The Year The World Broke

On November 3rd my first book, The Everything Code, is coming out. It’s everything I’ve worked out over thirty years about how the world really works, in one place for the first time.

What follows is an excerpt from chapter 2...

I remember the exact moment I knew it was over.

Not in the abstract, academic way you read about it in textbooks. In the way your chest tightens and your stomach falls as you face the sinking realization that the ground beneath an entire system has given way.

And there’s nothing underneath...

Everything described in the previous chapter, the demographic pressure, the debt spiral, the productivity failure, the wages that never went up, the whole rotten architecture of an economy borrowing from its future to fund its present, reached its terminal point. The collateral of the system, which was housing, started to crumble. And because every major bank on earth had leveraged itself against that collateral, the falling prices set off a chain reaction that made the whole edifice shake, then crack, then implode.

I watched it happen from the front lines, staring at screens showing numbers I’d never seen before and hope never to see again. The entire banking system was becoming insolvent.

Not one bank. Not a handful of banks. The whole thing.

One terrifying realization kept me up late into the nights of those dark days: there was no way to tell just how far this would go. Even after markets had fallen 50%, it might not be over. I’d studied the Argentine collapse of 2002, when the financial system disintegrated so completely that people were bartering for food with gold jewelry. I’d studied the cascading failures of 1929 through 1933, where a crash became a depression became a societal catastrophe.

Somewhere in the back of my mind was the thought: here we go again.

This could be the end of everything we take for granted about how commerce works.

It wasn’t. But only because one man understood what had gone wrong in 1929 and had a trick up his sleeve. The trick was the debasement of money itself.

The consequences of that trick, what it cost, who paid the price, and why nothing has been the same since, explain a hell of a lot about where we are now.

The year the world broke

I’ll reduce the mechanics of the crisis to their simplest form. Housing was the collateral base of the financial system, and the weight of the debt piled on top of it finally exceeded what the collateral could bear. As home prices fell, the borrowings against them became unsustainable. Banks that were leveraged 30 or 40 to one found their capital evaporating. A debt spiral radiated outward from the American mortgage market to the Chinese banking system to Europe, almost taking down several European sovereigns along the way.

The debt figures laid out in the previous chapter had reached their mathematical endpoint. Total debt-to-GDP, all of it, across households, corporations, government and the financial sector, approaching 370%, households maxed out, corporations maxed out, governments borrowing to fill the gap. When the collateral fell, the game was up.

The damage didn’t end in 2008. It rolled forward for years. By 2012, the crisis had metastasized into a full-blown European sovereign debt catastrophe. Living in Spain at the time, I watched it unfold from uncomfortably close range. The Greek default spread like wildfire. Banks across southern Europe were failing one after another. Governments were losing control of their bond markets.

Every morning brought fresh headlines of another institution going under.

Things were so bad that I bought a generator. I stockpiled tinned and dried food. Not as a theoretical exercise, but because the Spanish banking system was teetering on the edge, and I’d studied enough emerging market crises to know what happens when banks close their doors: you can’t buy food, you can’t pay your rent, and suddenly the rules of civilization start to feel provisional.

The crisis culminated in Cyprus in 2013, where the authorities did something unprecedented. For the first time, banks weren’t bailed out. They were bailed in. Billions of euros’ worth of deposits over €100,000 were converted to equity in the collapsing bank, wiping out customers with larger savings and many businesses overnight.

A line was crossed...

It was made very clear, in the most concrete terms imaginable, that you don’t own your money. The bank does. And with it, it can do what it pleases.

2008 was the year that broke everything. And everything that followed, every policy, every market phenomenon, every political movement, flows from what the authorities chose to do in its wake.

This catastrophe had the hallmarks of another 1929. A complete system-wide reset. But the full replay of the Great Depression was avoided for one reason: Ben Bernanke, then chairman of the Federal Reserve, had studied the 1930s in depth and understood the catastrophic mistake of allowing the money supply to contract when the financial system seized up. He wouldn’t allow it to happen again. His solution was radical. He would use the balance sheet of the central bank to effectively deflate the value of money itself, and in doing so, stop asset prices from collapsing further.

The great debt jubilee

On Bernanke’s orders, the response was the most dramatic intervention in the history of finance. Interest rates across every major nation were reset to near zero. Think about what that means in human terms. Imagine every interest payment you owe, your mortgage, your car loan, your credit card, suddenly goes to zero. And stays there for nearly a decade. That is essentially what happened to governments, banks, and large corporations across the developed world.

This was a form of debt jubilee. Not a write-off. The debts still existed. But the cost of servicing them was forgiven.

What followed was a refinancing bonanza. Every government, every corporation, every bank with access to capital markets rushed to refinance at these absurdly low rates. Governments issued massive amounts of debt in the three-to-five-year sector, the cheapest part of the curve. Corporations did the same. It was cheap and it drove profitability up.

Sounds reasonable. Maybe even prudent.

But the governments never paid anything back. They just kept rolling the debt in one big refinancing cycle, where interest payments were financed by increasing the debt. Like using your credit card to pay the interest on your credit card. Their debt compounded at an exponential rate. Corporations followed the same playbook.

Households, however, were cut out of the game. The introduction of Basel III and other banking regulations after the crisis meant that banks pulled back lending to individuals. Getting a mortgage became dramatically harder. Criteria for consumer credit were tightened. Household debt as a percentage of GDP (which, as the prior chapter showed, had ballooned to nearly 100% by 2008) steadily fell back toward 75% as ordinary people were forced to deleverage.

Meanwhile, government debt ballooned. A two-tier system was born: governments and large corporations gained access to effectively free money to roll and expand their debts, while ordinary households were locked out. The institutions that created the crisis were rescued. The people who suffered its consequences were left to fend for themselves.

This zero-rate regime lasted approximately seven years in the US. Seven years of essentially free money for anyone who could access it (which didn’t include you and me). And the short-term debt structures created during this period would have profound consequences, consequences that created a perfectly cyclical economy I’ll explain in detail later.

The narrative trap

The story we were told about what the central banks were doing was somewhere between a strategically massaged narrative and a bare-faced lie.

Quantitative easing, or QE, was described as a “precise” tool used to inject targeted liquidity into the financial markets to help generate growth and stability. The money would go in, the economy would stabilize, and then the central banks would withdraw it. Temporary measures for extraordinary times.

I bought this story for years. Most market participants did. It was a comforting narrative. It suggested that adults were in the room, managing the situation with surgical precision, and that normality would eventually return.

Here is Ben Bernanke, then Fed chairman, explaining QE to Congress on February 9, 2011:

Monetization would require a permanent increase in the money supply to pay the government’s bills through money creation. What we’re doing here is a temporary measure that will be reversed so that at the end of this process, the money supply will be normalized, the Fed’s balance sheet will be normalized, and there will be no permanent increase, either in money outstanding or in the Fed’s balance sheet.

Temporary. That was the promise.

A measure to be reversed.

The balance sheet would be normalized.

Soothing words, right?

The Fed’s balance sheet was approximately $900 billion before the crisis. It now sits, as I write, at roughly $6.7 trillion after years of attempted reduction. At its peak it tickled $9 trillion.

The combined G4 central bank balance sheets (that’s the Fed, the European Central Bank, the Bank of Japan, and the Bank of England) grew from roughly $4 trillion in 2008 to over $20 trillion by 2024.

They shaved more than two trillion off the peak, but that was the limit of it. Nothing was normalized. Nothing was reversed in full. Nothing was temporary.

Not in the US. Not anywhere else.

My hunch is that this wasn’t a lie of ignorance. The Fed employs hundreds of PhD economists. These are not stupid people. It is my view that they knew exactly what they were doing from very early on. They were monetizing all interest payments via new debt, which then went onto the balance sheet. They covertly understood that this was not a temporary liquidity injection but a permanent debasement of the currency.

They just wouldn’t tell us.

You see, QE was not merely a liquidity tool. It was the purposeful monetization of debts and a true debasement of the world’s reserve currency. Not via the simple mechanism of injecting cash, but by devaluing the denominator. When you debase the denominator, which is fiat currency, asset prices optically rise even if their real value hasn’t changed at all. Because the measuring stick has shrunk.

At this point it’s important to grasp the distinction between debasement and inflation. In fact it’s one of the most important things I can explain to you. Inflation, as measured by the Consumer Price Index (CPI), is about the supply and demand for goods and services. That’s variable, it ebbs and flows. Debasement is something different entirely. Debasement drives up the price of scarce assets, things like equities, real estate, gold, art. But it does not drive up wages. It does not drive up corporate earnings. It does not drive up commodity prices. Those are all variable inputs driven by GDP growth and the business cycle.

This is a phenomenon that anyone who’s spent time in emerging markets understands instinctively. Look at the Turkish stock market during years of high inflation: it goes up in lira terms while people get poorer. The currency is falling, so the nominal prices of everything denominated in that currency go up. Most people in developed economies, accustomed to relatively stable currencies, fail to recognize this mechanism happening to them.

But it has been happening. Since 2008. Every single year.

I fell for the narrative trap myself. For years, I saw the correlation between the Fed’s balance sheet and asset prices and assumed it was about liquidity flows. It took me until around 2020 to fully grasp that the game was much bigger than liquidity. The game was debasement. It was the purposeful destruction of the purchasing power of money to make the debt load optically smaller and to keep asset prices optically rising. It’s a neat trick, all the more insidious because nobody notices it.

That’s where I’ll leave the excerpt. The rest of the chapter is where it gets uncomfortable: what that debasement actually costs you every year, who pays for it, and why the only rational response is to get on the right side of it.