James Lavish: the Debt Spiral Has Begun

The Bond Market Is Pushing Back

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For years, investors were told the U.S. Treasury market was the safest place on earth.

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It was the anchor. The collateral. The foundation beneath the global financial system.

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When stocks crashed, Treasuries were supposed to rally. When panic spread, capital was supposed to run into U.S. government debt. When uncertainty rose, the world was supposed to buy America’s paper.

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But James Lavish believes something has changed.

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On the latest Pinnacle Digest Podcast, Lavish warned that rising bond yields may not be a temporary market tantrum. They may be the early signal of something far more dangerous: the beginning of a classic debt spiral.

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“This is the classic debt spiral,” Lavish said. “We’ve seen it play out before in other countries. We just haven’t seen it in the U.S. yet.”

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That is the revelation at the center of this conversation. The problem is no longer just inflation. It is no longer just Federal Reserve policy. It is no longer just whether the Fed cuts rates or holds them higher for longer.

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The problem is that the bond market itself may be starting to demand a higher return for lending to governments that are already drowning in debt.

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And if the bond market demands more yield, Washington’s math gets worse.

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Higher interest costs widen the deficit. Wider deficits require more borrowing. More borrowing creates more Treasury supply. More supply forces bond buyers to demand even higher yields.

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The loop begins to feed on itself.

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The Era of Free Money Is Over

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Lavish traces the current stress back to the massive policy response after the lockdowns, when governments and central banks expanded liquidity at historic speed. According to Lavish,

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“The chickens are coming home to roost.”

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He points primarily to the money printing and deficit spending that followed the Covid crisis.

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The U.S. is not alone. Lavish noted that yields have been rising across major economies, including the United Kingdom, Germany, and Japan. But the U.S. matters most because Treasuries sit at the center of the global system.

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According to the Congressional Budget Office, the U.S. federal budget deficit is projected at roughly $1.9 trillion in fiscal 2026, while federal debt is projected to rise toward 120% of GDP by 2036.

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The U.S. Treasury’s own public debt data shows the scale of the machine that must constantly be refinanced. Every month, the government publishes the outstanding debt, marketable debt, non marketable debt, and other obligations sitting on the federal balance sheet.

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Lavish’s core argument is brutally simple: the Treasury has to keep issuing debt. But the more debt it issues, the more skeptical bond buyers become.

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“The bond buyers are very aware that these central banks are managing the deficits,” Lavish said.

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That one sentence captures the whole problem.

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Investors are no longer simply lending money to a government with a clean balance sheet. They are lending money into a system where deficits are structural, interest costs are rising, and the central bank may eventually be pressured to intervene again.

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That is why Lavish believes bond buyers are demanding compensation.

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They are not just pricing interest rates. They are pricing currency debasement.

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The Fed Does Not Control the Rate That Matters Most

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One of the most important moments in the interview came when Lavish explained the difference between the Fed funds rate and the 10 year Treasury yield.

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The Fed can lower overnight rates. It can talk about policy. It can signal dovishness. But mortgages, auto loans, credit cards, corporate debt, and much of the real economy are tied more closely to longer term Treasury yields.

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“The bond market itself is the one that’s setting that rate,” Lavish said.

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That matters because it means the Fed is not fully in control.

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If the 10 year Treasury yield rises because investors demand more compensation for inflation, deficits, and debt supply, the Fed can cut short term rates and still fail to bring borrowing costs down across the economy.

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This is where the system becomes dangerous.

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If long term yields rise too far, they can compress corporate margins, pressure valuations, raise mortgage rates, slow housing, and hit consumer credit. Lavish warned that if yields spike hard enough, something in equities or credit could break.

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Reuters recently reported that inflation, fiscal deficits, and geopolitical stress have challenged the traditional role of U.S. Treasuries as portfolio hedges. The report noted that the 30 year Treasury yield moved above 5%, while the correlation between S&P 500 returns and Treasuries reached its highest level in more than two decades.

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That is a major shift.

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Treasuries are supposed to stabilize portfolios during equity weakness. But if bonds and stocks begin selling off together, the old safe haven playbook starts to crack.

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The Only Play Left

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Lavish believes if yields rise too far, policymakers will eventually reach for the same old tool: liquidity.

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“They’ll come up with some brand new acronym,” he said.

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The name may change. The mechanism may be dressed up. It may be called a buyback program, a liquidity facility, a market functioning tool, or something else entirely. But Lavish argues the essence is the same: the government and central bank will find ways to inject money into the system.

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He was especially critical of Treasury buybacks, arguing they are not as benign as they sound.

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“There’s nothing regular about a Treasury buyback,” Lavish said. “It’s just a little bit of a shell game.”

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His point is that when policymakers intervene to suppress yields or improve market functioning, they may also increase liquidity. And when more money enters the system, asset prices can rise in nominal terms.

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Gold. Silver. Bitcoin. Houses. Stocks. Real estate.

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Lavish does not view that as true wealth creation. He sees it as a mirror.

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“They’re actually a mirror reflecting the debasement of the dollar,” he said.

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That line may be the most important quote in the entire interview.

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Because to Lavish, rising asset prices are not always proof of prosperity. Sometimes they are proof that the unit of measurement is being weakened.

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The Great Debasement

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Lavish laid out two possible paths.

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The first is a major credit event, where policymakers are forced into what he called “the big print.” In that scenario, the next crisis could demand more money creation than the last one.

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“They won’t print $5 trillion,” he warned. “They’ll print $10 trillion, $15 trillion.”

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The second path is less dramatic, but perhaps more insidious. He called it “the great debasement.”

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That would mean the system avoids an immediate collapse, but only by relying on constant behind the scenes liquidity. The economy keeps moving. Asset prices keep levitating. The debt burden is managed with more dollars. But the currency loses purchasing power over time.

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Lavish described it as a system that “papers over the fact that we’re living on borrowed time and debt.”

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That is the tragedy of the debt spiral. The crisis does not need to arrive all at once. It can arrive slowly, through inflation, debasement, and the steady erosion of purchasing power.

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Gold, Bitcoin, and the Search for a Real Anchor

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Lavish remains constructive on hard assets, but he also warned that gold and silver had become caught in what he called a “hot ball of money.”

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Capital has chased one theme after another: crypto, artificial intelligence, mega cap technology, gold, silver, and other speculative trades. Lavish believes gold was due for a repricing, but also thinks it got ahead of itself in the short term.

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Still, his long term view is clear.

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“When we start debasing hard again, I fully expect gold to take off,” he said.

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The independent data helps explain why gold remains central to this story.

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World Gold Council data shows total gold demand in 2025, including over the counter demand, exceeded 5,000 tonnes for the first time. The value of total demand reached a record US$555 billion, up 45% year over year. Global gold ETF holdings also grew by 801 tonnes, the second strongest year on record.

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Lavish also connected gold demand to a broader geopolitical shift. After Russian assets were frozen following the invasion of Ukraine, he argued that many countries began rethinking their reliance on U.S. Treasuries.

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His view is that the freezing of Russian reserves sent a signal: Treasury ownership could be politicized.

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Whether one agrees with that view or not, the direction of central bank gold demand has been unmistakable. World Gold Council data shows central banks added more than 1,000 tonnes of gold in both 2022 and 2023, with 2022 marking a record and 2023 the second highest annual purchase in history.

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For Bitcoin, Lavish’s argument is different. He remains deeply bullish, but believes broader understanding is still limited.

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“Bitcoin is difficult to understand for the first time,” he said. “It is different than gold. It is different than stocks.”

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That is both the opportunity and the obstacle. Bitcoin may be designed as hard money, but Lavish believes it will not be viewed as the ultimate base asset until more people understand what they own.

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Stablecoins as the New Treasury Buyer

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One of the more fascinating parts of Lavish’s thesis is the role of stablecoins.

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If foreign central banks are buying fewer Treasuries, and if traditional buyers are demanding higher yields, the U.S. needs new pockets of demand.

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Lavish believes stablecoins could become one of those pockets.

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“If we have fewer central banks buying U.S. Treasuries,” he said, “we’ve got to find pockets of capital somewhere.”

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That is where Tether and other dollar backed stablecoins enter the story. These issuers often hold short term U.S. Treasury bills as reserves. In effect, global demand for digital dollars can become demand for U.S. government debt.

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Tether reported that as of March 31, 2026, its direct and indirect exposure to U.S. Treasury bills was approximately US$141 billion. The company described its reserves as primarily allocated to short duration, high quality liquid instruments.

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This supports Lavish’s point. Stablecoins are not just a crypto story anymore. They are becoming part of the Treasury demand story.

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If someone in a high inflation country wants access to digital dollars, and that stablecoin issuer backs the token with Treasury bills, then a person with a phone can indirectly support demand for U.S. government debt.

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That may not solve the debt problem. But it may help explain why policymakers are increasingly interested in regulated stablecoin infrastructure.

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The ETF Risk Nobody Wants to Talk About

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Lavish also warned about another hidden risk: the way modern investors buy and sell the market.

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For years, passive investing has trained millions of investors to simply buy broad index ETFs. That strategy has worked extremely well. But Lavish worries that the structure could intensify a selloff if sentiment turns. According to Lavish,

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“ETFs buy indiscriminately.”

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When money flows into an index ETF, the fund buys the index according to weight. When money flows out, it sells the index according to weight. Investors are not selling a few individual holdings. They are selling the basket.

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Lavish warned that in a crash, that can create a cascading effect.

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This does not mean ETFs are bad. It means market structure has changed. The same tool that makes investing simple on the way up can accelerate liquidation on the way down.

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This matters because Lavish believes inflation has forced people to take more risk. Cash loses purchasing power. Housing feels unattainable. Young people feel squeezed. Investors are pushed toward stocks, crypto, speculation, and risk assets because doing nothing feels like falling behind.

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That is how inflation changes behavior. It does not just raise prices. It changes psychology.

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The Four Door Problem

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Near the end of the interview, Lavish returned to the fundamental problem.

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How does a country escape a debt trap?

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He described four doors.

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Door one is austerity. Cut spending, reduce programs, and force the government back toward balance. Lavish does not believe that is politically realistic.

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Door two is raising taxes. But he warned that aggressive tax hikes can damage productivity, investment, and small business formation.

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Door three is default. But a country issuing debt in its own currency has little incentive to outright default when it can print.

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That leaves door four.

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“Print more money, buy your own debt, and keep the engine going by debasing,” Lavish said.

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He called it a “daily default.”

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Not a sudden default. Not a missed payment. Not a dramatic announcement from the Treasury.

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A quiet default through purchasing power destruction.

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If the government borrows $100 and pays back $100 years later, but that money buys far less, the creditor has technically been repaid. But economically, the value has been eroded.

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That is the debt spiral in its most subtle form.

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Why This Matters for Investors

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Lavish is not predicting an immediate collapse of the dollar. In fact, he believes confidence in the U.S. dollar remains extraordinarily strong around the world.

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That is important. The dollar still has deep liquidity, global trust, military backing, institutional power, and unmatched network effects.

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But his warning is that the system does not need to collapse for investors to lose purchasing power. It only needs to continue debasing.

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That is why the Treasury market matters so much.

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If yields rise, the debt burden worsens. If policymakers suppress yields, liquidity may return. If liquidity returns, asset prices may rise. But if asset prices rise mainly because money is being debased, investors must ask a harder question.

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Are they getting richer?

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Or are they simply watching the dollar get weaker?

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That is the revelation Lavish brings to the conversation.

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The bond market is no longer background noise. It may be the market forcing every other market to reprice.

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Stocks. Gold. Bitcoin. Real estate. Energy. Currencies. Treasuries.

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Everything now revolves around one question:

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How long can the U.S. finance itself without debasing the currency faster than investors can protect themselves?

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James Lavish is not warning about a single bad auction or one ugly day in the bond market.

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He is warning about a system where the math is becoming harder to hide.

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Deficits are massive. Interest costs are rising. Foreign demand is shifting. Central banks are buying gold. Stablecoins are becoming Treasury buyers. Investors are being pushed further out the risk curve. And the Fed may eventually be forced to choose between defending the currency and financing the government.

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That is why rising yields matter.

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They are not just numbers on a screen.

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They may be the first visible cracks in the foundation of the entire financial system.

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