What happened when the insolvent government of the UK in the 1820s did the same?
This can give us important insights, as Mr. Gundlach is expecting exactly that for the US:
a probable coupon cut on US Treasuries.
https://www.youtube.com/watch?v=w70pXOAtxE0
In the historical episode described, the UK government—burdened by excessive debt, largely as a result of fighting the Napoleonic Wars—chose to reduce the coupon on its obligations. What is interesting is that it resulted in a similar outcome to the current debasement policies of the US, as the US central bank is in a process of deficit monetization.
Investors, dissatisfied with declining real yields, began reallocating in search of better returns. This shift triggered a broad-based expansion in risk-taking. Capital flowed into increasingly speculative ventures, many of which lacked solid fundamentals.
Juglar notes that, as a result of this reduction in real yield (using a reduction of coupon instead of debt monetization and deficit monetization, as is the case currently in the US):
In 1) people were yield-seeking.
And that is exactly what the BIS described as “yield seeking as a result of yield repression.”
In 2) a prosperity a lot more apparent than real ensued.
(Wealth effect of the stock market for the 10% responsible for 50% of consumption—does it ring a bell for anyone?)
And plenty of Minsky garbage projects got funding which should not have been. “Whatever absurd.”
Those projects might have been as quoted in the text.
Remember the recent SPAC boom?
In 3) bad paper enters the circulation. In other words, this excessive speculation and yield-seeking give rise to absurd projects getting funding.
Remember what the BIS wrote about the profile of companies getting funding via private equity?
Well, that’s exactly what Juglar describes: “The worst paper enters the circulation.” This is particularly similar to the 2007 situation rather than today’s, because subprime, bad-quality paper entered the interbanking market and repo.
The bad paper, as we explained in previous episodes, is more concentrated in private equity, which is a less severe problem than in 2007 because it is not funded by deposits on sight, but with quarterly redemption, so we do not have a bank run risk like in 2007. And the paper is not layered in the interbank market.
But a second aspect is important: the recutting of the coupon, hinted at by Gundlach—which did occur in the 1820s in the UK—led to instability in the banking system. Today, we have instability in the repo market due to crowd-out and excess issuance of government securities.
The recut on UK gilts was met with investors rejecting the new, lower-yield bonds. They demanded repayment (cash or equivalent), which is economically equivalent to a sale. The system cannot absorb this smoothly, so the BOE injects liquidity (via discounting/advances). That liquidity enters circulation as banknotes/credit.
The coupon reduction triggered a collapse in demand for government debt. At lower yields, investors simply refused to hold the same quantity of bonds, leaving a structural excess of supply. The Bank of England filled that gap by injecting liquidity—effectively replacing missing demand with balance sheet expansion.
It is happening again today, with an imbalance of supply and demand for US securities in hedge funds via the Cayman Islands, and the Fed has to monetize this excess of government deficit. Since December 12th, 2025, the Fed has had to address this crowd-out that is leaking into the repo market.
If Mr. Gundlach is correct on the recut, we could see both of the same situations happen: some yield-seeking into other asset classes and yet more second-order effects, instability, and the Fed forced to monetize more.
However, this situation eventually results in degenerate credit, which leads to credit instrument destruction. The level of redemption is severe, and the BDCZ (Private Equity Index) seems to indicate strain there.
As per deterioration of credit quality and divergence with public credit spreads.
An interesting aspect is the link with overheating and gold outflow (in a fixed parity system), but in a floating parity system it happens as well, however with a spike in price. The gold outflow corresponds to overheating of credit, loss of terms-of-trade competitiveness, and settlement of the trade imbalance in gold.
In the Bretton Woods II system, the G7 were forbidden from settling their excess USD for gold and had to keep that trade surplus in USD, recycled into UST, this being accentuated with energy strictly defined as oil and gas.
The situation with China is altered. Not only does China perform a traditional external drain by converting its excess USD into gold (they do not care about the US prohibition), but they are also redefining what is energy, since EV transportation is now cheaper in many parts of the world for cars and trucks compared to ICE, accelerating a process that has long been in progress.
And the same thing is happening with electricity, with renewables not requiring USD-denominated fuels.
Gold outflow and price spikes abating with credit contraction.
And the gold outflow abating with a credit contraction. We have seen that in 2007, with a spike and speculation in a lot of commodities FIRST.
…before a deflationary plunge.
Eventually, with the credit crisis, the massive terms-of-trade imbalances correct with internal deflation. And that is what Juglar highlights. The gold requests continued, but the terms of trade turned favorable for the UK, and from that point on, the metallic reserves improved.
What that means in the current context is that if trade imbalances are reduced, a credit contraction occurs, and the US is considering austerity at the same time, then the situation for gold can change.
What is different this time is that we have a large and constant government budget deficit, stimulus/deficit, and monetization. If a credit deceleration is left unattended, or if an even more radical situation occurs where the government decides to shift to austerity—like the government of McCulloch, which decided to contract the currency and balance the budget after the money printing of the Civil War—then a deflationary situation and a steep rise of the currency versus gold and commodities would occur. It happened post–Civil War.
The same situation occurred with Warren G. Harding, who, post–WWI, decided to cut government expenditures. This evidently resulted in a short bout of deflation until the May 1922 Resolution 9 of the Genoa Convention created a QE by forcing central banks to accept both the USD and GBP as reserves (with the mistake of keeping convertibility at the worst moment, at a pre-WWI, far too low price).
We are not at all in this austerity situation, but Mr. Gundlach has hinted that the bond market could force the end of the government if the 30-year bond does not cooperate.
https://www.youtube.com/watch?v=w70pXOAtxE0
The other problem he sees is base rates not falling in economic weakness.
In summary, the pattern of trying to cheat on government debt obligations results in a flight into an everything bubble, followed by the formation of bad credit, and the party ends when this bad credit really sours. That’s what we can learn from Juglar.
RINSE/REPEAT