Illustration of the financial system as a nuclear reactor built from fiat paper: debt piled on debt, cracks spreading, meltdown approaching.

In the final episode of Chernobyl, HBO’s retelling of the 1986 nuclear disaster, Valery Legasov, the scientist leading the state’s response, testifies1 before a Soviet court. For all their mistakes, he explains, the reactor’s operators cannot be held solely responsible, because the state had kept secret earlier reports describing the flawed design of the RBMK reactor.

Asked to explain how an RBMK reactor can explode, he answers:

“Because of our secrets and our lies. They are practically what define us. When the truth offends, we lie and lie until we can no longer even remember it is there. But it is still there. Every lie we tell incurs a debt to the truth. Sooner or later that debt is paid. That is how an RBMK reactor core explodes. Lies.”

Chernobyl (2019) (HBO) - How does an RBMK reactor explode? Lies! Vichnaya Pamyat - Episode 5

The monetary lie

When the time comes, someone will have to explain how the monetary system could explode, and they will, almost word for word, recycle Legasov’s response. Our financial system, our banking systems, and the global economy are built upon a monetary lie that hides economic reality from its operators and will eventually lead to its demise.

In the Soviet Union, the lies manufactured by apparatchiks and zealous bureaucrats were relayed by people living under the constant threat of state coercion. In our society, the propaganda machine relies on subtler, more insidious mechanisms: fiat money and price distortions. No need for gulags or state-owned media; our lies are created with the stroke of a pen and spread by the printing press.

Our political leaders are no different from their Soviet counterparts. They, too, are careerists whose agendas are encumbered by the truth. The only difference lies in the nature of the truth machine they seek to jam, and in the levers they pull to jam it. Since every allocation of capital entails a cost – a forgone opportunity, expressed through free-market prices – and since politicians have every incentive to hide the true cost of their actions from the people they seek to please, market prices and free enterprise are, in a free society, the enemies of the state.

Since, at least, 1971 when the last link between the US dollar and gold was severed, governments have enjoyed an unfettered power to lie. In our fiat system, the cost of every welfare program, every war, every subsidy, every state-guaranteed loan and every stimulus check has been hidden from the public. Nobody wanted the truth: not the public servants gaining popularity through state intervention, not the beneficiaries of their programs, not even the taxpayers and currency holders footing the bill.

Everybody wants to believe in the free lunch.

When free-market prices confront us with a truth that offends, we paper it over, we bury it under a pile of debt and credit ledger entries, until we can no longer remember it is there. Yet each of these lies incurs a debt to the truth, and sooner or later, that debt is paid.

What remains open is how, by whom, and in what money. Those three questions are what this newsletter is about.

Every two weeks, we will play the role of Legasov. We will dissect the subtle mechanics by which our monetary system is collapsing, try to anticipate how our governments are likely to react, and, most importantly, share how we think about protecting capital along the way. The destination may be certain, but the journey matters.

This first edition lays out the thesis that will guide all the others.

Too much debt, papered over a thousand times

The core issue is the same everywhere: too much debt, papered over a thousand times, inflating the biggest asset bubble in the history of capitalism and fueling an illusion of prosperity that bears no relation to reality.

In reality, the capital stock is both depleted and misallocated. Decades spent suppressing genuine price discovery and creative destruction, the very processes through which economic truth is revealed, have led each and every one of us to allocate capital unsustainably, in ways that cannot meet the future needs of our nations. To keep up appearances, we have consumed capital on an unfathomable scale. The fruit of decades, of saving, sacrifice, investment and hard work has been set on fire to sustain this great illusion.

Stocks and Flows

Economic commentators entertain the bad habit of comparing stocks to flows, a tendency best illustrated by their fetish for public debt-to-GDP ratios. A public debt is never really repaid; it is rolled over, again and again. What a debtor actually pays, year after year, is interest. That cost of servicing is what decides whether a debt is sustainable. A country owing 250% of its GDP at 0% pays nothing; a country owing 60% at 15% is on its way to the IMF. Japan has carried public debt above 200% of GDP for years without a crisis, for the simple reason that, for years, it paid next to nothing on it.

The arithmetic fits on a napkin. Call r the average interest rate on the debt and g the nominal growth rate of the economy. Each year, the debt ratio grows by roughly (r – g) times the debt ratio, minus whatever primary surplus the government manages to run. As long as r stays below g, the debt melts relative to the economy on its own. Once r rises above g, the debt compounds faster than the economy, and only ever-larger budget surpluses – the political equivalent of a unicorn – can stop it.

France and Japan

While the comparison of the stock (the debt) to the flows (interest payment and GDP) is useful to gauge the sustainability of the debt, we also need to consider the composition and the other side of the balance sheet.

Japan has the highest public debt-to-GDP ratio among G20 countries, most of which is domestically owned. But its foreign net asset position, i.e. the difference between its assets and liabilities vis à vis the rest of the world, is enormous. It’s their debt, but it’s our problem; the Bank of Japan can always wipe off their excess debt by liquidating their holdings of foreign assets.

Conversely, France’s debt-to-GDP is half Japan’s, but is mostly owed to foreigners. After WWII, Japan maintained a very low exchange rate for decades. It made them very competitive and allowed them to run large current account surpluses. All this flow of dollars, euros, and pounds, was recycled in western assets and government debt. Conversely, France’s competitiveness collapsed for the opposite reason: since it joined the euro, it has operated with an artificially high exchange rate. It favored the expansion of the public sector at the expense of the private, incentivized import-driven consumption financed by debt issuance instead of saving and investment, leaving the country in a much more precarious situation than Japan.

The contrast between France and Japan is simply the consequence of decades of imbalances compensated by wealth transfers: Japan earned more than they spent, accumulated a huge war chest, against which they created an enormous, albeit smaller pile of domestic debt, whereas France lived above its means and financed it by mortgaging its future and selling its assets to foreigners. This structural disequilibrium is maintained by inadequate exchange rate. By fixing prices recklessly for political reasons these imbalances last and create ticking-time bombs.

In 2024, Japan had more public debt relative to GDP than France, but a lower implied interest rate and a lower annual interest bill relative to GDP. The implied rate is annual gross interest expense divided by year-end debt. Published debt definitions differ, as noted in the figure.

When cheap debt becomes expensive

Almost two decades of Zero-Interest Rate Policy (ZIRP) - another price fixing method - are at the root of the current excess of debt. It incentivized both the public and private sector to grow their debt at a very high level. After all, it was sustainable since it costed nothing! The problem with such reasoning is that it ignores second order effects: because debt is cheap, economic agents abuse it, leading to capital misallocations and inflation, sluggish growth, increasing risk of defaults and decreasing productivity, resulting in higher interest rates.

Once the rates rise, the cheap debt becomes a deadly vicious circle that feeds on itself. Higher interest widens the deficit, the deficit adds to the debt, more debt means more issuance, and more issuance pushes rates higher still. Engineers have a name for this kind of loop. The RBMK reactor had a positive void coefficient: the more its cooling water boiled into steam, the more reactive the core became, the hotter it ran, and the more water boiled. A heavily indebted state has a positive void coefficient of its own.

In 2022, the Fed attempted to curb the COVID inflation by raising rates from zero to over 5% in little more than a year. Every major central bank followed suit, igniting a chain reaction akin to the one described above. Within months, the Bank of England had to buy long-dated gilts to stop a fire sale by pension funds. Within a year, Silicon Valley Bank collapsed under the weight of the losses on its bond portfolio, and the Fed opened a facility lending against Treasuries at face value, as if those losses did not exist.

Commentators also love to focus on public-sector debt. But this is only half the story; too much private debt slows growth, decreases tax receipts, and increases debt-servicing cost as a share of revenue, which in turn slows investment and growth, creating a vicious circle that can push the government into a debt trap – interest expenses outpace tax receipts, and the debt must rise just to pay the interest on it, eventually leading to bankruptcy. Conversely, when private debt levels and servicing costs are manageable, governments have more tools at their disposal to deal with a public debt problem.

Five ways out

The return to reality – closing the gap between the lies embedded in our prices and the reality of our scarce resources, our true wealth and our productivity – can take five forms. Each acts on one term of our napkin equation: it raises g, shrinks the debt itself, forces a surplus, or holds down r.

1. Growth, or earning back what we stole from the future: if the economy grows faster than the interest bill, the debt melts relative to the economy and nobody is robbed. It is the only painless path, and the rarest. Real growth comes from productivity, and a debt overhang is precisely what kills productivity: decades of cheap credit keep zombie companies alive and channel capital toward leveraging existing assets rather than creating new ones.
2. Default, or reneging on the promises made: the debtor tells its creditors it will not pay in full. Brutal, but honest in its own way: the loss is recognized at once, priced, and borne by those who lent. Greece did it in 2012, in the largest sovereign debt restructuring in history, imposing losses of more than half the face value of their bonds on private creditors. Argentina has done it nine times. Yet for a state that borrows in a currency it prints, outright default is a choice, not a necessity, which is why developed countries almost always trash their currency before defaulting.
3. Inflation, or inflating away the real value of these promises: the debt is repaid in full, in money worth less. Inflation lifts nominal growth, the g of our equation, and erodes the real value of every bond outstanding. But it only works as debt relief if creditors fail to see it coming, or cannot escape it; otherwise they demand higher rates, r catches up with g, and nothing is gained. When the public stops believing altogether, inflation turns into hyperinflation – Weimar in 1923, Zimbabwe in 2008, Venezuela in the late 2010s – and the currency itself goes up in flames.
4. Austerity, or telling the truth and starting to live within our means: cut spending, raise taxes, run budget surpluses until the debt is back under control. It is the honest path, and it works when it is chosen. In 1995, a few weeks after the Wall Street Journal had called Canada an honorary member of the Third World, Ottawa slashed spending, and its federal debt ratio was roughly halved within a decade. But voters rarely reward governments for announcing that the party is over, so austerity is more often imposed from outside – by creditors, by the IMF, by the bond market – than chosen from within, as the Greeks learned between 2010 and 2018.
5. Financial repression, or quietly transferring wealth from savers to debtors – first among them the state: keep interest rates below inflation by force of regulation, so that the debt shrinks in real terms year after year, and make sure savers cannot leave. This, far more than growth, is how the United States and the United Kingdom got rid of their war debts. The Fed pegged long-term rates from 1942 to 1951, deposit rates were capped, capital controls were the norm, and US federal debt held by the public fell from 106% of GDP in 1946 to about a quarter of GDP by the mid-1970s.

Each option is a different way to engineer a massive transfer of wealth, and each comes with its own political trade-offs. Default and austerity are swift and efficient, but their political cost is so astronomical that they are rarely chosen, and more often imposed. Inflation and financial repression, by contrast, are usually the path of least resistance – but a longer path, along which the victims must be kept trapped while they are fleeced.

As the saying goes: you can shear a sheep many times, but only slaughter it once.

Boiling the Frog

Of the five paths, financial repression is the one governments reach for first, because it is the only one that keeps r below g without anyone having to vote for it. Default and austerity need a decision, a culprit and a press conference. Financial repression needs a few technical amendments to prudential rules. It is the perfect lie: a tax that appears on no payslip and on no ballot.

Reinhart and Sbrancia document frequent negative ex-post real contractual interest rates in the postwar period. In their wartime-debt group, the share ranges from 28.0% of observed years in Belgium to 66.7% in the United Kingdom. The figure also reports the average real rate over all available years. Sample gaps and the distinction from bond total returns are explicit.

History tells us that three conditions are usually required to pull it off:

A crisis granting politicians extended discretionary powers;
A political consensus for large public spending once the crisis is over;
Demographic and wealth imbalances that make a transfer from one generation to the next politically profitable.

Nowadays, politicians have a wide variety of emergencies to choose from: pandemic, war, energy, trade, AI, etc. For instance, in 2025, on the back of the Russian threat and J.D. Vance’s Munich speech, Germany exempted defense spending from its constitutional debt brake and created a €500 billion infrastructure fund, while Brussels unveiled a plan to mobilize up to €800 billion for defense. As for the third condition, a generation priced out of housing by record asset prices has little sympathy for its parents’ savings.

The cyber incidents of 2026 offer another emergency. An AI agent accessed non-public files on Australia’s Medicare portal. AI-assisted research exposed critical flaws in PHP, software underpinning millions of websites, and attackers began targeting them. Axios reports US banks finding agents in accounts without bank approval. A genuine threat to savings could make tighter controls over payments and withdrawals easier to sell. Protecting our money could become the justification for deciding where we are allowed to keep it.

The method matters as much as the motive. Capping yields through the central bank’s balance sheet alone – yield curve control, Japanese style – has an obvious flaw: it hands the printing press to anyone willing to sell bonds to the central bank, and the currency pays the price. The more discreet method is to make savers buy the bonds themselves, through the institutions that hold their savings. Savings institutions are the diplodocus of the investment landscape: they are big, heavily regulated and lack agility. Insurers, pension funds and banks are already required to hold large amounts of government paper, and leaving them is slow and fiscally punishing.

French readers need not look far. Since the Sapin II law of 2016, a council chaired by the Minister of the Economy can temporarily restrict withdrawals from life insurance contracts, the main pillar of French household savings. On the other side of the Atlantic, the GENIUS Act of 2025 requires dollar stablecoins to be backed by cash and short-term Treasuries, turning the fastest-growing corner of crypto into a brand-new captive buyer of US government debt – a development the US Treasury has openly welcomed.

The hard part of the maneuver, however, is not forcing savings institutions to hold government bonds; it is preventing capital from fleeing. Capital controls need not be perfect to work; quite hermetic is often enough, and the prospect of heavy fines or prison keeps most regulated institutions in line.

One channel, however, escapes this logic, because it settles transactions outside the banking system altogether.

The life raft: Bitcoin in self-custody

Enter Bitcoin. It moves value across borders outside the purview of any financial regulator which, in a world of financial repression, makes it enemy number one.

Since the end of 2024, European platforms must check whether a self-hosted wallet belongs to their client before processing transfers above €1,000 to or from it. Since January 2026, under the DAC8 directive, they collect their clients’ transactions for reporting to tax authorities. Governments, especially in the EU, where the debt burden is the heaviest, are increasingly monitoring and closing the exits, one on-ramp at a time.

Bitcoin is an acephalous, distributed network that nobody can switch off. Holding bitcoin is, at bottom, holding a secret number. Sending it is broadcasting a signed message. Short of outlawing mathematics, speech or the Internet, there is little a state can do to stop someone who holds their own keys from keeping or exchanging their coins.

This is why self-custody is a necessity and not a luxury. Bitcoin left on a platform is a claim, another ledger entry, exposed to the same freezes as a bank account. Bitcoin in self-custody is property. In The Road to Financial Repression, a previous newsletter built on a similar thesis, Théo Mogenet called this “the crucial innovation in Bitcoin: the fusion of information and property.” Every other store of value fails a censorship test somewhere: real estate cannot cross a border, your shares are yours until your broker – or its regulator – decides otherwise, and gold is costly to move and easy to confiscate. A twelve-word seed phrase can be memorized and carried across any border.

Canadians learned this in February 2022. Under the Emergencies Act, invoked against the truckers’ protest, banks were ordered to freeze accounts without a court order, and platforms received a list of bitcoin addresses to blacklist. Coins held on platforms could be frozen; coins held in their owners’ own wallets could not. A federal court later ruled that invoking the Act had been unreasonable. The accounts had been frozen anyway.

Repression does not kill this demand, it creates it. When Nigeria’s central bank ordered banks to stop serving crypto exchanges in 2021, trading simply moved peer-to-peer. The harsher the financial repression, the sexier the exit from it. Adoption has always run highest where repression bites hardest – Argentina, Nigeria, Turkey, Venezuela – where nobody needs a lecture on what censorship-resistance is for. As our own financial environment comes to resemble theirs, our behavior will come to resemble theirs too.

None of this makes bitcoin a risk-free asset. Its price is volatile, and a crackdown on platforms can weigh heavily on it in the short run. But it changes the question worth asking. Not “will bitcoin go up?”, but “what is the probability that the path out of debt my government chooses runs through my savings?” If that probability is anything but negligible, then learning how to hold bitcoin yourself – how to keep your keys, move your coins by your own means, verify your own transactions – costs little, while its payoff, should repression come, is large.

That asymmetry is the whole trade.

ANATOMY OF THE FALL

Happy families are all alike; every unhappy family is unhappy in its own way.

– Anna Karenina, Leo Tolstoy

Most developed countries are over-indebted, but not all in the same way. Many depend on foreign creditors or face aging populations, while a few enjoy large savings or young populations; some carry manageable private debt, others heavier debt-servicing burdens; a handful matter geopolitically, most do not. They will therefore respond differently, and each will react to the others’ responses.

Japan offers a live demonstration. For years, the Bank of Japan capped bond yields near zero, a textbook instrument of financial repression. It formally abandoned yield curve control in 2024 and has been raising rates since – to 1.25% in September 2026, the highest level since 1995 – while ten-year government bond yields climbed close to 3%, a level unseen since 1996. Yet the yen kept sliding, to nearly 164 to the dollar this summer, until Tokyo and Washington launched a rare joint intervention to prop it up.

Each of these moves spills across borders: higher yields at home tempt Japanese investors, among the largest foreign holders of US Treasuries, to bring their capital back, pushing yields up elsewhere and draining liquidity from markets2; a weak yen undercuts Chinese and German exporters; defending the currency means drawing down foreign reserves.

Only by analyzing the game-theoretic (dis)equilibrium that emerges as each player wrestles with its own debt problem, and with the consequences of everyone else doing the same, can we hope to anticipate how it all unravels.

What is The Cost of Lies?

We won’t go on enumerating here the bottomless list of signals to watch, and the scientific or pseudo-scientific fields needed to study them. Instead, we will use this newsletter to share with our readers our analysis and the frameworks we rely on to form it in the first place.

We expect to have great fun doing so! If nothing else, we are living through incredibly interesting times. Periods like this one - in which the end of a debt cycle, the dawn of a new monetary system, the emergence of a new world order, the start of a paradigm-shifting technological revolution and the advent of Bitcoin, the greatest monetary revolution, all align - are unique in history.

For more than half a century, our monetary system has been the instrument of the biggest lie ever told: that we can eat our cake and have it too, that we can borrow from the future at no cost.

Every two weeks, we will show you the bill.

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The real Legasov never testified at the trial, and the line about the debt to the truth was written by the series’ creator, Craig Mazin. In August 1986, before the experts of the International Atomic Energy Agency in Vienna, Legasov had defended the official version, which put the blame chiefly on the operators. The truth about the reactor’s design came out later, in memoirs he dictated onto cassette tapes before taking his own life in April 1988, two years and a day after the explosion.

Interestingly, Sumitomo Mitsui DS AM’s Kunibe just sold its entire portfolio of French bonds amid concerns regarding the nation’s fiscal situation, and rotated into Bunds and JGBs. While the current situation in France is indeed concerning, the move by the Japanese fixed income investment firm is partially explained by higher JGB yields.
Source: Bloomberg

The Cost of Lies Manifesto