“When you see one cockroach, there are probably more” – Jamie Dimon, JPMorgan CEO, 16th October 2025

Debt and liquidity are two sides of the same coin. The monetary system we’ve all been operating in since the 1970s is one in which the vast majority of money has been created through the process of debt creation by commercial banks. In simple terms, when an individual or a company (and maybe in the future artificial intelligence, who knows?) takes out a loan from a bank, their bank account is credited with money which the bank simply creates out of thin air.

In the aftermath of the Global Financial Crisis there was often talk of central banks ‘creating money’ and to a certain degree it was true. But it’s not the same sort of money that most of us think about when we imagine money. It is unequivocally not money that you can hold in your hands or use to buy goods and services. Central banks create reserves – a sort of money used exclusively by the financial system i.e. banks. Banks hold reserves in accounts with central banks, and they use these reserves to settle payments between themselves. However, these reserves never leave the financial system and certainly never find their way into the economy. They never become ‘money’ as most of us would understand it. This raises all sorts of questions about the wisdom of using quantitative easing (QE), which is the process of central banks buying financial assets – usually government bonds – using newly created reserves to try and create consumer price inflation. This is what the major central banks did with such abandon from 2009 onwards. Fortunately for you dear reader, that’s a rabbit hole down which I have already spent too much of my life, and one I don’t wish to revisit at this stage.

What I am not saying is that QE has no impact. Firstly, of course, it does create inflation – just not the sort measured by consumer price indices. Instead, it creates asset price inflation, with all the moral hazards and distributional issues that brings (the rich get richer and the rest, well, they don’t). If QE operates alone that is pretty much where its influence on consumer prices ends. However, if governments get in on the act, then everything changes. Governments can inject money directly into the economy, which can very much have a direct influence on consumer prices. Want to know what that looks like? Well just cast your mind back to 2022. Central banks buy government bonds forcing their prices up and thus their yields down, governments then take advantage of these lower borrowing costs to borrow and then inject this money directly into the economy’s veins. Tax cuts are obviously one way but in the post-common-sense world in which we now operate that’s far too indirect. Sending cheques and creating never-ending programmes of giveaways is seen as much more effective.

Thus, we have a direct link between debt and money and in modern financial parlance, when there is more money floating around people will describe this money as liquidity.

So, when there is lots of money sloshing about in the real economy that means there’s also a lot of debt. It might be debt from the private sector (money creation by commercial banks) or it might be debt issued by the public sector (governments borrowing from financial markets in order to inject into the real economy) or it might be both.

Unfortunately, it is mostly the case that the more money there is, the more likely it is being misused. When a resource is scarce, those who use it will attempt to do so in the most effective and efficient way possible. That is a fact which sits at the very heart of both capitalism and the subject of economics (for those who haven’t had the pleasure of studying this most magical of pseudo-sciences, the subject is most accurately defined as the study of the efficient allocation of scarce resources). Logically it therefore follows that when the monetary and fiscal authorities combine to boost the economy by facilitating money creation, they tend to sow the seeds of the next problem.

Which brings us to the Jamie Dimon quote sitting at the top of this piece. Recently, a few hitherto unknown firms involved in unusual borrowing practices have gone the way of the dodo. When I use the term ‘unusual’ that is in the mind of the average person. I’m sure for the financial alchemists of Wall Street and its global equivalents the practices are de rigueur. As usual, when such things happen the chorus from banks and credit investors (i.e. the sorts of investors who are generally lending money to the very same sorts of firms that have just gone belly up) is that these are isolated incidents and there is nothing to worry about. They may be correct, of course. However, it is important to understand context and incentives. These folk are not really incentivised to shout fire as they are all resident in a very crowded theatre with very few and very small exits. Note that one of the best-known investment banks on Wall Street issued a buy recommendation on Lehman Brothers mere weeks before it collapsed nearly taking the entire global financial system with it.

Our take is that caution is warranted. Banks do look much less exposed now, with far less leverage than they had leading up to 2008. But largely that’s because regulation has forced this leverage into darker corners of the financial system where it is harder to spot. For that reason, those loud voices out there simply making arbitrary comparisons to such points in history and confidently declaring the all-clear may be missing the point. Each of these debt-driven wobbles is different. If they weren’t, we’d all spot them easily and they’d never become a problem. It is the fact that the system adapts and finds new ways to juice returns through leverage that makes each one difficult to spot – it’s rarely lucrative to fight the last battle. Just ask the US Federal Reserve about this. They amended and optimised their monetary framework to account for the low inflation of the post-crisis era quite literally at the exact moment that inflation broke out to rates not seen since the early 1980s. The comedically ironic result was a policy error for the ages – one which they are still trying to recover from.

For now, these credit worries are being brushed aside, as the market is wont to do. Equities are at all-time highs, despite recent tariff-related wobbles. However, while trying not to sound too cynical, and borrowing a phrase from 90s Scottish soft rockers Del Amitri – equites are always the last to know. If I want to know what’s lurking in the dark corners of financial markets the equity market is the last place I’d look.

What’s been far more interesting over the last month is that despite the bullishness in risk assets there is a creeping bullishness in government bonds too. The US jobs market looks wobbly and when that happens most other economic indicators can be significantly downplayed. So, the Fed looks likely to cut rates a couple more times this year. Potentially as significant for the treasury market in its entirety, and certainly less well-advertised, is that the Fed is also close to ending its programme of quantitative tightening (QT), which is the selling of bonds bought through QE. The reason for this has little to do with economic growth or inflation and everything to do with liquidity in the financial system. In general, the Fed’s central bankers have a tiger by the tail when it comes to its balance sheet and liquidity policies. They are quick to add liquidity at the first sign of trouble, and slow to withdraw it when the trouble passes. They have no ability to measure how much liquidity is needed to promote a healthy economy, versus how much is being used simply because it is there and it can juice returns. They assume that if they withdraw too much liquidity, we will start to see stress in the system, at which point they’ll know it’s time to stop. Well without going deep into the weeds, we have started to see evidence of these stresses, including banks borrowing directly from the Fed at above-market rates – a surefire sign of emerging trouble. You don’t pay up to borrow from the Fed if anyone will lend to you privately for less. And if no-one will lend to you privately that’s probably because they aren’t confident they’ll get their money back.

The Trump administration, with its penchant for tax cuts, is still far from putting the Treasury market on a truly safe footing. But if the Fed stops selling Treasuries it will certainly improve the supply vs. demand balance and should significantly support prices.

Finally, a word on gold. I’ve been bullish about the yellow metal for about three years. I struggle to think of an environment in which gold’s positive characteristics shine so brightly. Global fiscal incontinence has been facilitated by monetary incontinence – and with dollops of US dollar weaponisation and geopolitical fragmentation on top. Gold is money, everything else is credit and if trust is declining then there aren’t many better places to seek safety than the precious metal. The last few months however have seen gold take on meme-status. Every day I read another article calling for a continued rally or decrying its ascent as the work of gold bugs and maniacs. Maybe I’m both. Long term I still think that unless and until our governments put national balance sheets back on a stable and sustainable footing then gold and its thousands of years of inert, unchanging stability will be in demand. This demand will also continue to be fuelled, I believe, until central banks return to a narrower role, defined by the goals of monetary and financial stability, rather than seeking to micro-manage inflation. Right now though, with prices going vertical and the public queueing outside bullion stores around the world I’m very wary about a short-term retreat.

‍

‍

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.