Posted:October 6, 2025
Categories: Central Bank, Fiat Currency, Gold, Inflation, Market Update, Monetary Inflation, Quarterly Commentary, US Dollar, US Treasuries
In 146 BC, the Roman Republic had achieved unparalleled military dominance. It asserted itself as the dominant power in the Mediterranean, following victories of Carthage and Corinth. However, the Roman Republic was also beginning to face severe internal instability, economic inequality, and social dislocation. By defeating most of the immediate surrounding territories, new conquests required citizens to be conscripted for many years, which meant men weren’t able to tend to their land.
With men fighting wars in far-off lands such as Spain and Africa, much of the land ended up in the hands of wealthy nobles. Furthermore, successful wars led to a large influx of slave labor. These wealthy nobles acquired both land and slaves for their expanding estates, causing the demand for free labor to plummet and resulting in widespread poverty for the general population.
In 133 BC, Tiberius Sempronius Gracchus, a Roman politician, recognized this issue and urged his fellow senators to reform. Tiberius was instrumental in passing the Lex Agraria (Agrarian Law), but the passage ultimately cost him his life and marked the beginning of the end of the Roman Republic.
Figure 1: Tiberius Gracchus
Source: Wikimedia Commons
What I found interesting about this story is the parallels between the Roman political situation and our current political situation, more specifically, with the current and ongoing government shutdown.
Tiberius’s reform legislation aimed to redistribute publicly owned land to the poor, a cause that drew tremendous support from dispossessed citizens. Knowing they would lose the vote, the senatorial opponents recruited one of Tiberius’s fellow tribunes, Marcus Octavius, to obstruct the proceedings. When the clerk rose to read the Lex Agraria in preparation for the vote formally, Marcus Octavius stepped forward and vetoed the reading of the bill.
After the initial veto, Tiberius responded with a series of radical actions, breaking with the established traditions (mos maiorum) and leading to a temporary shutdown of the government. Sound familiar? Octavius was stripped of his office, allowing the Lex Agraria to pass overwhelmingly. The bill established a land commission, a three-man panel explicitly created to enforce the provisions of the Lex Agraria. The commission’s purpose was to survey, determine ownership of, and parcel out land. However, funding for the land commission was blocked by the Senate. In response, Tiberius circumvented this senatorial opposition by announcing that the recently acquired treasury of King Attalus III of Pergamum would be used to fund the commission and provide start-up capital for the new owners.
To protect his legislation, Tiberius violated the custom against consecutive magistracies by standing for reelection to the tribunate. Smelling blood, the wealthy senators now found a way to get rid of Tiberius so that they could retain their wealth and land ownership. The election ultimately ended in violence. Scipio Nasica led a group of armed senators and their followers who attacked the crowd on the Capitoline Hill. Tiberius Gracchus was killed, along with approximately three hundred of his supporters, marking the first major instance of political bloodshed and civil sedition in Rome since the monarchy.1
Figure 2: Mort de Tiberius Gracchus
Times have changed, but many of the reasons we fight persist. The fight in 133 BC was principally about money and power. The current government shutdown in the United States primarily revolves around the same: money and power. The more things change, the more they stay the same.
Current Government Shutdown
One of the primary reasons for the government shutdown is the dispute over the level of the budget deficit and how to allocate it. Last week, I watched an interview with Rand Paul, where he stated that he would only vote to end the shutdown if there were a $1 trillion budget reduction. Wouldn’t that be great? However, this is virtually impossible due to the current debt-based monetary system. I would like to revisit the topic of how our debt-based monetary system works, as it partially explains why asset markets are rising.
I typically write many of these reports over a period of time. At times, ideas come right away and flow easily into my writing. Sometimes, ideas need to marinate in my mind, and it takes longer for them to develop into a concept or thesis fully. One of my primary goals in writing is to explain complex financial topics, including investing and the monetary system, clearly and concisely. The fun part about exploring these topics is that other analysts and investors are also discussing them regularly, which is incredibly helpful in both my understanding and creation of these reports. One such analyst is Brent Johnson, a portfolio manager. True to form, his weekly video discussed much of the content I am about to explain, most of which I had already written. However, I will build on some of the points he discussed today as they complement my thoughts. 2
King Dollar and the Debt Imperative
The United States budget deficit is currently running at a “wartime” level of 6 to 7% of GDP or about $2 trillion per year. Our current gross level of government debt is over $37 trillion. The deficit persists in its historically large size, primarily because of the irreplaceable structural demand for the US dollar as the global reserve currency. This dynamic, related to Triffin’s dilemma, compels the US to run perpetual trade deficits, thereby supplying the world with the dollars needed for international finance, trade invoicing, and the vast Eurodollar market.
The sheer scale of dollar-denominated global activity is massive, indicating an entrenched and inflexible demand for the currency (US dollar). Consider the following figures as reported by Michael Nicoletos: 3
This continuous external demand overvalues the dollar and creates a self-financing mechanism for US government debt: the dollars the US creates through trade deficits are then reinvested in US assets, especially US Treasury securities and US equities, by foreign entities. This capital inflow helps the US fund its twin deficits (trade and budget deficits) without suffering the immediate currency collapse or sovereign debt crisis that would strike almost any other country running deficits of 6 to 7% of GDP.
The Paradox of Debt: Why Paying It Off is Impossible
Brent Johnson, as mentioned, made some excellent points this weekend, many of which I argue at length in my book, Timeless. In a purely fiat-based and debt-based monetary system, where money is not backed by a physical commodity, such as gold or silver, the government is responsible for creating and issuing money. It creates the money and puts it into the system, requiring people to give some back through taxes. The money that is left over, which resides in the economy or is saved, often in US Treasury bonds, bills, or bank accounts, is essentially the government debt.
This fiat-based system has historically proven to be incredibly fragile, which is why all fiat currencies eventually die over time. Johnson further argues that our current debt-based financial system must grow to survive, and, being an exponential system, it will eventually either:
Johnson also emphasizes that money in the system is not physical but is loaned into existence. Money is created via leverage. To generate this leverage, some form of collateral is required. Think of collateral like your mortgage. If you buy a home with a 20% down payment, in reality, the bank owns 80% of your home. It’s their “collateral” for your loan. The primary collateral in the global monetary and banking system is US dollar reserves or US Treasuries. Both are direct obligations of the US government. In other words, debt!
Because US Treasuries are US national debt, if the government were to pay off the national debt, it would be eliminating the very collateral upon which the entire monetary system has been leveraged and loaned into existence. The consequence is direct: removing the national debt means removing the collateral, which in turn removes the ability to leverage, and ultimately removes the money. Johnson argues this would lead to a crisis or collapse, causing a sudden and severe impact, where individuals would likely lose their jobs and homes, and their quality of life would decline. This is precisely why, while I agree with Paul Rand, we need more fiscal prudence, it’s almost impossible given our current monetary system.
Impact on Financial Markets
This incessant and unending liquidity dump of dollars tends to end up in asset markets, ranging from stocks to gold to US Treasury bonds, among others. Again, our current debt-based financial system is powered by pools of collateral. The monetary system has evolved into a debt refinancing system, where debt is continually rolled over, necessitating liquidity. Michael Howell asserts that, according to the BIS, approximately 75% of primary transactions in global financial markets involve some form of debt refinancing or rollover.4 Herein lies his theory of global liquidity that’s needed as a vehicle to rollover this debt. This pervasive refinancing process demands what he calls “balance sheet capacity” among credit providers in the financial sector. Rising liquidity levels lead to rising asset prices. As debt increases, so does liquidity. This is visually evident in Figure 3 below, which shows various asset markets and debt markets since the COVID-19 pandemic in early 2020.
Purple Line = US Technology Stocks +176%
Green Line = US Stocks (S&P 500) +119%
Gold Line = Spot price of Gold +117%
Black Line = US Home Prices +55%
These asset markets are built atop:
Blue Line = US M2 Money Supply (US dollars in existence) +56%
Blue Dashed = US Federal Debt +37%
Figure 3: Markets & Debt, 2020–2025
Source: TradingView
Inflationary Regime Change
If politicians were to reduce the deficit by $1 trillion, this would plunge liquidity, thereby reducing the ability to roll over existing liabilities and throw global markets into a deflationary shock. Therefore, the markets require debt and liquidity to expand. This fact explains why markets remain robust as liquidity remains robust. Yes, at some point, there will be a reckoning. At some point, much like the Roman Republic, the great US empire will be overtaken. But not yet. This potential reality is still far off in the distance. For now, investors must recognize this inflationary regime shift and adjust their portfolios accordingly.
HISTORICAL BOND RATES
HISTORICAL MARKET RETURNS - ANNUALIZED
Sources: Kwanti Portfolio Analytics 5, TradingView, 6 Morningstar, Inc. 7
HISTORICAL MARKET RETURNS - YEAR BY YEAR
Quote of the Month
“It is this spirit which has commonly ruined great nations, when one party desires to triumph over another by any and every means and to avenge itself on the vanquished with excessive cruelty. Accepting defeat was no longer an option.” Mike Duncan
References
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