After a decade of zero rates and QE post-2008, the financial system can no longer function without continuous stimulus. Attempts to tighten policy, as seen with the 2018 repo crisis, immediately cause breakdowns, forcing central banks to reverse course and indicating a permanent state of intervention.

A core function of money is to be the 'final extinguisher of debt.' However, fiat currency is created as debt, meaning every dollar is both an asset and a liability. This inherent contradiction makes the entire financial system fundamentally fragile.

The 2008 crisis wasn't just about mortgages; it was about banks not knowing the extent of toxic assets on each other's books. This paranoia froze the credit system. A similar dynamic is emerging where uncertainty causes every bank to pull back simultaneously, seizing the entire system out of rational self-preservation.

While bad credit might be the spark, the fuel for nearly every major financial crisis is a fundamental mismatch between assets and liabilities. This occurs when an entity holds illiquid investments but owes money to creditors who can demand it back on short notice, forcing fire sales.

A huge volume of corporate and personal debt was refinanced at near-zero rates in 2020-2021 with 5-7 year terms. With 50% of all debt rolling over in the next 3 years at much higher rates, a severe and unavoidable drag on economic liquidity is already baked into the system, regardless of future Fed actions.

The underlying math of U.S. debt is unsustainable, but the system holds together on pure confidence. The final collapse won't be a slow leak but a sudden 'pop'—an overnight freeze when investors collectively stop believing the government can honor its debts, a point which cannot be timed.

While low rates make borrowing to invest (leverage) seem seductive, it's exceptionally dangerous in an economy driven by debt management. Abrupt policy shifts can cause sudden volatility and dry up liquidity overnight, triggering margin calls and forcing sales at the worst possible times. Wealth is transferred from the over-leveraged to the liquid during these resets.

Lacking demand for long-term bonds, the Treasury issues massive short-term debt. This requires a larger cash balance (TGA) to avoid failed auctions, draining liquidity from the very markets needed to finance this debt, creating a self-reinforcing crisis dynamic.

Citing a lesson from former Goldman Sachs CFO David Viniar, Alan Waxman argues the root cause of financial crises isn't bad credit, but liquidity crunches from mismatched assets and liabilities (e.g., funding long-term assets with short-term debt). This pattern repeats as investors collectively forget the lesson over time.