Because commercial bank loans are created from nothing, repaying that debt doesn't transfer money—it extinguishes it. This process of "zeroing out" the ledger via double-entry accounting actively removes liquidity from the system. A slowdown in new lending combined with debt repayment can rapidly shrink the money supply.

Stuffing banks with reserves via Quantitative Easing doesn't spur lending if there's no real economy demand. The current shift is driven by a genuine "pull" for credit from sectors like AI and onshoring, making banks willing to lend, which is a far more powerful economic force.

Only the Fed and commercial banks can create new, spendable money out of thin air. In contrast, credit creation, like in shadow banking, simply reallocates existing money from a saver to a spender. This distinction is crucial for understanding economic stimulus and risk.

For the past decade, the Fed was the primary driver of liquidity. Now, the focus shifts to commercial banks' willingness and ability to create credit to fund major initiatives like AI and onshoring. Investors fixated on Fed policy are missing this crucial transition.

A major regime change is underway to "reprivatize the financial system." This involves shrinking the Fed's footprint and loosening bank regulations to compel commercial banks to step back into their pre-GFC role as the primary creators of credit and market liquidity, reducing reliance on the central bank.

Economist Steve Keen's model suggests GDP is a function of money supply and its velocity. Since banks create money through private loans, the rise and fall of private debt directly dictates GDP growth and employment levels, a factor mainstream economics largely ignores.

The vast majority of global trade is funded by US dollars that exist outside the US, known as Eurodollars. This system operates beyond the Fed's direct control and relies entirely on trust. Money is created when banks extend credit and destroyed when they don't, making the global economy inherently fragile.

Unlike past crises, the Federal Reserve is unlikely to provide the next wave of market liquidity via its balance sheet. With rates far above zero, its primary tool is rate cuts. Instead, any new liquidity will likely originate from commercial banks, which are being deliberately deregulated to encourage credit creation.

Contrary to textbook models, banks aren't intermediaries for savers and borrowers. They create new money and debt simultaneously when issuing a loan. This new credit directly adds to aggregate demand, making it a primary driver of economic cycles rather than a neutral facilitator.