Hank Paulson, ex CEO of Goldman Sachsand US Treasury Secretary during the 2008 financial crisis, he is a serious man. So when Mr. Paulson shows up in Washington DC and tells people that the US Treasury needs ‘break-the-glass’ contingency plan if market demand for US Treasuries collapsesmaybe you should take it seriously.
During the 2008 crisis, Paulson bailed out the broader economy (and his old employer, supporting the liabilities of the failed AIG) basically relying heavily on federal government credit. A gigantic amount of Treasury bonds were issued and the resulting mountain of cash made all the boos better. Federal Government debt/GDP was about 64% post-crisis, so that was possible. After all, the Federal Reserve ended up buying a lot of the bonds, after all. It was all a big shuffling of cards, covered in what amounted to ‘printing money’.
Macro investor Ray Dalio, in his recent book How countries broke (2025), found a recurring pattern in countries entering debt crises. First, there is some kind of private sector debt crisis, which has been patched up by public debt. Public debt/GDP rises to unsustainable levels and then the government essentially collapses. I say “effectively” because governments don’t usually collapse like an individual or a corporation by failing to make payments. Conversely, if the debt is denominated in a currency that the government itself controls (as is the case with the US), the result is typically that the value of the currency falls dramatically, “devaluing the debt”. This can even happen – as it has – without much additional “money making”. But when a government’s back is against the wall, it usually “prints money” — financing its revenue needs by creating money, resulting in runaway inflation and often hyperinflation.
Monetary inflation can get pretty bad even when governments aren’t printing money. It was very bad in the 1970s, when the value of the dollar against its old benchmark, gold, fell by 90% (from about $35/oz in 1970 to about $350/oz in the 1980s and 1990s). But the really powerful element – hyperinflation – occurs when governments go too far into creating money to pay their bills. It is happening recently in Argentina, Venezuela and elsewhere.
“People say, ‘When are you going to hit the wall?’ Obviously I don’t know – it’s impossible to know.” Paulson told reporters. “When we hit it, it’s going to be vicious, so we have to prepare for that eventuality.”
Meanwhile, Jamie Dimon, CEO of JP Morgan Chase, he recently told an audience in Oslo“The way it’s going now, there’s going to be some sort of bond crisis and then we’ll have to deal with that.” So has Jeff Gundlach, head of fixed-income money management giant DoubleLine Capital repositioning its portfolio for the risk that the US Treasury will unilaterally reduce coupon payments on certain higher yielding issues. This means: A bond that maybe pays 5%, will then pay 2%, because the Treasury can do just that. This is a kind of default.
“I’m not saying that’s a 30% chance, even” Gundlach said recently. “But what if they say, ‘You know what? Our interest costs are now $3 trillion. We had a recession. Interest rates have risen. We now issue 30-year bonds at 6%. We can’t afford it. We’re drowning here.”
Can you hear what these men — Paulson, Dalio, Dimon, Gundlach, the best of the best — are telling you? They tell you that this clown is coming down, and he’s not that far away.
I think that if the returns hit 7% on any topic, that topic is toast. So if the 30-year hits 7%, forget it – the issue will move to the 10-year. If the 10 year reaches 7%, the issue will move to the 2 year. Dalio, in his book of more than thirty examples of failing governments, describes this as an expected course of events. The yield on the 30-year Treasury note was recently 5%, and looks poised to move higher.
So what’s the plan? The “glass breaking plan” that Paulson proposes, or Gundlach fears, is basically some kind of shakedown to keep the rotten business going a little longer. Presumably, this will be accompanied, one way or another, by a continued decline in the value of the US dollar, evidenced by more and more dollars being needed to buy gold, commodities and eventually everything else, just as we described in our 2022 book Inflation: What it is, why it’s bad, and how to fix it.
But, since we all know it’s not going to work for long, what’s the plan after that plan fails?
Basically I see two results.
One is the typical Latin American result, which is decades of miserable inflationary stagnation, resulting from moderate government policy. This, unfortunately, is the rule in human affairs.
The other is a renaissance of American exceptionalism. Some countries emerge from their crises stronger than ever. Japan did it in the 1870s and 1950s. So did Germany in the 1950s. The US did it after the terrible Civil War. France did, when Napoleon brushed aside the ashes of the First Republic. Napoleon was also sidelined soon after, but his Napoleonic Code and the gold-fixed value of the French franc survived into the 19th century.
In all these cases, there is a specific Break Glass design. It’s basically this:
1) The government only goes to cash. No money is spent unless received first. 2) Taxes are dramatically reduced, allowing industry to take off. 3) The value of the currency stabilizes, either against a reliable international currency, or against gold.
The hyperinflationary Latin American countries of the 1980s eventually pegged their currencies to the US dollar. The hyperinflationary Eastern European countries of the 1990s pegged their currencies to the German mark and later to the euro. But, that won’t work for the dollar itself. Gold is the only option – as it was for hyperinflationary France in 1798.
In our current casethe Federal Government should simply abandon all domestic welfare programs: Medicare and all health care, all need-based programs, even Social Security, which probably won’t be worth much anyway if monetary inflation worsens. Since the US Constitution today actually prohibits all of these (we just ignore them), we don’t even need to pass laws, we can just follow the Supreme Law of the Land as it currently exists.
Then I would get rid of Income Tax, both the Individual and Corporate version. Then I would get rid of the employee paid side of the Payroll Tax, leaving only the 7.65% paid by the employer. This would provide enough revenue to keep the shrinking federal government running until a better solution is implemented. I propose a 7% Federal VAT, which is actually quite similar to the Payroll Tax, but also applies to corporate income.
President Trump likes to remind us that, before the Income Tax was introduced in 1913, the Federal Government paid for itself with some tariffs and some domestic sales taxes. The reason this was possible was that the Federal Government — following the Limited Government principles of the Constitution — was small. In 1912, the total tax revenue of the Federal Government amounted to 2.44% of GDP. That’s all it takes, once all the welfare goods are discarded. A simple 7% VAT would be more than enough to pay for it.
Since the government would be in cash only (no deficits) and the debt would either be inflated or perhaps restructured, it would then be easy to stabilize the value of the dollar by fixing its value in gold.
We are not yet at the point where this plan is politically feasible. But Japan got there (1949), and Germany (1949) and France (1798), and people like Hank Paulson tell us today that we will get there too. In 1872, President Lincoln’s wartime income tax was repealed. In 1879, the floating fiat dollar (which Lincoln had literally printed to pay the soldiers during the war), was again pegged to gold. From 1880 to 1913, the US emerged from the ruins of the Civil War, and became the richest country in the world.
