted basis, the index for final demand rose 2.6% for the 12 months ended in August.

More importantly, the PPI for final demand less foods, energy, and trade services rose 0.3% in August, the fourth consecutive increase, and moved up 2.8% over the year – the largest 12-month advance since March 2025.

Services and Shelter: Not Offsetting Goods Inflation

A notable aspect of the current inflation picture is that while goods prices are facing upward pressure from tariffs, services and shelter inflation aren’t declining enough to offset this increase. Services inflation, which should be largely insulated from direct tariff effects, is showing persistent strength. In August, core services excluding shelter rose 0.3%, with transportation services particularly robust – airline fares increased 5.9% in August after a 4.0% gain in July.

Meanwhile, the shelter component, which had been moderating and helping to contain overall inflation, is no longer providing as much of a disinflationary offset. The shelter index rose 0.4% in August, the largest increase since January. Given that shelter accounts for about a third of the CPI basket, this shift is significant. The lack of sufficient offsetting declines in these major components means that as goods inflation accelerates due to tariffs, overall inflation will likely continue to rise.

Reading Between the Lines: The Concerning Details

Looking at the details reveals even more concerning trends. Grocery prices recorded their largest jump since August 2022, rising 0.6% in August. Core goods prices climbed at their fastest rate in seven months, with notable increases in vehicle and apparel prices. Core services prices also continued to firm, supported by higher travel-related expenses and a pickup in shelter costs.

While some analysts focus on headline year-over-year figures that still appear relatively contained, the momentum in monthly data paints a very different picture. The trajectory of inflation is clearly upward, and the rate of change is accelerating. This becomes evident when you analyze monthly growth rates rather than annual comparisons that can mask recent trends.

The Fed’s Credibility at Risk

Despite this clear inflationary trend, the Federal Reserve is expected to reduce its policy rate by 25 basis points in September. In my view, this would be a clear signal that the Fed has yielded to political pressure, contribting to undermining its credibility and creating an additional, independent inflation risk.

It’s worth noting that the Producer Price Index data for August showed an unexpected decline of 0.1%, which may give the Fed cover to proceed with rate cuts. However, the underlying details show that this decline was largely due to a 1.7% drop in trade services margins, which could indicate that businesses are temporarily absorbing higher costs from tariffs rather than passing them on to consumers. This is likely unsustainable, and we should expect to see more pass-through of these costs in the coming months.

The Inflation Trend That Emerges When You Examine All Six Price Indices

While individual price indices can sometimes send mixed signals, my analysis of all six major price measures (headline and core versions of CPI, PCE, and PPI) shows a consistent pattern of acceleration since April 2025. This comprehensive approach reduces the noise in any single measure and reveals the underlying inflation momentum.

The pattern becomes especially clear when examining the data in sequence. Each month since April has shown an acceleration from the previous trend, with August showing the most dramatic deviation yet.

The fact that this pattern holds across multiple indices strengthens the conclusion that we’re witnessing a genuine inflation acceleration rather than statistical noise.

Beyond Tariffs: A Fundamental Shift in Expectations

I believe we’re seeing something more concerning than just the direct effects of tariffs. The data suggests we’re witnessing a fundamental shift in inflation expectations, which presents the risk of a more permanent inflationary regime beyond the one-time impact of tariff adjustments.

What’s particularly concerning is that much of the tariff impact has yet to be fully realized. Many businesses have managed to soften the impact of rising costs by relying on pre-tariff inventories and accepting slimmer profit margins, as evidenced by the decline in trade services margins in the August PPI. However, these buffers are likely to continue to fade.

The fact that we’re already seeing accelerating inflation before the full effects of the tariff increases have worked their way through the economy suggests that the problem could become much worse in the coming months.

Conclusion: US Inflation’s Upward Trajectory Is Clearer Than Many Admit

While many commentators continue to express surprise at the lack of visible inflation from Trump’s policies, I maintain that the evidence is clear for those willing to look beyond headline figures and examine the actual trajectory of monthly data. I believe my analysis indicates that US inflation is not only rising but accelerating at a concerning pace.

The coming months will likely validate this assessment as the full effects of tariff increases work their way through the economy.

More troubling is the potential for entrenched inflation expectations, which could make this inflationary episode much more persistent than many currently anticipate.

Federal Reserve policymakers should take note of these warning signs before proceeding with interest rate cuts that could further fuel inflationary pressures. The window to prevent a more serious inflation problem may be closing quickly.

Long-term British government bond yields are now at their highest level in almost 30 years.

What is even more concerning is that the UK economy is actually slowing down, which means that nominal GDP growth must now be considered significantly lower than long-term interest rates.

This is extremely critical, as it means that public debt as a percentage of GDP is now on an explosive rise, and if the UK government cannot convincingly demonstrate to financial markets that it will address the large budget deficit, currently around 5% of GDP, then expectations that the Bank of England will have to step in and run the printing press to finance the deficit will explode.

In that situation, the pound will collapse, and inflation will soar dramatically. And we are already on the way – despite the Bank of England lowering its monetary policy rate this year, long-term rates are rising – and yes, inflation is again rising sharply. We are currently at almost 4% – and there are indications that it may soon become much worse.

And the UK government is paralysed, and there is no indication that Prime Minister Keir Starmer has support within his Labour party to address the fiscal problems, while voter support for the populist Reform Party grows day by day, which is hardly encouraging if one believes there is a need for fiscal tightening and major macroeconomic reforms.

Public debt in the UK is already above 100% of GDP, and with interest rates as we see now, interest payments are consuming an increasing share of the state budget. This creates a vicious cycle where the government must borrow more to cover interest payments, which in turn increases debt and future interest payments.

And yes, it all looks very similar to the US, but unlike the dollar, the pound is not a global reserve currency.

So there is no mercy, and things could soon go very wrong in the United Kingdom.

The American economy stands at a critical juncture. President Trump’s assault on the Federal Reserve has reached an intensity that threatens the very foundations of independent economic institutions.

Lisa Cook, a Federal Reserve Board member, has become the primary target of Trump’s political pressure. Despite repeated claims of dismissal, Trump has encountered formidable legal barriers.

The Federal Reserve Act’s protective provisions are crystal clear: Board members can only be removed “with cause” – a legal standard requiring documented inefficiency, neglect of duties, or malfeasance in office.

Trump’s rhetoric has been unrelenting. He has repeatedly branded Federal Reserve Chair Jerome Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL”. These are not mere political utterances, but a calculated strategy to undermine the institution’s credibility and independence.

The nomination of Stephen Miran to the Board represents a strategic manoeuvre. Miran, a key architect of Trump’s protectionist tariff policies and an overt critic of Fed independence, epitomises the administration’s approach to institutional capture.

Equally troubling is the nomination of E.J. Antoni to lead the Bureau of Labour Statistics, revealing a broader pattern of institutional pressure. Antoni’s background is particularly concerning. Present in Washington during the 6 January 2021 events and lacking formal statistical training, he has described BLS methodological changes as “Orwellian tricks”. His predecessor, Erika McEntarfer, was summarily dismissed following a jobs report revealing weak growth and significant downward revisions.

These are not isolated incidents, but a systematic strategy to erode the boundaries between political leadership and independent economic institutions.

The parallels with Turkey’s macroeconomic experience over the past two decades are stark and deeply troubling.

When politicians systematically attempt to control statistical narratives and pressure monetary authorities, the consequences are predictable and potentially catastrophic.

To understand the potential trajectory of these institutional pressures, I turn to an in-depth analysis of Turkey’s economic and financial data.

By examining the structural breaks in Turkey’s exchange rate and consumer price index, we can map the precise mechanisms through which political interference destabilises economic institutions and forecast the potential risks facing the United States.

The Method: Identifying Structural Breaks

To examine how institutional credibility manifests in economic data, I employ piecewise-linear regression on the logarithm of Turkey’s exchange rate (TRY/USD) and consumer prices (CPI):

Breakpoints are identified through a recursive residual minimization algorithm with minimum segment length constraints to prevent overfitting. The fitted model highlights trend accelerations indicative of collapsing policy credibility.

Structural Breaks in the Data

Based on CPI (all-items, 2015=100) and OECD TRY/USD data from 2000 to mid-2025, the model detects the following breakpoints:

ln(CPI, All-Items)

• April 2004
• January 2009
• July 2012
• December 2021

ln(TRY per USD)

• August 2001
• May 2008
• June 2016
• January 2021

The 2021 break is common to both series and corresponds to an inflection point in Turkey’s macroeconomic credibility.

Institutional Context

2001-2004: Turkey enters an IMF-supported stabilization program. Initial credibility gains follow structural reforms.

2008-2009: The global financial crisis provides cover for credit expansion via state banks. The exchange rate trend weakens.

2012-2016: President Erdoğan intensifies public attacks on the central bank, calling interest rates “the mother and father of all evil.”

2016: Following the July coup attempt, massive institutional purges and emergency rule accelerate TRY depreciation.

2021: Multiple central bank governors are fired in rapid succession. Interest rates are cut amid soaring inflation. The head of the statistical agency is replaced following public scrutiny. Both inflation and the exchange rate experience their sharpest accelerations.

The Cumulative Cost

Turkey’s all-items CPI rose from 9.5 in January 2000 to 74.36 in June 2025. The chart below shows the dramatic shift in inflation dynamics after 2021:

Similarly, the Turkish lira depreciated steadily until 2016 and then began to collapse after 2021:

The timing aligns precisely with political interference in core institutions.

Parallels to the United States

The U.S. now faces its own institutional tests:

• Trump has called Powell a “stubborn MORON” and demanded the Fed Board “ASSUME CONTROL.”
• He has threatened lawsuits over Fed building renovation costs.
• Trump claims to have sacked Lisa Cook.
• Stephen Miran, a prominent critic of Fed independence, has been nominated to the Board.
• E.J. Antoni, who lacks formal statistical training, has been tapped to lead the BLS.
• The federal deficit will reach $1.9 trillion in FY2025 (6.2% of GDP), while unemployment is at 4.2%.
• Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035.

These dynamics echo the institutional erosion seen in Turkey during its slide into macroeconomic instability.

The eerie resemblances between Turkey and the US

The structural parallels between Turkey’s economic trajectory and the current United States landscape are far more than academic coincidence. They represent a precise roadmap of institutional decay.

In Turkey, political interference transformed a functioning economic system into a case study of monetary mismanagement. Our data analysis reveals how repeated attacks on central bank independence created predictable, catastrophic outcomes: hyperinflation, currency collapse, and total loss of economic credibility.

The United States is traversing an eerily similar path. Political pressure on the Federal Reserve, repeated attempts to undermine institutional independence, and strategic appointments designed to capture economic institutions mirror the early stages of Turkey’s economic unravelling.

The risk is not hypothetical. Each politically motivated intervention increases the probability of a return to double-digit inflation and challenges the dollar’s global reserve currency status.

The mechanisms of institutional erosion are identically structured: politically controlled statistical agencies, central bank leadership under constant threat, and monetary policy increasingly subordinated to short-term political calculations.

Market signals already indicate growing vulnerability. Dollar weakness, shifting international trading patterns, and increasing institutional uncertainty suggest we are not merely at risk, but already in the initial phases of potential systemic transformation.

The Turkish case study is not a warning, but a blueprint. Without immediate, robust defence of institutional integrity, the United States risks replicating a path from economic stability to monetary chaos with remarkable precision.

Suppose I came to you and said: “I would like to borrow a very large sum of money in order to buy massively overpriced shares. By the way, I am already drowning in debt.” What interest rate would you charge me?

The answer would be either prohibitively high or a flat refusal.

Yet this is precisely the course the United States government has embarked upon.

The Intel Purchase: A Costly First Step

Only days ago Washington acquired around ten per cent of Intel, spending close to nine billion dollars by converting subsidies from the CHIPS and Science Act into equity. The US Treasury now holds more than four hundred million non voting shares at roughly twenty dollars each.

Markets offered a modest applause, with Intel’s share price ticking higher. But the company remains far below its past peaks and management has already warned that government ownership could complicate global sales.

Officials present this move as the foundation of a new American sovereign wealth fund. The difference from Norway is obvious. Norway’s fund is backed by oil revenues. The United States has no such cushion of accumulated wealth, only mounting debt.

Next Target: Defence Contractors

US Commerce Secretary Howard Lutnick has confirmed that the administration is considering taking direct equity stakes in Lockheed Martin, Boeing and Palantir. His rationale is that defence contracting has become a giveaway and that taxpayers deserve equity in return for financing the industrial base.

It sounds like logic. In practice it risks transforming the United States government into both regulator and shareholder of strategic industries. To many observers that is not market capitalism but a slide into state capitalism or what I have called ‘Red hat socialism‘

Palantir’s Extraordinary Valuation

The inclusion of Palantir Technologies makes this strategy especially alarming. Palantir’s price to earnings ratio currently sits somewhere between five hundred and seven hundred times trailing earnings. Even forward estimates remain stratospheric, around two hundred to three hundred times earnings.

To put that in context, the S&P 500 trades at about twenty two times earnings. Palantir is thus one of the most richly valued large cap stocks in the world. For any rational investor it represents significant downside risk. For a government already weighed down by record deficits it borders on financial recklessness.

The Risk Cascade

If the US government continues down this path, the sequence of risks is straightforward. Overvalued markets always correct. When that correction comes, Washington will book enormous losses directly onto the public balance sheet.

A political leader faced with such an outcome may not accept failure. Instead President Trump could choose to double down by buying even more equity, perhaps in weaker or more speculative firms. It would be the gambler’s fallacy applied to fiscal policy.

As this desperation becomes visible, confidence in US Treasuries may fracture. Investors would start to wonder whether the American government is a sovereign borrower or a speculative hedge fund. The response would be simple. Yields would climb as bondholders demanded higher compensation for risk.

Higher borrowing costs would arrive just as debt levels are exploding. Mortgages, corporate credit and municipal borrowing would all become more expensive. Financial conditions would tighten dramatically and growth would stall. Rising interest costs would in turn swell the deficit, fuelling perceptions of fiscal irresponsibility and intensifying the pressure on both equities and bonds.

This is how a misguided equity gamble could spill over into a sovereign debt crisis made in America.

Argentina, Not Norway

A genuine sovereign wealth fund requires wealth. Norway built its fund on decades of oil revenues. The US by contrast is building what amounts to a sovereign kamikaze fund, financed not by surpluses but by debt and managed not with prudence but with political bravado.

In this sense the US increasingly resembles Argentina under Juan Perón, where populism, intervention and debt blended into a destructive mix.

The real danger is not only that Washington loses taxpayer money on overpriced equities. The greater risk is that such policies undermine trust in US Treasuries, the bedrock of the global financial system. If desperation drives the administration into doubling down on failed bets, America could face spiralling bond yields, collapsing market confidence and a fiscal crisis of its own making.

Donald Trump calls it a win for American industry. Trump’s economic advisor (or what ever it is he is doing) Kevin Hassett calls it the first step towards a sovereign wealth fund. I call it Red Hat Socialism.

The United States government has just taken a near ten per cent stake in Intel. Officially it is about safeguarding domestic chip production. In reality it is subsidies converted into equity in a company that continues to lose ground to TSMC and Nvidia. The deal gives Washington no real control but leaves American taxpayers exposed when the share price falls.

And it does not stop there. Only a month ago the Pentagon bought into MP Materials, the United States’ only rare earths miner. The state is now the largest shareholder and has promised a minimum price for output at nearly double the Chinese market rate. In Washington this is described as national security. From abroad it looks like state-sponsored market distortion.

The US stock market is, by most measures, massively overvalued. At the same time, the US federal government is running a massive deficit. These two things cannot coexist for long: buying overvalued US companies financed by government debt issuance.

A sovereign wealth fund works when you invest fiscal surpluses into undervalued assets. Norway is the textbook example. What the United States is building is the polar opposite. Overvalued assets financed by record deficits.

The arithmetic is brutal. When the market reprices lower and it will be taxpayers who will take the hit. At the same time bond investors will wake up to the reality of ever-expanding debt and rising issuance.

I suggest you sell your US Treasury bonds before the double-whammy hits – a massive sell-off in the US stock market combined with skyrocketing US bond yields.