First, despite the denial that there is only one chance in a million that the US would do that, history strongly disagrees.
Let’s unpack this.
About Coupon Recut
At the beginning of the 19th century, the UK government carried out a major "recutting" (reduction) of its debt interest through a series of debt conversions, most notably in 1822 and 1824.
War Context
Following the Napoleonic Wars, the government sought to reduce the massive interest burden of a national debt that had reached roughly 200% of GDP. The primary mechanism used was to offer holders of high-interest debt (such as 5% and 4% annuities) the choice to either be paid off in cash or convert their holdings into new stock with a lower interest rate (typically 3.5% or 3%).
Debt Conversions
1822 (Vansittart's Conversion): Nicholas Vansittart, the Chancellor of the Exchequer, converted approximately £150 million of 5% stock into new 4% stock.
1824 (Robinson's Conversion): His successor, Frederick John Robinson, further reduced the interest on £75 million of 4% stock down to 3.5%.
1830 (Goulburn's Conversion): Another significant conversion occurred in 1830, further consolidating the move toward lower interest rates.
Solvency Concerns
With the debt at "astronomical" levels, reducing the annual interest payments (coupons) was essential for fiscal stability and to avoid the "national bankruptcy" that contemporaries feared.
The Take of This Poster
We are ALREADY in a coupon reduction. The Fed monetizing the deficit is ALREADY a coupon (and principal) recut, and as noted by both Jamie Dimon and Larry Summers, the inflation calculations are already far below the calculations used in the 1970s.
Anecdotal Evidence
Consumer confidence recently touched a historical low, and the population’s primary concern is prices.
(Coming Back to History) Market Consequences
The UK government’s reduction of interest rates (from 5% and 4% down to 3.5% and 3%) left investors with significantly lower returns on their "safe" government stocks. This forced capital into more speculative areas as people "chased yield."
Latin American Mining
Investors poured money into newly independent South American republics (like Mexico and Colombia).
Absurd Ventures
Speculation reached the point where companies were formed for bizarre schemes, such as a company famously noted by Clément Juglar that planned to "drain the Red Sea" to recover Egyptian gold.
Asset Inflation
Stock prices for these "bubble companies" skyrocketed; for example, Juglar recorded Anglo-Mexican mine shares jumping from £43 in December 1824 to £150 just one month later.
We have discussed in this post the impact of coupon recuts in more detail:
Graph Financials article on Gundlach and UK precedent
(Back to Today)
We already have the same coupon recut via monetization and distorted inflation calculations, and we have the space Minsky garbage doing the same, notably in rocket and space companies ahead of the SpaceX IPO.
(Coming Back to History)
Banking Instability and “Whipsaw”
As explained by Juglar and contemporary analysis, this environment created structural instability in the banking system:
Credit Expansion
To support the boom, the Bank of England and country banks significantly increased note issuance, with the Bank's note circulation rising by 25% between 1822 and 1825 while its gold reserves were actually falling.
(Bank reserves are always drained during an overheating phase if creditors cannot be forced to hold your debt.)
When the government announced the 1822 conversion (reducing the 5% stock to 4%), many investors—particularly those holding smaller "nest eggs" through provincial country banks—refused the lower rate. They demanded to be paid out in specie (gold) or cash rather than accept the new, lower-coupon stock.
Back to Today
Rinse and repeat: the external drain first, and the coupon reduction by other means, have the exact same impact on gold today, and since it is not at parity, its price flies.
Back to 1825
The Monetary Whipsaw
The debt conversion initially injected massive liquidity into the economy, but as the Bank of England eventually realized its reserves were depleted, it abruptly contracted credit in early 1825.
Systemic Collapse
This sudden tightening "whipsawed" the economy. In late 1825, a massive banking panic ensued, resulting in the failure of 93 private banks (roughly 15% of the market). The UK was famously described as being "within twenty-four hours of barter."
(Back to Today)
So massive speculation in absurd ventures has already started to deteriorate, visible in the Private Credit index BDCZ and also in fintech ABS securitization companies, whose bubble has popped. UPST, AFRM, SOFI, and CVNA are fighting the pop, throwing every trick in the book—index inclusion, stock splits—but despite that, they are still below their highs of Dec-Jan 2026 (though there is still a lot of short juice left).
The #BTC, $COIN, $PLTR, and $HOOD have also blown-off topped.
The bubble has now moved into derivatives of AI (memory) and some space absurdities (sounds like a Radiohead song), which are probably also in their own blow-off top sequence. Some ridiculously small space commodities companies look attractive as shorts during their blow-off sequence, which is necessary for the success of the ridiculously priced SpaceX. But remember that RIDICULOUS IS NORMAL in this phase of the cycle if you look at history.
Here is the bubble chart everyone loves.
In 2023, there were fears that credit would turn and that a normal purge of bad credit would occur, with some tensions in credit spreads and some gating in private equity. The combination of the AI boom and the move from Janet Yellen to tame the long end of the bond market gave a new impulse.
Private Credit is now in a more severe situation than in 2023. Unless we have another new technology boom, we shall have the normal liquidation cycle with further deterioration of credit.
Overheating
Overheating produces a choking cycle between commodities and the rate curve. This is well documented in history, including during the cotton embargo of the Civil War. I provided some historical data in this recent post:
https://graphfinancials.com/blog/gundlach-expects-a-reduction-of-ust-coupons-what-the-precedent-of-the-uk-of-the-1820s-tells-us
Broad-Based Rally Versus Spikes and Blow-Off Tops
The share of stocks above the moving average versus the stock market index at a new all-time high matters. A stock market in which all participants are rising does not need a few stocks to spike upward to push the average higher.
BUT, in a context of blow-off topping, you can simultaneously have many stocks that are tepid while the index continues to rise because the ones "blow-off topping" push the average upward.
I believe that is what is happening right now. Markets seem to be overbought, and I will let RSI specialists ponder that aspect. But the number of stocks above their moving averages is nowhere near the highs seen in 2021.
Context of Divergent Credit
The NDFIs are not looking great at all.
Credit spreads are absolutely not like they were in Jan 2025, when they were at their lows.
Next, we will discuss the banking deterioration apparent at American Express and talk about the losses starting to appear in banks due to their exposure to NDFIs. Those losses are mainly relevant as part of the “noose tightening” around this form of credit, more than as a systemic risk for the banking sector. Not all credit contractions result in a banking freeze like 1929 or 2008.
Without spoiling too much of the next posts, what Mr. Moreland at @BankRegData has done has been truly remarkable. Allow me to provide both attribution and free advertising, because his level of proficiency and focus on data are only matched by his easy-going attitude toward these topics. He digs into a rare level of granularity that you usually only see from people who have worked for many years inside banks, rather than observing them from the outside like capital markets analysts typically do.
Basically, the growth of NDFIs is now the second-largest area of growth since 2012.
And only three years ago, it was ranked only #12 in growth.
Delinquencies are supposedly “low.”
With a fudged ASC 820 accounting framework, of course.
That’s private credit, and we know from the Bank for International Settlements that this is where rotten credit has accumulated. Gundlach said so, we have highlighted many times the distorted incentives and accounting rules, and the BIS has been more polite, mentioning “weak companies with leverage” as the primary recipients of funding from private credit firms.
Now the losses are starting to appear, because defaults cannot be masked with mark-to-market valuations forever.
