What made the 1970s pivotal was not only the oil shocks that reshaped energy markets and geopolitics. It was also the reinvention of the global financial system after the Nixon Shock of 1971, when the US ended dollar convertibility into gold—a pillar of the Bretton Woods system established in 1944.
This reinvention went far beyond gold. It transformed who could participate in financial markets, what instruments were traded, how risk was managed, and where global finance was conducted.
Over the 15 years that the reinvention lasted between 1971 and the London Big Bang in 1986, the world moved from a post-war world of fixed exchange rates, capital controls, regulated deposit rates, relationship lending, and nationally segmented markets to a dollar-based fiat system of floating currencies, volatile interest rates, freer capital flows, offshore funding, securitized credit, and rapidly expanding futures, options, and swap markets.
By 1986, financial risk—especially currency, interest-rate, and credit risk—could increasingly be priced, transferred, and leveraged through markets rather than remaining mainly on bank balance sheets or constrained by regulation.
In December 2025, in our article 2025: Year of the Trump Shock, we made a parallel between the Nixon Shock and the Trump administration’s then-emerging financial agenda—especially its push to place dollar stablecoins at the centre of a new monetary architecture. Our argument was that this agenda could have consequences far beyond crypto: it could reshape the global financial system itself. The past few weeks have felt like an acceleration of our thesis, and with it a crisper understanding of what the new system will look like.
To put the acceleration in context, just consider a few very recent events:
🇺🇸 On July 31, 2026, the US Treasury joined Japan to buy yen in support of the JPY, an event we discussed recently in The Dollars Japanese Problem. Then on August 19, 2026, the Treasury announced that it would increase 10–30 year Treasury buybacks starting in September, an attempt to tame the 30-year yield, which hit a 19-year high of 5.34%.
With those two actions, the Trump administration is moving toward what economists call yield-curve control: a form of financial repression in which long-term interest rates are shaped by state intervention rather than set solely by markets. The approach remains soft—for now—but it is state-managed nonetheless. It marks a significant shift in who steers the Treasury market and, therefore, in how the US economy is financed.
🇨🇳 Simultaneously, Beijing is advancing its own version of the Great Reset through a continued strategy of “commercial embeddedness.” On 10 August 2026, Deutsche Bank was the first European bank appointed as RMB Clearing Bank for Europe, enabling it to handle Chinese yuan payments directly on the continent. This opens up new payment routes that allow businesses and national economies to bypass the US dollar and Western networks such as SWIFT. Beijing continues to focus on making its payment systems too convenient to ignore and making the yuan indispensable, even if it has not yet won the world’s full trust.
Foreign investors still worry about China’s strict government controls. Beijing’s capacity to tightly manage domestic liquidity was on display in mid-August, when the People’s Bank of China conducted an unusual ¥349 billion overnight reverse-repo operation to ease mid-month funding pressures in the banking system. The move supported a bond rally, with the 10-year Chinese government-bond yield falling by about 1 basis point to 1.68%, its lowest level since July 2025. That is quite a contrast with the US.
🇺🇸 Finally, something else is happening in America. Within days, Washington had signalled a broader ambition: to bring the infrastructure of the AI and digital-asset economy within US market rules—and, with it, to turn intelligence itself into a commodity. On August 19th, the CFTC, the regulatory authority that oversees commodity markets, opened a request for comment on derivatives linked to computing power—treating “compute” as a prospective commodity market—and Chairman Michael Selig described compute as perhaps the most important commodity of the intelligence economy. Meanwhile, the SEC has proposed a dedicated “Regulation Crypto Assets” framework for certain investment contracts involving crypto assets, while the Treasury made a proposal to implement the GENIUS Act’s licensing and cross-border rules for payment stablecoins. The emerging US policy direction, beyond the general ‘pro-crypto’ stance, is clearly an effort to onshore and regulate the market infrastructure of the next financial and technological cycle.
These signals and developments are, in our view, among the defining macro stories of 2026. The 1970s produced a Great Financial Reset that redrew the map of global finance—from New York to the Caribbean, London, and Hong Kong. Today, the actions of governments and markets from Washington and Frankfurt to Abu Dhabi and Beijing suggest that another reset is underway—one that will produce a markedly different financial system on the other side.
🇺🇸 America’s debt and the mechanics of soft yield curve control
We all know the drill: in Western economies, central banks have the authority to set short-term interest rates, that is, the rate at which banking establishments can borrow from the central bank itself; long-term interest rates, on the other hand, are set by the market. Those longer yields reflect investors’ assessment of the risk of lending to a sovereign over time.
The ‘spread’ is the difference between long-term interest rates and short-term interest rates. It is not only a vote of confidence in the central bank but also a vote of confidence in the fiscal authorities and the government. If the spread is high, it clearly signals either a lack of confidence in the fiscal trajectory or expectations of higher inflation, or both.
Over the past 18 months, the Trump administration has repeatedly pressed the Federal Reserve to cut interest rates. In their view, lower policy rates can reduce borrowing costs, encourage households and companies to spend and invest rather than hold cash or short-dated fixed-income assets, support asset prices, and lower the government’s near-term debt-servicing costs.
Trump reiterated that preference recently in widely discussed remarks concerning Switzerland. Meanwhile, Kevin Warsh, the recently appointed Federal Reserve chair, has repeatedly indicated an openness to a more accommodative monetary-policy stance.
The standard objection has been voiced all along: the Federal Reserve controls short-term interest rates; it does not directly control the long end of the Treasury curve. If investors doubt the credibility of the US’s fiscal trajectory—because they expect persistently large deficits, rising debt issuance, or an inflationary policy mix—then long-term yields may remain elevated even as the Fed cuts its policy rate. The result would then be a wider spread between short- and long-term rates: easier money at the front end, but persistently expensive financing for mortgages, corporate investment, and the government at the long end.
In other words, rate cuts can support cyclical growth, but they cannot by themselves restore market confidence in public finances. If fiscal credibility deteriorates or the inflation outlook worsens, the bond market may effectively offset the Fed’s easing by demanding a higher term premium.
And well, here we are: while the Fed most recently decided to hold short-term interest rates despite facing above-target inflation in the context of tariffs, multiple shortages, and the Iran war, long-term interest rates reached a cycle high of 5.34% on 19 August—a level not reached since before the Great Financial Crisis in 2008. Clearly the rise in long-term rates points to growing investor concern about the US’s fiscal trajectory and expectations of higher inflation. In other words, investors are demanding greater compensation for the risks of holding long-term US government debt: the risk of default, the risk of a depreciation in the value of their claims through inflation, or both.
This summer rise in long-term yields appears to have prompted growing concern within the Trump administration. The Treasury intervened twice to contain it:
As we discussed in The Dollar’s Japanese Problem, the US Treasury stepped in to support the Japanese yen and prevent a chain reaction in global bond markets. A sharp fall in the yen could have forced Japan to sell large amounts of US Treasuries to defend its currency, pushing US interest rates even higher. Rather than selling reserves, Treasury Secretary Scott Bessent appears to have relied mainly on public statements to calm the market.
The US Treasury then announced it would increase buybacks of long-term government bonds as the 30-year yield hit record high levels. While Treasury buybacks are a regular part of America’s public debt management, increasing their size provided additional liquidity to a market where investors were becoming more reluctant to hold older, less liquid Treasuries. This temporarily helped support bond prices and limit further increases in long-term yields.
What does this tell us? As the global financial system undergoes a massive transition, America seems to be quietly turning to a strategy known as financial repression: using the financial system to keep borrowing costs under control and limit the movement of capital. Given the turbulent reset, governments face two adverse reactions from markets: (i) bondholders demand higher yields to compensate for the increased risk, while (ii) investors try to move their wealth out of the country altogether, creating capital flight. To maintain stability while the monetary and financial system is being upgraded, governments need to contain both—and intervene:
Capital flight can be prevented by restricting the ability of investors to move money across borders, using regulations, capital controls, and other measures that keep domestic savings within the national financial system. The US is not currently imposing capital controls in the traditional sense, but the Trump administration has begun to restrict the movement of capital in more targeted ways, particularly by limiting US investment in China and restricting Chinese access to sensitive US assets. It has also signalled that it wants to expand these restrictions further. In other words, Washington is not yet trying to trap capital inside the US, but it is increasingly seeking to control where US capital can go and who can own US assets.
Yield curve control, meanwhile, is implemented through direct intervention in the bond market, with the government or central bank stepping in to buy long-term bonds and keep yields from rising too far. That is broadly what we are now seeing from the US Treasury (see above).
There is a direct and important connection between the two. By forcing yields down, yield curve control makes government debt less attractive to investors, which can increase the incentive to move capital elsewhere. The more governments suppress yields, the greater the need for other forms of financial repression to prevent capital flight. Over time, the two measures reinforce each other: controlling the bond market makes capital controls more important, while controlling the movement of capital makes it easier for governments to keep bond yields down.
It’s too early to tell where this is going. On one hand, if the Trump administration is serious about reining in the deficit, it will have to confront powerful constituencies. A major contribution to the US skyrocketing deficit, indeed, is what economists call the “voracity effect.” The idea is that when borrowing is unusually easy, every constituency, whether domestic or foreign, has an incentive to capture some of that borrowing capacity for itself, either through more spending or lower taxes.
And so, if the US government can borrow at what looks like an attractive rate, why not borrow a little more? That logic, repeated across both domestic and foreign constituencies, can turn cheap borrowing into a self-reinforcing process. Defense contractors, the healthcare industry, wealthy taxpayers, America’s allies, and increasingly even Bitcoin holders demanding a Bitcoin strategic reserve all have an interest in securing a larger share of the resources made available by the US government’s ability to borrow. What starts as extraordinary borrowing power therefore becomes a political resource, which in turn creates yet more incentives to borrow.
This is part of the deeper problem facing the US. Global demand for dollars and Treasuries has given Washington an extraordinary capacity to run deficits while allowing the US to attract the foreign capital that funds innovation and sustains its financial system (an “exorbitant privilege”). But the same system also makes it easier to postpone difficult decisions about spending, taxation, income distribution, and the country’s industrial base. As long as demand for US debt remains strong, the political pressure to restrain borrowing remains weak (an “exorbitant burden”).
That paradigm, however, may be changing. The rise in long-term Treasury yields suggests that the demand for US debt may be becoming less elastic, even as the cost of servicing the existing debt continues to rise. The Treasury can try and intervene to improve market liquidity and contain yields in the short term, but those measures do not address the underlying fiscal problem. If the administration wants to change that trajectory, it will eventually have to confront the constituencies that have benefited from the borrowing capacity of the US government.
There’s even a political rationale for going in that direction. Recently resurfaced videos of Vice President JD Vance from 2023—before he took his current office—revived the critical argument that the dollar’s global reserve currency status acts as a “resource curse.” This constant global demand keeps the US dollar artificially strong, which systematically hollows out American manufacturing and hurts American workers by preventing the domestic economy from rebalancing.
Since Vance is arguably a contender for the Republican nomination in 2028, this perspective suggests the Republican Party could develop an intriguing political synthesis in the isolationist, fiscally conservative tradition of Robert A. Taft (another prominent Ohioan). Vance’s modern Taft-like framework would advocate for both isolationism (arguing we have had enough of the rest of the world using our currency as a reserve) and strict fiscal conservatism: by voluntarily renouncing the “exorbitant privilege” of the global dollar, the US would no longer have an unrestrained, foreign-funded debt machine to rely on, effectively forcing Washington to rein in its massive fiscal deficit once and for all.
💵 Stablecoins as systemic debt satellites
We are far from a consensus. Vance’s argument treats the dollar’s reserve role as a constraint on fiscal discipline and industrial renewal. The administration’s stablecoin strategy, by contrast, seeks to strengthen that role by expanding global demand for dollar assets and Treasuries. Indeed, other developments from this summer suggest that the US is in fact determined to keep borrowing ever more from the rest of the world, specifically by making it easier to issue dollar-denominated stablecoins and flooding the global economy with them.
To understand this counterforce, one must look at the underlying plumbing of how a “digital dollar” actually works in the new regime instituted by last year’s GENIUS Act. Because stablecoin issuers are required to hold US Treasuries as reserves, growth in stablecoin issuance can create substantial additional demand for US government debt. This means that stablecoin issuers have quietly transitioned from speculative, crypto-native tools into systemic “debt “satellites”—privately run funding vehicles that help the US Treasury finance its mounting fiscal deficits.
Recognizing these developments, the Treasury has moved aggressively to bring these digital rails under formal state control. On August 17, 2026, the Treasury issued a Notice of Proposed Rulemaking (NPRM) to implement Section 3 of the GENIUS Act, establishing a formal licensing regime for payment stablecoins slated to take effect on January 18, 2027. Scott Bessent himself was characteristically frank about the geopolitical goal of this regulatory land grab, explicitly stating that formalizing stablecoins is designed to “cement the role of the U.S. dollar as the world’s reserve currency” and, echoing Trump’s own words, ensure America remains the undisputed “crypto capital” of the world.
This new role is well illustrated by Tether, the largest player in the industry. Its stablecoin, USDT, is backed largely by US Treasury bills and other US government assets, meaning that global demand for USDT translates into demand for US government debt. As Tether’s circulation has grown, so has the pool of Treasuries held against it. Tether is therefore not merely a crypto company issuing a digital dollar: it has become a large, privately run buyer of US government debt, effectively acting as one of those “debt satellites” of the US Treasury. Its growing integration into the regulated financial system only strengthens this role. On August 13, 2026, Tether completed a historic milestone by securing a clean, unqualified audit opinion from KPMG US on the financial statements of its primary issuing subsidiary, Tether International, S.A. de C.V., for the year ended December 31, 2025. The audit verified that Tether’s reserves exceeded its liabilities by $6.814 billion.
Yet, even as Washington attempts to use stablecoins to export dollar demand globally, Silicon Valley’s dream of entirely borderless digital money is colliding with the reality of localized sovereignty. As Airwallex’s Jack Zhang has observed, central banks around the world are refusing to let stablecoins bypass their domestic laws. Instead, financial systems are becoming increasingly localized: Brazil has absorbed virtual assets directly into its foreign exchange laws, Vietnam is setting up a regulated crypto market while continuing to prohibit crypto payments, and the Philippines has indefinitely locked down its licensing regime. In the eurozone, the ECB has warned that broad domestic use of foreign-currency-denominated digital assets, including dollar stablecoins, could cause digital currency substitution and weaken monetary-policy effectiveness. It has also stressed that stablecoin growth requires safeguards against financial-stability risks, while its preferred path is properly regulated, EU-governed, and euro-denominated settlement assets.
This global pushback is a direct defense mechanism against American financial hegemony. When the US Treasury attempts to solve its domestic debt crisis by exporting digital dollars, other nations face an existential threat: the risk of their own citizens abandoning local currencies for the safety of the digital greenback. To prevent this capital flight, foreign governments have a powerful incentive to fence in these digital assets. By forcing stablecoins to comply with strict domestic rules and localized fiat gateways, sovereign states are ensuring they maintain control over their domestic monetary borders—effectively shattering the dream of a unified, borderless digital dollar.
Furthermore, this Trump administration’s embrace of stablecoins masks a brutal, unresolved conflict:
On one side of this fault line stands the Wall Street establishment for whom, as explained to us by Michael Pettis a few months ago, dollar primacy is a way to make money and therefore non-negotiable; in this context, if stablecoins can serve as efficient, high-tech vacuum cleaners sucking up global capital to buy Treasuries, they are a welcome addition to help fund the massive national deficit of which Bessent, a Wall Street man himself, is in charge.
On the other side stands Silicon Valley, which, interestingly, views crypto very differently: as a borderless escape hatch from traditional finance.
Vance sits at the intersection of two incompatible projects. As vice president, he must support an administration that continues to run large deficits and depends on the Treasury’s ability to place ever more government debt—much of it with foreign investors. That aligns him, for now, with Treasury Secretary Scott Bessent, whose central task is to ensure that the US can finance its borrowing at tolerable rates.
