Financial repression isn't just about forcing institutions to buy government bonds. A key, subtle mechanism is making other asset classes less appealing. For example, implementing rent controls can remove the inflation-hedging quality of property, while high transaction taxes can deter equity investing, thus herding capital into government debt.

Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.

Policies designed to suppress market volatility create a fragile stability. The underlying risk doesn't disappear; it transmutes into social and political polarization, driven by wealth inequality. This social unrest is a leading indicator of future market instability.

Governments with massive debt cannot afford to keep interest rates high, as refinancing becomes prohibitively expensive. This forces central banks to lower rates and print money, even when it fuels asset bubbles. The only exits are an unprecedented productivity boom (like from AI) or a devastating economic collapse.

Market participants are conditioned to expect a dramatic "Minsky moment." However, the more probable reality is a slow, grinding decline characterized by a decade of flat equity prices, compressing multiples, and degrading returns—a "death by a thousand cuts" rather than one catastrophic event.

Financial historian Russell Napier predicts governments will shift from fiscal/monetary tools to direct regulatory power to control capital. This involves compelling pension funds and insurers to invest in specific assets (like government bonds or domestic infrastructure) to achieve political goals, a tool he calls the "clunking fist."

The current economic cycle is unlikely to end in a classic nominal slowdown where everyone loses their jobs. Instead, the terminal risk is a resurgence of high inflation, which would prevent the Federal Reserve from providing stimulus and could trigger a 2022-style market downturn.

Despite fears of fiscal dominance driving yields up, US bond yields have remained controlled. This suggests a "financial repression" scenario is winning, where the Treasury and Federal Reserve coordinate, perhaps through careful auction management, to keep borrowing costs contained and suppress long-term rates.

Beyond the obvious impact on consumer spending, government shutdowns create tighter financial conditions through a less visible channel. The decline in disbursements to government programs and employees reduces bank reserves, tightening liquidity and putting downward pressure on equity markets.