Unlike the post-GFC era, governments now lack the fiscal and monetary flexibility to cushion every economic shock due to high debt levels. This is forcing global markets to trade on their own fundamentals again, creating volatility and relative value opportunities reminiscent of the pre-2008 era.

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.

Global governments are actively pursuing policies (running economies hot, suppressing energy costs, managing rates down) to create a period of artificial prosperity. This is a deliberate strategy to push a massive debt sustainability crisis further into the future, which will feel great until it doesn't.

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.

Deteriorating debt fundamentals are a known long-term risk, but markets often remain complacent until a specific political event, like an election or leadership change, acts as a trigger. These upheavals force an immediate re-evaluation of what is sustainable, transforming abstract fiscal worries into concrete, costly market volatility.

Policymakers can maintain market stability as long as inflation volatility remains low, even if the absolute level is above target. A spike in CPI volatility is the true signal that breaks the system, forces a policy response, and makes long-term macro views suddenly relevant.

The U.S. is increasingly using currency and debt markets to smooth out GDP growth and control economic volatility, mirroring China's state-managed approach. This creates a superficially stable economy but centralizes systemic risk in the Treasury market, which serves as the ultimate 'exhaust valve.'

Under "fiscal dominance," the U.S. government's massive debt dictates Federal Reserve policy. The Fed must keep rates low enough for the government to afford interest payments, even if it fuels inflation. Monetary policy is no longer about managing the economy but about preventing a debt-driven collapse, making the Fed reactive, not proactive.

Tyler Cowen predicts the US will eventually resort to several years of ~7% inflation to manage its national debt. This strategy, while damaging to living standards, is politically more palatable than raising taxes or cutting spending. Rapid, AI-driven productivity growth is the only plausible alternative to this outcome.