War embargoes trigger a recurring cycle: supply shocks drive price spikes, speculation surges, trade routes shift, and liquidity tightens. The Civil War cotton crisis mirrors the 1970s oil shocks and today’s energy markets—featuring demand destruction, falling real incomes, and cost-push inflation. These booms end in crashes, as capital misallocation and banking stress unwind the speculative excess.
In the 1820s, post-Napoleonic UK cut gilt coupons. Investors, denied real yield, chased returns in speculative ventures, funding dubious projects. Gilt demand collapsed, causing banking instability; the Bank of England injected liquidity. Today's parallel: US yield repression fuels risk-taking, lower-quality credit, Fed monetization. Gundlach warns a Treasury coupon cut could repeat this: yield-seeking bubble, credit deterioration, contraction. Lesson: cheat on debt, get a bubble, then a bust.
The Minsky clean-up is not unique to today or the US. A similar dynamic occurred in the UK in 1825 after post-war debt led to changes in gilt coupons. Today’s SPAC boom echoes past speculative excesses. As always, the cycle turns when credit tightens. Cutting gilt coupons has two key effects: it shifts relative yields and disrupts credit markets.