Saturday, 15 August 2026

TO MOBILISE A FRACTURED SOCIETY FOR WAR

From Fear to the Front Line: What History Tells Us About Mobilising a Fractured Society

A Living in the Air analysis

The mobilisation ladder across a century of experience

In 1914 and 1939, governments could mobilise a nation because “the nation” meant, broadly speaking, one people. But what happens with war again on the horizon, when now other peoples  with different identities, cultures and loyalties have joined the nation?


Fast Track (30 seconds)

Historians of propaganda identified a repeatable ladder that 20th-century states used to move populations from indifference to war: fear, atrocity framing, collective identity, patriotic duty, legal obligation, and finally the operational machinery of mobilisation with letters of conscription etc. That ladder assumed one settled national "us". Mass immigration since the late 1990s has fractured that assumption across the West, and Joseph Campbell's hero's journey, the mythic template propagandists have always leaned on, depends on an audience that shares a common story. A fragmented society may still climb the first rungs of the mobilisation ladder easily. It is the top rungs, the ones requiring sacrifice, where history suggests it could buckle. 

Into the gap step Lippmann and Bernays: if national identity can no longer provide the common ‘us’, their work suggests that the appeal must move upwards, from the patrie to higher values - freedom, democracy, security, even the notion of a shared civilisation - creating a common story in which different peoples can recognise themselves and each other, without necessarily sharing the same national identity.

In this article, we shall try to solve the problem the modern propagandist has: not persuading different peoples to become identical, but persuading them that, despite their differences, they all belong to the same political community - that the stranger with a different history, religion or culture is nevertheless one of "us". A passport can establish nationality; it cannot manufacture the needed solidarity. And when the price of solidarity becomes the willingness to die for one another, that distinction becomes very important.

How will they integrate us? Read on ...


Propaganda scholars have long studied how 20th-century states moved their populations from peacetime indifference to wartime mobilisation. The pattern was documented, it was not conspiratorial - a rhetorical sequence that recurred because it worked on the psychological ... let's-call-it "substrate" of the era: a substrate of myth, a thick, largely uncontested base soup of national identity. That substrate no longer exists today in quite that same form. 

The challenge. This piece climbs the classic mobilisation ladder, section by section, each rung from indifference to adhesion, then asks what happens to those rungs today when the audience climbing it is no longer one people telling itself one story.


Why It Matters

Understanding the historical mobilisation ladder is not an academic exercise. If the West is preparing populations for confrontation with Russia or China, Iran even, the same rhetorical stages will very likely recur, adapted for a very different society than the one that marched to war in 1914 or 1939. 

Recognising the stages as they happen is the only real defence against being moved by them unknowingly.

The older generations are aghast at the way their society has been demolished - "I died in the war for people like you!", they cry. This article answers that cry.


Contents Cover the Following

This article covers: 

  • the classic six-stage escalation ladder from fear to compliance
  • how each stage has historically worked, from the atrocity frame to legal obligation
  • the new challenge of a fragmented "us" following decades of mass migration
  • the geographic and maritime roots of Anglo-Saxon war rhetoric
  • the question of whether modern wars still need soldiers
  • Joseph Campbell's hero's journey as the underlying mythic template beneath all of it
  • what actually was done - propaganda and the engineering of consent using Lippman and Bernays frameworks
  • and what history suggests propaganda we could expect to see as the ladder adapts to our fractured society.


1. The Classic Escalation Ladder

Propaganda scholars identified a recurring sequence in how 20th-century states moved populations from indifference to mobilisation: 

  • threat identification, 
  • atrocity and moral framing, 
  • in-group consolidation, 
  • patriotic duty, 
  • legal obligation, and finally 
  • the logistics of compliance. 

This was not a conspiracy so much as a rhetorical pattern that recurred because it worked on the psychological substrate of the time - a substrate of thick, largely uncontested national identity.

Harold Lasswell's 1927 study, Propaganda Technique in the World War, remains the founding academic dissection of WWI campaigns; he coined the analytic model later distilled as "who says what to whom, through what channel, with what effect". By comparing the British, French, German and American campaigns, Lasswell identified recurring techniques for creating fear, demonising the enemy, mobilising patriotism and swinging public opinion behind the war.


2. Fear as the Opening Move

Every campaign studied by Lasswell, and later Jacques Ellul, begins with establishing the adversary as a live, proximate danger rather than some abstraction. This step is the least dependent on social cohesion - the fear response is close to a universal psychological lever, this is why it tends to look historically similar across eras and regimes.

Ellul's Propaganda: The Formation of Men's Attitudes (1962) distinguished short-term "agitation propaganda", agiprop, built on acute fear; from long-term "integration propaganda", this being built on normalised belonging.

"Normalised belonging" means making membership of a group feel quite ordinary, not questioned, part of everyday life.

For Ellul, integration propaganda is not primarily trying to frighten people into action. It works more slowly by repeatedly reinforcing the idea that this is who we are, these are our values, these are the people we belong with, and so finally, this is how people like us behave.


3. From Fear to Hatred: The Atrocity Frame

Strategic conflict is converted into moral conflict by foregrounding - sometimes by documenting, sometimes just by exaggerating - the cruelty by the adversary. Lasswell's original study catalogued how WWI belligerents each ran near-identical atrocity campaigns against each other.

The Institute for Propaganda Analysis (1937 to 1942) later built a public-facing taxonomy of these techniques: 

  • name-calling
  • card stacking (select the cards that make your hand look good and leave the bad cards on the table)
  • glittering generalities

... precisely so citizens could recognise the atrocity and label it as an enemy technique along with an emotional charge of hate - not just absorb it as a plain fact.


4. The Collective and Patriotism

Here the historical model assumed a single, largely settled national in-group that fear and moral outrage could activate. Edward Bernays, writing from his WWI committee experience, was explicit that propaganda does not create group loyalty from nothing - it activates loyalty that already exists.

Bernays's Propaganda (1928) is the founding text of modern PR. Bernays saw no contradiction between democracy and the deliberate engineering of mass consent.


5. Duty to the Patrie

Once collective identity is activated, loyalty is re-framed as obligation rather than preference - the shift from "I belong" to "I owe".

Walter Lippmann's Public Opinion (1922) is the key text here: Lippmann's "pseudo-environment" explains how a government can make a distant war feel like a personal threat. We have never seen the enemy, never witnessed most of the events we are shown and may know nobody involved, yet the pictures, stories and repeated messages become our reality — and from that manufactured reality can come fear, hatred, loyalty and eventually a willingness to sacrifice ourselves.

Pseudo-environment - we can understand this as a mediated or constructed reality, a manufactured picture of the world, or a second-hand or borrowed reality, if you prefer. The whole subject here is about how the authorities will build this world we are to inhabit.


6. Moral Duty, Then Legal Obligation

The final rhetorical steps convert duty into codified law - conscription statutes, mobilisation orders - the point at which persuasion ends and compulsion begins.

George Creel's How We Advertised America (1920) is a practitioner's own account of running the U.S. Committee on Public Information, useful precisely because it shows a propagandist unashamed of the machinery, in his own words.


7. The New Obstacle: A Fragmented "Us"

This is where the twenty-first-century case diverges sharply from 1914 or 1939. Sustained mass immigration since the late 1990s, pursued by Western governments for economic and demographic reasons, often against the stated preferences of domestic working populations, has changed what "the nation" is being asked to mean. The in-group consolidation step no longer has one settled audience, it has several, increasingly organised around cultural or religious and civilisational identity, rather than simple nationality.

This is a documented sociological shift, it is not part of propaganda theory as such, but it directly undermines the psychological one-nation substrate that every classic campaign would assume was already in place.


8. Maritime Aggression and the Channel Effect

A secondary historical pattern: Anglo-Saxon war propaganda has tended to run hotter and more morally absolute than continental European equivalents - perhaps because the UK and America are more geographically insulated... Britain is insulated by the Channel, America the Atlantic. Insulated because one-step removed from the immediate, visible cost of war that continental powers like France and Germany by their geography cannot escape.

Continental and maritime powers. This observation tracks a broader realist-school claim that maritime powers, less exposed to direct invasion, can afford - and have historically indulged in - more expansive, values-based justifications for war than land powers, hemmed in as they are by contiguous rivals.


9. The Cover Story: "Wars No Longer Need Soldiers"

Here's another one. Professionalised volunteer forces, precision weapons, drones, and cyber capability have measurably changed force structure since 1990. But every conflict since the Gulf War that was framed as winnable from the air has, eventually, required ground forces to hold terrain. The claim that modern wars do not need infantry may be true for a given campaign, or could it be doing rhetorical work here, quietly avoiding the legal-obligation step for as long as possible because planners doubt a fragmented society could sustain it?

Boots on the ground - the track record of "this one will not need boots on the ground" claims is decidedly mixed.


10. The Hero's Journey as the Underlying Template

Every step above maps unusually well onto Joseph Campbell's monomyth, laid out in The Hero with a Thousand Faces (1949). The Call to Adventure is the fear and threat stage. Refusal of the Call is the natural resistance a fragmented, sceptical public now offers more strongly than in 1914. Crossing the Threshold is patriotic commitment. The Road of Trials is the moral-duty stage. Atonement and Return map onto legal obligation and the front line itself. Campbell's insight was that this structure recurs because it mirrors something in individual psychological development - which is exactly why propagandists, consciously or not, have always reached for hero-narrative structure rather than bureaucratic argument to move populations toward sacrifice. A fractured society does not just weaken collective patriotism, it weakens the shared mythic vocabulary a hero's journey needs an audience to already recognise and believe in.

Campbell drew his monomyth from comparative mythology across cultures, which is itself instructive: the problem for modern war-mobilisation campaigns may not be that the mythic structure has disappeared, but that competing populations now carry different, non-overlapping versions of it.


11. What History Suggests We Would Expect to See

Putting all that together, what could we expect to see happen? We can expect the pattern documented above, the classic ladder of in-group consolidation, to shift up from nation to a higher-order, more abstract unifying frame - consider "democracy versus autocracy", or "the free world", what about the valuable "rules-based order". These are identities a fragmented population can still share even where national identity is contested. The atrocity-frame stage could proceed largely unchanged, since it depends least on cohesion, but we are going to get trouble and holding-off around the legal-obligation stage - ie official reluctance to name conscription as a possibility for as long as possible - not necessarily because it will not be needed, but because a fragmented society makes it the single highest-risk step in the entire sequence.

Just speculating ...


12. Conclusion

Bottom Line

Whether this ladder, as adapted, can actually deliver 1914 or 1939-level mobilisation is yet to be seen - for example, the old ladder was bottom-up but the adaption is definitely top-down and thus harder to impose - but the authorities have started already and aim to move the population from largely anti-war to largely pro. That is the aim. 

The tools - fear, moral framing, mythic narrative - are unchanged and still psychologically potent. What has changed is the audience: no longer a society with one dominant story about itself, but several... and a mobilisation campaign that does not reckon with that new of catching multiple shoals in the same net may find (to mix metaphors) the ladder holds for the first several rungs and buckles precisely at the step that has always mattered most - the one requiring a shared answer to "who is we?"... and a firm commitment.

Friday, 14 August 2026

EDWARD BERNAYS - THE MAN NOBODY HAD HEARD OF

Edward Bernays: The Man Who Engineered Consent


Bernay's five-step process for engineering consent - still the basis of propaganda. Perhaps it will be used again to get a reluctant young public social media to the front lines.

The biggest cons we never knew. If a man could convince a nation that bacon was healthy, that smoking was liberation, and that a foreign government deserved to fall - would you still trust your own opinions?


Fast Track (30 seconds)

Edward Bernays, nephew of Sigmund Freud, took his uncle's theories of the unconscious and turned them into a professional discipline: engineering public consent on behalf of paying clients. He convinced America that bacon was the healthy breakfast, that women smoking in public was an act of feminist liberation, and - working for United Fruit - helped lay the psychological groundwork for a CIA-backed coup in Guatemala. He called what he did "the engineering of consent." Everyone else eventually called it propaganda.


You have scrolled past adverts that did not feel like adverts. You have watched a product review quietly funded by the company being reviewed. You have formed an opinion on a political candidate from a feeling you cannot quite explain. None of it was an accident, and almost all of it traces back to one man: Edward Bernays, born in Vienna in 1891, died in Cambridge, Massachusetts, in 1995, at the age of 103.

Bernays is the reason breakfast looks the way it does. He is the reason women began smoking in public. He is a reason an elected government in Central America was overthrown. He did not merely sell products - he sold identities. And unlike most architects of influence, he wrote down exactly how he did it, in plain language, and called it "the engineering of consent." Others would later call it propaganda.


Why It Matters

Bernays did not just invent techniques - he invented a worldview still governing how information reaches you today. Astroturfing, native advertising, manufactured expert consensus: all of it traces to a single man who believed the public could not be trusted to reason for itself, only steered. Understanding his methods is the first step to recognising them in your own newsfeed.


Contents Cover the Following

This article covers: 

  • Bernays's family relationship to Sigmund Freud and the psychoanalytic ideas he inherited
  • his formative role in First World War propaganda
  • his invention of the "public relations" profession
  • four of his most famous campaign successes, including the 1954 Guatemala coup
  • his own uncomfortable brush with Nazi propaganda
  • and why his philosophy still shapes public life today.


1. A Freudian Inheritance

To understand Bernays, start with his family. He was born the son of Eli Bernays and Anna Freud Bernays, the sister of Sigmund Freud. His father, in turn, was the brother of Freud's wife. Bernays was doubly related to the father of psychoanalysis, and Freud's ideas about the unconscious - hidden desires, irrational drives beneath rational behaviour - were dinner-table conversation in his childhood. They would later become his professional weapons.

The family emigrated to New York in 1892. Bernays studied agriculture at Cornell, graduating in 1912, though farming never interested him. What fascinated him was influence itself: how to get people to think, feel, and buy in ways they believed were entirely their own idea.

"He did not sell products. 
He sold the unconscious back to the people who owned it."

Glossary - More of Freud's Key Concepts

The id, ego, and superego - Freud's 1923 structural model split the mind into three forces in permanent tension: the id (instinctual, pleasure-seeking, wholly unconscious), the superego (internalised moral authority), and the ego (the mediator trying to reconcile the two with reality). Bernays essentially treated advertising as a lever on the id, bypassing the ego's rational gatekeeping entirely.

Repression and the return of the repressed - Freud argued the mind pushes unacceptable impulses out of conscious awareness, but they don't disappear - they resurface indirectly, in dreams, slips of the tongue, or symptoms. This is the theoretical basis for Bernays's assumption that people can't be reasoned with directly: the real desire is buried, so you have to reach it sideways, through symbol and association rather than argument.

Symbolic displacement - Freud held that repressed desires often attach themselves to substitute objects, a person, an object, or an act standing in for the thing that can't be consciously wanted. This is close to the literal mechanism of "Torches of Freedom": the insight that a cigarette could become a symbolic stand-in for a desire, such as autonomy or equality, that couldn't be pursued directly.


2. The War That Taught Him Everything

Bernays's early career included theatrical publicity and a stint reframing a taboo play about venereal disease as a public health cause - his first real lesson in the power of framing a message rather than the message itself.

Then came the First World War. In 1917, President Woodrow Wilson formed the Committee on Public Information to convince a sceptical American public that the war was righteous. Bernays, aged 26, worked alongside Walter Lippmann and Carl Byoir, deploying posters, speeches, and "four-minute men" who delivered scripted patriotism in cinemas nationwide. It worked spectacularly. At the Paris Peace Conference, Bernays watched crowds cheer Wilson as a hero based entirely on manufactured messaging - and a thought took hold: if propaganda could send men to die for a slogan, it could certainly sell them a product.

Glossary

Framing - the choice of which subject a piece is placed inside. The same facts could sit within several different frames, but only one is chosen, and that choice decides what the audience is invited to think about and what is left outside the picture entirely. Bernays's staging of a play about venereal disease as a public health cause rather than a scandal shows this clearly: the play did not change, only the frame within which it was presented changed - and with it, what the audience was prompted, "pre-formatted," to consider.

Walter Lippmann - American journalist and CPI colleague of Bernays who wrote on how public opinion is shaped by mediated images and stereotypes rather than direct experience.

Carl Byoir - Publicist who worked alongside Bernays on the Committee on Public Information, later becoming one of the pioneers of the modern public relations industry.


3. Inventing "Public Relations"

In 1919, Bernays opened his own firm with Doris Fleischman, a journalist and feminist who became his wife and lifelong business partner - and whose contributions to his work have been largely written out of history. Wary of the word "propaganda," Bernays rebranded himself a "counsel on public relations," a term that sounded benign while describing the same scientific manipulation of opinion for private gain.

He drew theoretical grounding from three sources: Freud's theory of the irrational unconscious, Gustave Le Bon's writing on crowd psychology, and Wilfred Trotter's concept of the herd instinct. In 1923 he published Crystallizing Public Opinion, the first book on public relations as a discipline. In 1928 came Propaganda, whose opening lines remain his starkest confession: that manipulating public opinion is essential to democracy, and that those who do it "constitute an invisible government" - the true ruling power of the country.

Glossary

Counsel on Public Relations - The title Bernays gave himself in place of "propagandist." It sounded neutral and professional, but described the same underlying work: the deliberate shaping of public opinion on behalf of a paying client.

Gustave Le Bon - French social psychologist whose 1895 book The Crowd argued that individuals in a crowd lose their capacity for rational thought and become susceptible to suggestion and emotional contagion. Examples: a football crowd, a protest crowd.

Wilfred Trotter - British surgeon and social psychologist who developed the concept of the herd instinct, the idea that human beings have a primal urge to conform to the behaviour of the group.

Bernays's Key Publications - Bernays set out his ideas across several books. 

  • Crystallizing Public Opinion (1923) was the first work to treat public relations as a discipline. 
  • Propaganda (1928) remains his most quoted, opening with the claim that the deliberate manipulation of public opinion "is an important element in democratic society," and that those who do it "constitute an invisible government, which is the true ruling power of the country." 
  • The Engineering of Consent (1955) restated the same philosophy, three decades on.


4. The Campaigns

Bernays's theory only matters because of what he did with it. Four campaigns define his legacy.

4.1 Bacon and the "hearty breakfast." Hired by Beechnut in the 1920s to reverse falling bacon sales, Bernays did not actually advertise bacon at any point. He asked a physician whether a heavy breakfast was healthier, then had that doctor survey 5,000 colleagues. The resulting headlines - "Doctors recommend a hearty breakfast" - never named Beechnut either, yet fixed bacon and eggs in the American morning, and the idea that breakfast is "the most important meal of the day" persists to this day.

4.2 "Torches of Freedom." Working for the American Tobacco Company, Bernays was asked to get women smoking in public. A psychoanalyst told him cigarettes symbolised male power in the female mind - so smoking in public could be reframed as defiance. On Easter Sunday 1929, Bernays staged young women lighting "torches of freedom" during New York's Easter Parade, presented to the press as a spontaneous feminist protest. It was, in reality, a Lucky Strike marketing campaign, and it helped more than double the female smoking market within a decade.

"The parade was not a protest. 
It was an advertisement wearing the clothes of a protest."

4.3 Green, soap, and the presidency. Bernays ran a national soap-sculpting contest for children on behalf of Ivory - "children," he noted bluntly, "are the enemies of soap" - and made green the fashion colour of 1934 to match Lucky Strike's packaging. He also softened Calvin Coolidge's stiff public image with a vaudeville breakfast on the White House lawn, proving that politicians, like soap, could be repackaged.

4.4 Guatemala. The darkest chapter. Hired by United Fruit Company after Guatemala's democratically elected government redistributed unused company land to peasant families, Bernays built a sustained campaign branding President Jacobo Arbenz as a communist threat - he sent newsletters to 250 journalists, he gave guided press tours, he planted stories. The narrative reached Washington, where senior officials had personal ties to United Fruit. In 1954 the CIA's Operation PB Success, driven largely by psychological warfare, forced Arbenz's resignation. Thirty-six years of civil war followed, killing an estimated 200,000 people. Bernays later described himself, remarkably, as "a casualty of the situation."


5. The Uncomfortable Footnote

In 1933, Bernays learned that Joseph Goebbels kept his book Crystallizing Public Opinion on his propaganda bookshelf, using it against Germany's Jewish population. Bernays, who was Jewish himself, wrote only that this "shocked" him, before concluding that any tool could be used for good or evil. No deeper reckoning followed.


6. Why It Still Matters

Bernays died in 1995, still giving interviews from Cambridge, USA, where he lived into his nineties. His tools evolved into social media, targeted advertising, algorithmic amplification, and influencer marketing - but the underlying philosophy is unchanged: that the public is irrational, that its desires can be mapped and steered, and that an unseen elite class must guide opinion from behind the curtain. He effectively invented astroturfing and native advertising, and perfected manufactured "expert consensus," decades before either had a name.

What he may not have foreseen is the democratisation of his own methods. Techniques once requiring a trained professional are now available to anyone with a smartphone - a shift that has made the "invisible government" he celebrated not just invisible, but diffuse and largely ungovernable.

Glossary

Astroturfing - The practice of creating a fake grassroots movement to simulate genuine public demand for a corporate or political goal. Bernays's 1929 "Torches of Freedom" march, presented as spontaneous feminist protest but staged for a tobacco client, is one of its first documented examples.

Native Advertising - Commercial messaging embedded within editorial content so seamlessly that audiences struggle to distinguish it from independent journalism. Bernays pioneered the technique by planting client-friendly stories in newspapers without ever naming the client, decades before the term itself existed.

Manufactured Expert Consensus - The strategy of enlisting doctors, scientists, or academics to lend their authority to a commercial or political message, creating the appearance of independent agreement. Bernays perfected this in his 1920s "hearty breakfast" bacon campaign, in which a doctor-led survey generated headlines that never named the client, nor "bacon," nor Bernays himself.


Bottom Line

Bernays was not wrong that people are susceptible to emotional manipulation and herd behaviour; modern behavioural psychology largely confirms this. Where his philosophy turns dangerous is in the conclusion he drew from it - that an elite should therefore manage opinion on the public's behalf. That leaves the essential question permanently unanswered: who watches the "engineers of consent"?

Bernays worked, with equal professional detachment, for tobacco companies, banana monopolies, and authoritarian clients alike. His true legacy is not any single campaign but a worldview - that consent can be manufactured, and that reality itself can be designed and sold. He reduced citizens to consumers, and public discourse to marketing, and he told us so, in plain print, more than ninety years ago. We read it. And the machine he built keeps on running.



Saturday, 8 August 2026

ARGENTINA GULF STATES JAPAN - WHEN QE IS NOT QE

Argentina, the Gulf States and Japan - America supports its treasuries without calling QE

ESF, FIMA and the Dollar's Hidden Architecture

What happens when a country is enormously wealthy, yet suddenly finds itself short of money? And what happens when the issuer of the world's reserve currency decides it cannot allow that shortage to force the sale of the assets underpinning its own financial system?

The Gulf states and Japan both faced dollar shortages in 2026 despite immense wealth. Washington's response - Treasury's ESF and the Fed's FIMA facility - reveals a crucial but underappreciated distinction between existing government money and newly created central-bank reserves. Neither is quite QE. But together they raise a harder question: how far can "temporary" liquidity support go before it becomes permanent?


Fast Track (30-second summary)

  • The Gulf states and Japan both faced dollar shortages in 2026, despite owning vast dollar-denominated wealth. Wealth and liquidity are not the same thing.
  • Washington responded with different tools: Treasury's Exchange Stabilization Fund (ESF), the Federal Reserve's FIMA repo facility, and the Fed's separate permanent swap lines. They look similar to the recipient but draw on fundamentally different sources of money.
  • ESF liquidity is existing Treasury money, swapped outright with no collateral. FIMA liquidity is newly created central-bank reserves, lent against Treasury collateral.
  • Neither is technically quantitative easing. But both exist to stop foreign holders from having to sell US Treasuries - and that is where the real question begins.
  • After all, it's not what these facilities are called that matters, it's what happens when "temporary" liquidity support never quite manages to go away.

Why It Matters

If foreign holders of US Treasuries increasingly need Washington's help to avoid selling those Treasuries, the United States is no longer simply managing its currency. It is managing the willingness of the rest of the world to keep holding it. That has consequences for inflation, for the dollar's reserve status and for how much room the Federal Reserve genuinely has before liquidity support turns into permanent monetary accommodation.



Contents Cover the Following

  1. Wealth Is Not the Same Thing as Liquidity
  2. The Gulf Swap Line: What Was Actually Offered
  3. Gold and the Liquidity Trap
  4. Japan, FIMA and the Real Difference Between Treasury and Fed Money
  5. Three Levels of Intervention - and the Question That Follows

1. Wealth Is Not the Same Thing as Liquidity

The closure, or near-shutdown, of the Strait of Hormuz during the US-Iran war created a financial problem quite different from the physical destruction it caused. The Gulf states did not suddenly become poor. Saudi Arabia, the UAE, Qatar and the other oil producers still held enormous stocks of sovereign wealth, foreign-exchange reserves, US Treasury securities and gold. None of that disappeared because tankers could no longer move normally through the Strait.

What disappeared, temporarily, was something more basic: the flow of new dollars.

The Gulf economies are unusual because their principal source of foreign currency is also their principal source of government revenue. Oil is sold internationally, overwhelmingly in dollars, and those dollars finance everything from imports to sovereign investment. When Hormuz stopped functioning normally, that revenue flow was interrupted.

A person can own £5m house and still be unable to pay a£10k repairs bill. The problem is not insolvency. It is liquidity.

The same principle applies to a state. The Gulf producers could be simultaneously extremely wealthy and temporarily short of dollars - and the obvious remedy, selling Treasury holdings to raise cash, created a problem of its own. If several large reserve holders sell Treasuries at once, a Gulf liquidity problem becomes a US financial-market problem. Treasury Secretary Scott Bessent effectively confirmed this when he told the Senate that swap lines exist to maintain order in dollar funding markets and prevent disorderly asset sales.

Washington, in other words, was not necessarily rescuing an insolvent state. It was offering liquidity to a wealthy one, precisely so that wealth would not have to be liquidated.


2. The Gulf Swap Line: What Was Actually Offered

The story became public in April 2026, when the UAE approached Washington about a financial backstop. President Trump said a currency swap with the UAE was under consideration; Bessent later told senators that several Gulf and Asian allies had made similar requests.

What made the proposal interesting was the choice of tool. Rather than extending the Federal Reserve's permanent swap network - the arrangement it maintains with a small group of major central banks such as the Bank of Japan and the ECB - the administration considered instead using its Treasury's own Exchange Stabilization Fund. Under such an arrangement, Treasury would acquire dirhams from the UAE and provide dollars in return, with the transaction normally reversed later. The UAE would obtain dollars without selling its US assets.

There is an important qualification. The UAE facility was proposed and supported, but there is no reliable evidence it was ever drawn. It would be wrong to say Bessent lent the Gulf states billions from the ESF. What can be said with confidence is more interesting: Treasury built, or was prepared to build, a mechanism specifically designed to stop a dollar shortage from forcing Gulf states to sell US assets. The precedent was Bessent's genuine $20 billion ESF swap with Argentina in 2025 - a reminder that the tool is real, even where its Gulf application remained hypothetical.


3. Gold and the Liquidity Trap

The timing of the gold-price collapse in March 2026 invited a tempting story: Hormuz closes, oil revenue collapses, Gulf states need cash, they sell gold, gold falls. It is a clean narrative. It is also not supported by the evidence.

The World Gold Council's analysis of the roughly 12 per cent March fall - during which global gold ETFs lost around $12 billion, equivalent to some 84 tonnes - attributed the move to deleveraging and liquidity dynamics rather than any change in gold's investment case. Crucially, the Council examined and rejected the specific claim that Gulf oil exporters had been selling gold for liquidity.

That leaves a more interesting explanation. Gold fell not because confidence in it collapsed, but because in a liquidity shock, even the strongest reserve asset (and one that had considerably appreciated in value recently) can be sold to raise cash elsewhere - leveraged positions unwound, futures reduced, the dollar strengthened. Gold can be wealth and still be sold for liquidity. It is the same distinction that opened this article, now demonstrated in a different market.


4. Japan, FIMA and the Real Difference Between Treasury and Fed Money

The Gulf episode might have remained an unusual wartime footnote had something similar not happened, unmistakably, with Japan.

By July 2026 the yen had fallen toward ¥164 to the dollar, a forty-year low. Japan intervened to support its currency; this time, Washington joined in, with the New York Fed executing trades - reportedly selling euros and buying yen, a deliberate choice to avoid the appearance of an operation against the dollar itself. It was the first joint US-Japanese intervention in almost three decades.

Bessent then went further. On 4 August he said the United States would do "whatever it takes" to support Japan, and argued the Fed should consider enlarging its FIMA facility - currently capped near $60 billion, a figure he called small relative to today's Treasury market.

FIMA - Foreign and International Monetary Authorities - lets an approved foreign central bank borrow dollars from the Fed by pledging Treasuries as collateral. Japan holds roughly $1.1 trillion of them, the largest foreign stockpile in the world. Selling a meaningful slice to fund currency intervention would push Treasury yields higher at precisely the moment Washington wants them stable. FIMA offers another route: Japan keeps the Treasuries, pledges them, and receives dollars against them instead.

It is worth being precise here, because three distinct mechanisms are now on the table, and it is easy to blur them into one story about "Washington helping foreign holders get dollars."

The ESF currency swap, considered for the UAE, exchanges dollars for dirhams outright, with the transaction unwound later. There is no collateral involved and no new money created - simply Treasury's own dollars going out and coming back.

The FIMA repo facility, used by Japan, is collateralised lending. Japan pledges Treasuries it already owns - not yen, not dirhams - and receives newly created dollars against them, to be returned once the loan is repaid. The name itself signals this: it is formally the FIMA Repo Facility, a repurchase-agreement structure, not a swap line.

The Federal Reserve's permanent swap lines, maintained with a small group of major central banks including the Bank of Japan and the ECB, are a third, separate standing arrangement again - and notably, neither the Gulf nor the Japanese episode described here actually drew on that particular facility.

The Gulf and Japanese cases are therefore not the same operation, and the money behind them is not the same either.

ESF dollars are Treasury's own resources - existing government funds, or funds Treasury borrows through the ordinary fiscal machinery. The flow runs: Treasury's existing or borrowed funds, through the ESF, to the foreign central bank. The Fed does not create anything, and no new reserves enter the system. That is why the original observation - that the Gulf proposal was potentially Treasury money rather than Fed money - matters.

FIMA dollars are different in kind. When the Fed lends against Japanese Treasury collateral, it does not draw down some existing pile of dollars. It creates the reserves electronically, the same accounting-entry privilege that comes with issuing the world's principal reserve currency. Its balance sheet simply expands: Japan's Treasuries in as collateral, new reserves out as newly created dollars. No taxpayer hands over the money; no depositor loses it. It is manufactured, temporarily, for the transaction.

Is that quantitative easing? Technically, no. With QE the Fed creates reserves and buys the Treasury outright, so it becomes a permanent Fed asset. With FIMA the Fed creates reserves and lends them, taking the Treasury only as collateral, to be returned when the loan is repaid. One is a purchase. The other is a loan. The distinction is real, and it is why economists are careful to describe FIMA as collateralised central-bank lending rather than asset purchase.

But notice what both operations achieve for the financial system in the moment: an immediate increase in the dollars available, and a foreign asset that does not have to be dumped on the market. Different plumbing, same practical effect on the day it happens. That is the pattern already visible with the Gulf states, now recurring with Japan: interrupted revenue or a currency crisis creates a dollar need; a Treasury or Fed facility supplies dollars against collateral rather than forcing an asset sale.

The central bank does not necessarily have to buy the bond. It can lend against the bond.

5. Three Levels of Intervention - and the Question That Follows

It helps to set out the full progression, because the argument sharpens considerably once it is visible as a single continuum rather than three unrelated stories.

Level 1 - Treasury and the ESF. The government draws on its own existing or borrowed financial resources. No new money is created.

Level 2 - the Fed and FIMA. The central bank creates reserves electronically, but only as a collateralised loan, intended to be reversed.

Level 3 - quantitative easing. The central bank creates reserves and purchases assets outright, with no expectation of reversal.

Existing government money; newly created but collateralised central-bank money; newly created money used for permanent asset purchases. Each step along that continuum is technically distinct from the last. Each step also moves a little closer to the one beside it.

Every facility examined here comes with the same reassuring vocabulary: temporary, collateralised, reversible, liquidity rather than solvency support. And technically, each description is accurate. A swap line has a maturity. A FIMA loan has collateral. None of these is formally the same operation as an announced round of QE.

But the important question was never really what the facility is called. It is what happens when the underlying problem does not go away. Suppose Japan repeatedly needs dollars to defend the yen. Suppose Gulf states repeatedly need liquidity when energy revenue is disrupted. Suppose the Treasury market becomes too systemically important for its largest foreign holders to be allowed to sell freely into it. At that point, "temporary liquidity support" starts to look less like an emergency exception and more like permanent infrastructure - each use making the next one a little more expected, and a little harder to withdraw.


Bottom Line

The United States is not simply defending the dollar. It is increasingly defending the liquidity architecture built around the dollar - a system that depends on foreign countries wanting to hold Treasuries, but which becomes fragile precisely when those holdings grow large enough that selling them would destabilise the market itself. The ESF and FIMA are not QE, and the distinction between existing money and newly created collateralised money is real and worth defending. But the more precise question is not whether this is QE by another name. It is how far the United States can move along this continuum - from existing government funds, to collateralised central-bank lending, toward outright asset purchases - before temporary liquidity support becomes something closer to permanent monetary accommodation. Reversible into what, exactly, remains the harder question, and it is not yet answered.


Glossary

Exchange Stabilization Fund (ESF) - A US Treasury-controlled fund, created in 1934, used for foreign-exchange and international financial operations. Its resources are Treasury's own dollars, foreign currencies, gold and SDR-related assets, not newly created central-bank money. It can be expanded through Treasury borrowing, but that draws on the ordinary fiscal financing system rather than a printing press.

FIMA Repo Facility - The full name of the facility Japan used in 2026: a repurchase-agreement structure, distinct from a swap line, in which a foreign central bank pledges US Treasuries as collateral and receives newly created dollars against them, returning the Treasuries when the loan is repaid.

Federal Reserve standing swap lines - A separate, permanent set of currency-swap arrangements the Fed maintains with a small group of major central banks, including the Bank of Japan and the ECB. Distinct from both the ESF swap and the FIMA repo facility, and not the mechanism used in either the Gulf or Japanese episodes described here.

Quantitative easing (QE) - A central bank policy in which it creates reserves to purchase financial assets outright, usually to lower yields and increase monetary liquidity. Unlike FIMA, the purchased asset becomes a permanent holding on the central bank's balance sheet, with no expectation of reversal.

Liquidity versus wealth - Wealth is the total stock of assets a country or person owns. Liquidity is the availability of immediately spendable money to meet obligations. A country can be extremely wealthy in Treasuries, gold and reserves and still face a genuine shortage of dollars it can spend today.

Currency swap line - An arrangement in which two monetary authorities exchange currencies outright for a set period, with the transaction reversed at maturity and no collateral involved. The Gulf proposal in 2026 would have used one such swap, via Treasury's ESF, exchanging dollars for dirhams.

Deleveraging - The forced or voluntary reduction of borrowed money and leveraged trading positions, often producing rapid, indiscriminate asset sales - including, as in gold's March 2026 fall, sales of assets whose long-term investment case has not actually changed.

Reserve currency - A currency, such as the US dollar, held in large quantities by foreign governments and central banks as part of their official reserves, and used as the dominant medium for international trade and finance. Reserve-currency status gives the issuing central bank the unusual ability to create that currency electronically to meet global demand for it.

Collateralised lending (as distinct from asset purchase) - A transaction in which money is lent against a pledged asset that must eventually be returned, as opposed to a purchase, in which the asset changes hands permanently. FIMA is collateralised lending; QE is asset purchase - the distinction is central to why the two are not the same operation, even when their short-term market effect looks similar.


References

To be completed - source list for Bessent Senate testimony, World Gold Council March 2026 report, and FIMA Repo Facility documentation.


Further Reading

Joseph Wang - he derides the idea that this might be done to support US treasuries and thinks that the current situation will force a rise in Yen rates and that this is a great opportunity.

Link to related Living in the Air posts on 

-the debasement trade 

Financial assets and real assets

Currency debasement

Ray Dalio on preparations for 2026

The liquidity cycle is peaking - what does this mean for your investments

-Warsh Fed testimony etc

Slowing liquidity

Fed plumbing explained

Fed buys short and long

Could FX swap lines support US fiscal?

Tuesday, 4 August 2026

THE LIQUIDITY CYCLE IS PEAKING AND WHAT THIS MEANS FOR YOUR INVESTMENT PORTFOLIO



The Liquidity Cycle Peaks Again: What Michael Howell's Framework Says About 2026


If money moves markets before fundamentals ever do, what does it mean that the world's most experienced tracker of that money now says liquidity has peaked?


FAST TRACK (30-second summary)

Michael Howell, who built his global liquidity framework watching money physically move across the Salomon Brothers trading floor in the 1980s, argues capital arrives first before fundamentals justify it. His sixty-five month liquidity cycle, identified in 2000 and stable ever since, is currently peaking in 2026, following the last peak in 2021. 

Warning signs include a bearish flattening yield curve, narrow market breadth beneath a handful of surging technology names, a gold-oil ratio implying oil should be trading well above two hundred dollars a barrel, heavy US debt refinancing, and stress in market plumbing

The big structural problem: roughly six hundred billion dollars a week of US debt needing refinancing, forcing authorities to suppress bond market volatility rather than control yields directly. 

Howell's advice is not to time the peak precisely but to manage risk: keep a disciplined core portfolio and ring-fence any speculative positioning.


Introduction

There is a persistent habit among investors of treating markets as a referendum on fundamentals: earnings, interest rates, growth forecasts. Michael Howell, who has tracked what he calls global liquidity for four decades, argues this gets the causality backwards. Money moves first. Fundamentals catch up later, if at all, to justify what has already happened. His framework, developed on the trading floor at Salomon Brothers and refined ever since, treats the flow of money and credit through world financial markets as the primary driver of asset prices, with fundamentals relegated to the story told afterwards.

What follows sets out Howell's current thinking on where the liquidity cycle stands, how it is measured, and what it implies for asset allocation through the remainder of 2026.


Why It Matters

If Howell is correct that liquidity leads fundamentals rather than the reverse, then conventional analysis, focused on earnings multiples, GDP growth and central bank rate announcements, is perpetually looking in the rear-view mirror. For a reader trying to position a portfolio ahead of a shift rather than in reaction to one, understanding where the liquidity cycle sits matters more than parsing the latest earnings season. The stakes are not abstract: Howell's own cyclical marker points to a peak in 2026, and the framework's last peak, in 2021, was followed by a significant repricing across risk assets.


Contents Cover the Following

1. What global liquidity actually measures
2. Why liquidity leads fundamentals rather than the reverse
3. The sixty-five month cycle and its four phases
4. Late cycle warning signals: the yield curve and market breadth
5. Debt monetisation and the mechanics of yield suppression
6. The gold to oil ratio as a triangulation tool
7. IPOs, buybacks and the direction of flows
8. Portfolio construction across the cycle
9. Beneath the Headline Rate: SOFR, Reserves and the Fed's Plumbing - this is covered in the article Fed Plumbing Explained


1. What Global Liquidity Actually Measures

Howell defines liquidity broadly as money and credit, not simply the money supply figures that dominate financial commentary. The practical measurement looks at the credit side of financial institutions' balance sheets worldwide: central banks such as the Federal Reserve, the Bank of Japan and the People's Bank of China, alongside private sector banks, shadow banks and the repo markets. The distinction that matters is between money circulating in the real economy, which funds car manufacturing or widget production, and money circulating within financial markets, which is what his framework is built to track. It is this second category, wholesale money used for financial transactions rather than real economic activity, that determines asset prices.

Glossary

Global liquidity. The aggregate flow of money and credit through world financial markets, encompassing central bank balance sheets, private bank lending, shadow banking and repo market activity, as distinct from money circulating in the real economy. Howell treats it as a measurable quantity, built up bank by bank and market by market, rather than a loose metaphor for "easy money".

Shadow banking. Lending and credit creation carried out by institutions other than traditional deposit-taking banks, such as money market funds, hedge funds and private credit vehicles. It sits outside much conventional bank regulation, yet supplies a large and growing share of the credit that Howell's framework tracks.

Repo market. Short for repurchase agreement market, where institutions borrow cash overnight or short-term by temporarily selling securities, usually government bonds, with an agreement to buy them back at a slightly higher price. It is one of the plumbing systems of global finance and a key place where liquidity stress shows up first.

Financialisation. The long-run growth of financial markets relative to the size of the underlying economy. Howell notes that US financial markets are now roughly two times GDP, compared with fifty to sixty percent several decades ago, which is why liquidity flows now carry outsized influence over asset prices relative to historical norms.


2. Why Liquidity Leads Fundamentals Rather Than the Reverse

Howell's central claim is that capital arrives before the justification for it does. Expanding price-to-earnings multiples, for instance, reflect anticipation of future fundamentals that may or may not materialise, but the transaction itself is driven by available money. When central banks force liquidity into markets, as occurred after the 2008 financial crisis and again after the pandemic, asset prices rise regardless of what fundamentals are doing at the time.

"We're schooled in the idea that markets react to fundamentals, but actually capital gets there first."

The growing size of financial markets relative to GDP amplifies this effect: wealth effects generated by rising asset prices now feed back into the real economy in a way that was far less significant thirty or forty years ago.

Follow the money - be the first to get where the banbks are pushing the liquidity

Glossary

Wealth effect. The tendency of rising asset prices to increase consumption and economic activity, independent of underlying income growth, by making asset holders feel and behave as though they are wealthier. A rising stock market can therefore lift real-economy spending even before wages move.

Lagging indicator. A metric, such as corporate earnings or GDP growth, that responds to and confirms a market move only after the move has already occurred, rather than predicting it in advance. Howell's argument is that most of what investors watch closely falls into this category.

Price-to-earnings multiple, PER. A valuation measure comparing a company's share price to its earnings per share. A rising multiple means investors are paying more for each unit of current profit, typically because they expect profits to grow, or because there is simply more money chasing the same shares.

Cantillon effect. A theory describing how the benefits of money creation are distributed unevenly. Those who receive newly created money first can buy assets and goods before prices rise, while those who receive it later often face higher prices without a corresponding increase in income.

The practical lesson is that capital begins with Federal Reserve policy, is leveraged through the financial system, and then spreads into the real economy. Successful investors seek to follow that flow, identifying where money is moving next as the Cantillon Effect, economic conditions, and geopolitical forces channel it into commodities, monetary metals, quality property, and companies with durable pricing power.


3. The Sixty-Five Month Cycle and Its Four Phases

Howell identified a recurring cyclical pattern in global liquidity data using Fourier analysis around the year 2000. That work established the sixty-five month periodicity and, once set, the method has proved stable ever since, with the actual cycle extrapolated forward and tracked against outcomes for the following quarter century. The cycle divides into four phases: rebound, calm, speculation and turbulence. Equities perform best during the rebound and upswing phases. Commodities do best around the peak, because the liquidity cycle leads the real economy, and as liquidity peaks the economy is moving from trough towards acceleration, increasing demand for raw materials. As liquidity subsequently tightens, defensive assets and cash come into favour, and as the squeeze deepens towards the cycle's trough, longer duration bonds perform best in anticipation of central bank rate cuts.

Howell's current assessment places the cycle at a peak in 2026, following the last peak in 2021.

Glossary

Sixty-five month liquidity cycle. A recurring cyclical pattern in global liquidity that Howell identified using data analysis around the year 2000, with an approximate periodicity of sixty-five months. It has been tracked and extrapolated forward ever since, and has lined up reasonably well with subsequent turning points in markets.

Fourier analysis. A mathematical technique, originally developed for physics and signal processing, that breaks a complicated, noisy series of data down into a set of simpler repeating wave patterns. Howell applied it to decades of financial data to test whether liquidity moved in genuine, measurable cycles rather than at random, and it was this analysis that surfaced the sixty-five month pattern.

Speculation phase. The late stage of the liquidity cycle, occurring around its peak, characterised by continued positive returns coexisting with elevated volatility, such that the risk-adjusted quality of those returns is significantly reduced. Howell places the market in this phase as of 2026.

Turbulence phase. The most difficult stage of the cycle, arriving as liquidity contracts sharply and financial conditions tighten. It typically brings the worst risk-adjusted returns for equities and commodities, and is when Howell's framework argues investors should already be positioned defensively rather than reacting to the stress as it appears.


4. Late Cycle Warning Signals: the Yield Curve and Market Breadth

Howell points to several markers of a late cycle environment. The most robust, despite lagging the liquidity cycle by roughly nine months, is the slope of the yield curve; a bearish flattening, where long end yields rise more slowly than short end yields, is a reliable late cycle confirming signal. A second marker is market breadth: strong headline index performance driven by a narrow group of technology and semiconductor stocks, while the broader market outside those names remains lacklustre and many individual stocks make new lows, is characteristic of a late stage rally rather than a broad-based bull market.

"You've got to be approximately right rather than precisely wrong."

Glossary

Yield curve. A line plotting the interest rates, or yields, on government bonds of different maturities, from short-term to long-term. Its shape is one of the most closely watched signals in finance, because it reflects investor expectations for growth, inflation and future central bank policy.

Bearish flattening. A movement in the yield curve in which long-term yields rise more slowly than short-term yields, causing the curve to flatten and potentially invert. It is generally regarded as a late cycle warning signal, since it suggests investors expect growth or inflation to cool even as near-term borrowing costs stay elevated.

Market breadth. A measure of how broadly a market's gains are distributed across constituent stocks, as opposed to being concentrated in a small number of large or high-momentum names. Narrow breadth beneath a rising headline index is a classic sign that a rally is running out of underlying support.

Term structure. Another name for the pattern of interest rates across different maturities, essentially the technical term behind the more familiar phrase "yield curve". Movements in the term structure are what Howell is describing when he refers to flattening or steepening.


5. Debt Monetisation and the Mechanics of Yield Suppression

A structural feature of the current environment, in Howell's account, is the scale of government debt requiring refinancing. US Treasury debt carries an average maturity of five to six years, meaning a continual rolling burden estimated at roughly six hundred billion dollars a week. Financial markets, in his view, now function primarily as refinancing mechanisms for existing debt rather than as new capital raising mechanisms for productive investment. When banks purchase government debt, they are, in effect, monetising it, a process Howell frames as printing money by another name.

The authorities manage this burden partly through issuance strategy, concentrating new supply at the short end of the curve to starve the long end and keep long yields capped, and partly through direct intervention, using Treasury buybacks to suppress bond market volatility whenever the MOVE index, the bond market equivalent of the VIX, spikes higher.


Glossary

Debt monetisation. The process by which government debt is purchased by banks or central banks acting as intermediaries, effectively expanding the money supply to fund government borrowing rather than debt being absorbed by genuine new savings. Howell regards the current pace of Treasury issuance and bank purchases as a modern form of this practice.

MOVE index. An index measuring implied volatility in the US Treasury bond market, functioning as the bond market's equivalent of the VIX equity volatility index. Howell treats spikes in the MOVE index as a more important signal to watch than the Federal Reserve's own policy rate.

Yield volatility control. A policy of suppressing fluctuations in bond yields through active intervention, such as Treasury buybacks, distinct from yield curve control, which targets the level of yields directly rather than their volatility. Howell argues this, rather than outright yield curve control, is what is actually happening in US Treasury markets today.

Debt refinancing. The process of replacing maturing debt with newly issued debt, rather than paying it off outright. With an average Treasury maturity of five to six years, a large share of outstanding US government debt must be refinanced on a rolling basis every year, regardless of whether new spending is taking place.


6. The Gold to Oil Ratio as a Triangulation Tool

Howell treats the long-run ratio between an ounce of gold and a barrel of oil, averaging around twenty to one over the past fifty to sixty years, as a further confirming signal that moves in step with the liquidity cycle. At the front end of a liquidity upswing, the ratio rises because the gold price climbs while oil lags. Towards the back end of the cycle, the ratio falls back not because gold declines but because oil catches up, as money exits financial markets and flows into the real economy.

With gold trading in the four to five thousand dollar range, the historical ratio implies an oil price above two hundred dollars a barrel, a figure Howell acknowledges sounds implausible to most investors but which he presents as a structural implication of sustained debt monetisation rather than a near term forecast.

Glossary

Gold to oil ratio. The number of barrels of oil that one ounce of gold can purchase, historically averaging around twenty to one over the long term - the last 50 or 60 years. Howell uses it as a cross-check on whether gold or oil is mispriced relative to the other, and as a secondary indicator of the liquidity cycle's stage.

Debasement trade. An investment approach built on the expectation that ongoing debt monetisation and currency creation will erode the purchasing power of fiat money over time, typically expressed through holdings of gold, gold miners, and broader commodities as stores of value rather than income-generating assets. Howell's gold-oil analysis sits within this broader thesis.

Triangulation. In this context, the practice of cross-checking a view on one asset, such as gold, against two other related variables, here the oil price and the gold-oil ratio itself, so that no single number is relied upon in isolation. It is a discipline for testing whether a price looks genuinely stretched or simply unfamiliar.


7. IPOs, Buybacks and the Direction of Flows

A wave of major initial public offerings, including SpaceX at a scale representing a significant share of total US market capitalisation, alongside anticipated listings from firms such as Anthropic and OpenAI, would ordinarily be read as liquidity being withdrawn from financial markets to fund real economy activity, a negative signal within Howell's framework. He notes a mitigating technicality: the free float offered in such listings is typically small relative to the headline valuation, forcing index funds and other passive vehicles to chase limited available supply.

The more significant structural shift, in his view, is on the buyback side. Share buybacks in the US have been substantial but are beginning to slow as corporate cash is redirected towards capital expenditure, at the same time as buyback activity in Europe and Japan is increasing, a divergence he suggests favours geographic diversification away from US equities.

Glossary

Initial public offering (IPO). The first sale of a private company's shares to public investors, converting it into a publicly listed company. Large IPOs draw fresh cash out of the pool of money circulating within financial markets and into the company being listed.

Free float. The proportion of a company's shares actually available for public trading, as distinct from shares held by founders, insiders or locked up post-listing. It determines how much index and passive fund buying pressure a new listing can absorb relative to its full valuation.

Share buyback. The repurchase by a corporation of its own outstanding shares using company cash, reducing share count and, all else equal, supporting the share price. Howell treats it as the structural counterpart to IPO issuance in the flow of funds into and out of equity markets.

Capital expenditure (capex). Spending by a company on physical assets such as factories, equipment or infrastructure, intended to support future growth. Howell's point is that cash once used for buybacks is increasingly being redirected towards capex, reducing one source of equity market support.


8. Portfolio Construction Across the Cycle

Howell is cautious about translating cyclical analysis into precise market timing, preferring, in his words, to be approximately right rather than precisely wrong. His practical recommendation is a two tier portfolio structure: a disciplined core, built to compound steadily through the cycle even at modest annual returns sufficient to outpace inflation over the long term, and a smaller speculative allocation, sized according to individual risk tolerance, that can ride cyclical momentum during phases such as the current speculation stage without exposing the whole portfolio to a sharp reversal.

He regards the tendency of retail investors to treat their entire portfolio as a momentum trade, rather than ring-fencing speculation within a disciplined core, as one of the more consistent and costly mistakes made across market cycles.

Glossary

Core-satellite portfolio structure. This is the central structural idea Howell wants investors to take away. The "core" is the majority of the portfolio, say 80%. built for discipline and durability rather than excitement: diversified, unglamorous, and expected to deliver modest but reliable real returns, say 5 to 10% annual, that outpace inflation over the long run regardless of which phase the liquidity cycle is in.

The "satellite" is a smaller, clearly bounded portion, sized to what an investor can genuinely afford to lose, that is deliberately allowed to chase momentum during phases like the current speculation stage. The two are never mixed. The discipline is not in avoiding speculation altogether, since Howell is relaxed about investors taking speculative positions if they wish, but in never letting speculative logic govern the core, so that a sharp turbulence phase damages only the satellite and leaves the core, and the investor's long-term position, intact.

Risk management (in this context). The discipline of controlling how much of a portfolio is exposed to a given source of risk, rather than trying to predict the exact timing of a market turn. Howell frames sizing a speculative allocation as a risk management decision, not a forecasting one. Use Sharpe and Sortino.

Momentum trading. An approach that buys assets because their price is already rising, on the expectation the trend will continue, rather than because of an underlying valuation view. Howell warns against letting this become the default behaviour for an entire portfolio, since momentum can reverse sharply once a cycle turns.



Bottom Line

Howell's framework does not predict a crash on a given date. What it does is describe a regime: a liquidity cycle at its peak, a bond market showing late cycle stress, a rally increasingly narrow beneath the surface, and a debt refinancing burden so large that central banks are managing bond volatility directly rather than allowing markets to set yields freely. None of that requires an immediate reversal. It does argue for treating the current rally as a speculation phase rather than the early stages of a durable bull market, and for structuring portfolios accordingly: a disciplined core, a bounded speculative sleeve, and closer attention to commodities and non-US equities than the headline index numbers might suggest is necessary.


Optional Deep Dive

The basis trade. Part of what keeps long-term US Treasury yields capped despite a booming, inflationary economy is a specific piece of financial engineering known as the basis trade. Hedge funds buy cash Treasury bonds and simultaneously sell Treasury futures short, pocketing the small pricing gap between the two. The trade is highly profitable when scaled up with borrowed money, but it only works while bond market volatility stays low, because a sharp move in yields can turn a small, safe-looking spread into a large loss almost overnight. This is why the Treasury's own buyback programme, which steps in to suppress the MOVE index whenever it spikes, is not just a debt management tool but also, in effect, life support for the basis trade itself. The two are entangled: suppressed volatility sustains the trade, and the trade's continued appetite for cash Treasuries helps absorb the enormous weekly issuance the US government needs to roll over its debt.

Japan's role in financing US debt. Japan has historically been one of the largest foreign holders of US Treasury debt, a position closely tied to the gap between Japanese and US interest rates. For years, Japanese interest rates were held near zero while US yields sat far higher, encouraging what is known as the carry trade: borrowing cheaply in yen and investing the proceeds in higher-yielding US Treasuries. That flow has been a quiet but significant source of demand supporting the US bond market. As the Bank of Japan has moved gradually away from its ultra-low rate policy, the incentive for Japanese investors and institutions to keep recycling savings into US Treasuries has weakened, and any further narrowing of the US-Japan rate gap raises the risk that this long-standing source of demand shrinks or reverses, adding to the pressure on US authorities to find other buyers for their debt.

CPI Inflation"The inflation process is often described using CPI, but CPI is merely the final stage visible to consumers. Inflation usually begins with rising commodity costs, appears next in business surveys such as ISM and PMI Prices Paid, then enters the Producer Price Index through intermediate-demand and final-demand goods. Only after firms pass these higher costs through the supply chain does inflation appear in consumer measures such as CPI and PCE. For this reason, CPI is generally regarded as a lagging indicator of inflationary pressure already building elsewhere in the economy."

━━━━━━━━━━━━━━━━━━━━

ISM Prices Paid – A survey measure showing whether purchasing managers are paying more or less for inputs.

PMI (Purchasing Managers' Index) – A survey of business activity, orders, employment and input costs.

PPI Intermediate Demand – Inflation occurring between businesses as goods and services move through the production chain.

PPI Final Demand – Prices received by producers for goods and services sold to final users.

CPI – Consumer Price Index; measures prices paid by households.

PCE – Personal Consumption Expenditures; the Federal Reserve's preferred measure of consumer inflation.

Cost Transmission – The process by which higher input costs move through the supply chain and eventually reach consumers.


Related Articles on this Site

https://www.livingintheair.org/2026/08/the-liquidity-cycle-is-peaking-and-what.html

https://www.livingintheair.org/2026/06/slowing-liquidity.html

https://www.livingintheair.org/2026/06/fed-and-treasjury-buying-short-abd-long.html

https://www.livingintheair.org/2026/04/fx-swap-lines-used-to-support-us-fiscal.html


References

Michael Howell, interviewed August, 2026

Print or Collapse


Further Reading

 Howell - Capital Wars substack

FED PLUMBING UNDERSTOOD

What if the Fed's headline interest rate decision is pure pantomime?


Fast Track (30 seconds)

Michael Howell argues that the Fed's headline interest rate decision is theatre. The real liquidity signal sits in the plumbing: bank reserves, the repo market, and the spread between SOFR and what the Fed pays banks on reserves. When that spread widens, cash is genuinely scarce, whatever the headline rate says. A recent six month, six hundred billion dollar injection into money markets, triggered by exactly this kind of stress, is Howell's Exhibit A - and, by his account, the real explanation for Wall Street's buoyancy.

- Reserves - cash banks hold on deposit at the Fed, beyond what they lend out elsewhere.

- EFFR (Effective Federal Funds Rate) - the actual overnight rate banks charge each other to borrow reserves.

- SOFR (Secured Overnight Financing Rate) - the overnight rate for cash borrowed against Treasury collateral in the repo market.

- ON RRP (Overnight Reverse Repo Facility) - where money market funds park surplus cash with the Fed when reserves are abundant.

- SRF (Standing Repo Facility) - where banks borrow cash from the Fed against Treasury collateral when reserves are tight.

- IORB (Interest on Reserve Balances) - the rate the Fed pays banks on reserves; the anchor both EFFR and SOFR are meant to track.

- Fed funds target range - the Fed's official upper and lower bound, distinct from EFFR, which is the rate actually traded within it.

Introduction

Every six weeks or so, financial media treats the Federal Reserve's rate announcement as the most important economic event on the calendar. Michael Howell disagrees, and not mildly. In his view, the meeting itself is close to pantomime: a ritual performance that tells investors almost nothing about the actual state of liquidity in the financial system. The real story, he argues, is happening somewhere most people never look - in the technical plumbing of the banking system, where the Fed and Treasury quietly manage the pressure in a pipe network of reserves, repo markets and collateral.


Why It Matters

If Howell is right, investors who fixate on the Fed funds rate are watching the wrong gauge. The plumbing indicators below move first, move more honestly, and - in Howell's telling - already explain a recent multi hundred billion dollar liquidity injection that the headline rate never predicted. Understanding them is a precondition for understanding where the liquidity cycle, and by extension asset prices, go next.


Contents Cover the Following

1. Why Howell calls the rate decision "pantomime"
2. The plumbing gauge that matters most: the SOFR spread
3. Two safety valves: the ON RRP and the Standing Repo Facility
4. The six hundred billion dollar case study
5. Bottom line and what to watch next


1. Why Howell Calls the Rate Decision "Pantomime"

The actual volume of lending conducted at the Fed funds rate is small. That is Howell's starting point, and it is the reason he is dismissive of the attention paid to each FOMC meeting.

"Does it really matter that interest rates go up or down? Not really - the amount of transactions in the Fed funds market is diminutive."

He goes further: Kevin Warsh has signalled that under a different Fed leadership, there could be as few as three or four FOMC meetings a year, with no formal forward guidance at all. If the ritual itself may soon be scaled back, Howell's underlying point sharpens - the market's attention has been trained on the wrong signal for years.

What matters instead, in his framing, is what the Fed and Treasury are doing beneath the surface: managing bank reserves, watching wholesale money markets, and tracking how short term borrowing rates behave relative to the Fed's own targets.


2. The Plumbing Gauge That Matters Most: The SOFR Spread

Two overnight rates anchor the system. The Effective Federal Funds Rate (EFFR) is what banks actually charge each other to borrow reserves overnight. The Secured Overnight Financing Rate (SOFR) is the equivalent rate for cash borrowed against Treasury collateral in the repo market. Both are meant to trade close to the rate the Fed pays banks on their reserve balances (IORB), with low volatility.

When they don't - when SOFR spikes away from that anchor - something in the plumbing is under strain. That spread, not the headline target range, is Howell's preferred early warning gauge for stress in short term funding markets.

A widening SOFR spread is a sign of friction in the system long before it shows up anywhere the headline rate can capture.

3. Two Safety Valves: The ON RRP and the Standing Repo Facility

Two Fed facilities sit at opposite ends of the same pipe.

The overnight reverse repo facility (ON RRP) absorbs surplus cash from money market funds and other institutions. When reserves are genuinely plentiful, usage should be minimal. Rising usage signals excess cash sloshing around with nowhere better to go.

The Standing Repo Facility (SRF) does the reverse: it lends cash to banks against Treasury collateral when they are short. Occasional use is normal. Sustained, growing use signals real thirst for liquidity in the banking system - the condition Howell points to directly in the case study below.


4. The Six Hundred Billion Dollar Case Study

Howell points to a concrete recent episode. Over five to six months, the Federal Reserve injected roughly six hundred billion dollars into US money markets. He links that injection directly to the buoyancy of Wall Street over the same period - not as a side effect, but as a central driver.

The trigger, in his account, was that repo markets were growing short of liquidity, visible in exactly the indicator described above: SOFR spiking upward relative to the Fed's target range. The Fed responded not through a rate decision, but through the plumbing - reserve management purchases conducted purely to keep the banking system's cash levels adequate, with no accompanying announcement of the kind that dominates financial headlines.


Bottom Line

The Fed funds rate is a headline. The plumbing - reserves, the SOFR spread, and usage of the ON RRP and Standing Repo Facility - is where the real liquidity story is written. A recent six hundred billion dollar injection, triggered by repo market stress and largely invisible in mainstream coverage, is Howell's case that the plumbing already told investors what the rate decision could not.


Glossary

Reserves. In the Fed's plumbing, this refers to the cash balances that commercial banks hold on deposit at the central bank, above what they lend out elsewhere. Howell treats changes in reserves as more informative than the Fed funds rate itself, since reserve levels are one of the Fed's most direct levers for adding or draining liquidity.

Repurchase agreement (repo). A short term, secured loan structured as a sale and buyback of a security, usually overnight. One party sells a Treasury bond for cash and agrees to buy it back the next day at a slightly higher price; the other holds the bond as collateral. Stress in this market, visible as a spike in the repo rate, spreads quickly into the wider financial system.

Secured Overnight Financing Rate (SOFR). The benchmark rate for borrowing cash overnight against Treasury collateral. It has become the main reference for dollar borrowing costs and is one of Howell's preferred real time gauges of funding stress.

Standing Repo Facility (SRF). Lends cash to eligible banks and primary dealers against Treasury or agency collateral, at a rate set by the FOMC. It acts as a backstop when the repo market is short of cash, and rising use of it signals tightening liquidity in the banking system.


References

How money flows move asset prices

Michael Howell interview material
Federal Reserve Bank of New York - SOFR data and methodology
Federal Reserve Board - Standing Repo Facility and ON RRP operational notes

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