The Day America Ran Out of Options

Added: 2026-05-23

[00:00:00]The new chairman of the Federal Reserve was just confirmed by the United States Senate and he is about to inherit three doors. Now, behind one is a crashed economy. Behind the second is a dying currency and behind the third is the end of American credibility and there is no fourth door. To understand why, you have to go back to a library on Madison Avenue in the autumn of 1907.

[00:00:28]For three weeks, I've been walking you through a trap closing around the United States. And if you've been with me, the picture is coming into focus. If you haven't, then stay with me because we need the full picture loaded before we get to those three choices ahead. Now, the straight of Hormuz is still closed.

[00:00:45]We are now over 12 weeks in. Roughly 20% of the world's oil has been off the market for the entire spring. Oil is over $100 per barrel and rising. And the inflation that everybody pretended was beaten last year is accelerating again.

[00:01:00]The latest core PCE print was the worst since 2022. But the impact of 3 months of expensive oil hasn't even fully been priced in to the data yet. And the man about to inherit this mess with the tools to deal with it is about to make a choice. A choice that every central bank chairman in history has faced. And when faced with this choice, every one of them made the same call.

[00:01:30]On the morning of October 22nd, 1907, a line of frightened New Yorkers stretched around the block at the corner of Fifth Avenue and 34th Street. They were holding bank books. They were waiting to pull their savings from an institution called the Nickerbacher Trust, the third largest trust company in New York, where they had collectively deposited what would today be the equivalent of about half a billion dollars. But by 12:30 in the afternoon, the trust had paid out everything that it had, roughly $8 million in cash, and then they locked the doors.

[00:02:06]The president of the Nickerbacher, a man named Charles Barney, walked home and three weeks later, he shot himself. Now, from the Nickerbacher, the panic spread.

[00:02:15]Other trusts faced runs. The New York Stock Exchange nearly closed because banks ran out of cash to fund routine margin trades. The Dow Jones had already lost almost half of its value over the preceding year. But here is the part that matters, the the part that built the world we are living in right now. In 1907, there was no Federal Reserve.

[00:02:36]There was no central bank. There was no entity in the entire United States whose job it was to step in and stop the financial system from collapsing on itself. And so, one man stepped in and did it. And his name is familiar to all of you. His name was John Peront Morgan.

[00:02:54]JP Morgan. He was 70 years old. He was semi-retired and at the time one of the wealthiest men alive. Now, when the panic broke, he was at a church convention in Virginia, but he canceled his plans. He boarded a special train back to New York, and he went to work.

[00:03:09]And for the next two weeks, he ran the rescue of the United States financial system out of his personal library on Madison Avenue. He gathered the heads of all the major New York banks and trusts to his home. He locked the doors of his library and told them they weren't leaving until they had pulled enough cash to backs stop the system.

[00:03:30]He personally examined the books of the troubled trusts and decided which ones were solvent enough to save and which had to be allowed to fail. He coordinated roughly $25 million in emergency loans, a staggering sum at the time. He sorted the wreckage in front of him into two piles. The patients he could save and the patients he could not save, he let die. And it worked. The panic was contained and the financial system survived. But take a step back and look at what just happened. The largest economy on Earth had just been saved from collapse by one elderly private banker doing triage out of his own library. Morgan held no charter, no mandate, no government authority. He had cash, credibility, and the willingness to use them. If he had been in Europe or if he had been sick, dead or simply uninterested in being a hero, the United States might have crashed in a way no one in this century has ever seen. Now, the country drew an obvious conclusion from this. They couldn't keep relying on one rich man to save it. And so, three years later, in November of 1910, a small group of men boarded a private rail car at a station in Hoboken, New Jersey. They were traveling under assumed first names, and they had been told to dress as if they were going on a hunting trip. They were carrying, however, drafts of a piece of legislation that the United States Congress had not even seen yet. The men were Senator Nelson Eldrich, an assistant secretary to the Treasury, and four senior bankers, including representatives from the House of Morgan and what is today City Bank. Their destination was a hunting club on Jackal Island off the coast of Georgia, owned by JP Morgan himself. The cover story was a duck hunting trip. The actual purpose was to draft in secret what would become the Federal Reserve Act.

[00:05:19]Three years after that meeting on December 23rd, 1913, President Woodro Wilson signed the Federal Reserve Act into law, a new institution that had the power to do on demand what Morgan had done by hand. When banks ran short of cash, the Fed could create new cash and lend it to them. When markets froze, the Fed could thaw them out. When the system needed liquidity, the Fed could produce it. And that is the founding mission of the Federal Reserve. It exists in its bones to prevent another Nickerbacher crash to do triage on the financial system in the moments when nobody else can. For over a century, it's done that job well. We've not had another 1907.

[00:06:00]Every panic since 1987, '98, 2008, 2020 has been met with the same medicine. The Fed steps in, creates dollars, and buys what no one else will buy. The patient stabilizes. But there is a question Morgan never had to ask in his library.

[00:06:17]What is the cost of providing this medicine to the financial system? Morgan saved the financial system in 1907 using cash, using gold, and using deposits.

[00:06:28]The wealth that he and his peers had already earned. He moved real money around. He didn't invent any. The Federal Reserve does not work that way.

[00:06:37]When the Federal Reserve steps in to save the system, it does so by creating new dollars. more or less out of thin air. Now, not figuratively, literally.

[00:06:45]The Fed types those dollars into the accounts of commercial banks, banks that did not have the money 5 seconds earlier, and the new dollars enter circulation. There is no printing press, right? There is a keyboard. There's no vault of gold back in the new dollars.

[00:06:59]There is only the promise that they will hold their value. Every panic the Fed has prevented since 1913 has added to the pile of those keyboard created dollars. Every recession, every banking crisis, every wobble in the bond market, every one has been met with another round of dollar creation. The pile has grown for over a hundred years. It is now an unimaginably tall stack of paper resting on an unspoken agreement that everyone will keep accepting it as wealth. And that distinction between Morgan moving around existing money and the Fed creating new money is this whole story. Because in May of 2026, the tower is starting to lean visibly.

[00:07:43]For 3 weeks, I've been walking you through that trap. And if you've been with me, the next 2 minutes will be somewhat familiar. But stay with me because we need to get the full picture before we understand the consequences in front of us. A couple of weeks ago, I put out a video called two wars where we laid out the visible war. That's the missiles, the carrier groups, and the straight of Hormuz that's been effectively closed since early March.

[00:08:08]And the invisible war and that's happening in a place where nobody films.

[00:08:12]Foreign governments hold roughly $9.4 trillion of US Treasury bonds. When the war broke out and oil ripped higher, some of those governments were forced to sell their American treasuries to raise the money they needed to buy oil on the open market. Now, when too many holders sell, the price of those bonds falls.

[00:08:32]The same as any asset. If there's more sellers than buyers, the price will fall. And when the price of a US Treasury bond falls, the interest rate the United States has to pay on new debt climbs. And at too high of an interest rate, the interest bill on America's $39 trillion of debt starts to compound on itself faster than the federal budget can absorb. Now, because the United States is funded by debt, like a consumer living on a credit card, access to more debt is the big determinant in this story. In another video I put out last week called the first domino, we looked at the first piece of real world validation that the Treasury market was in trouble. The United Arab Emirates, heavily dependent on selling oil through the straight of Hormuz, saw its cash flow shut off for over 12 weeks. Now, the UAE holds roughly $95.6 billion in US Treasury bonds alone, plus trillions more in its sovereign wealth funds. If the UAE had sold those treasuries to raise cash, it would have cratered the bond market. So, instead, what it did is approach Washington with a proposal.

[00:09:40]They said, "Help us or we'll crash your bond market." The UAE asked for an emergency short-term loan known as a currency swap line. But first, let me answer a question here. How does a country whose own government runs entirely on borrowed money? A country that requires other countries to lend it dollars every quarter to fund its own operation suddenly turn around and lend another country tens of billions of those same dollars on demand. The answer is keystrokes. When the Federal Reserve extends a currency swap line, the dollars on the US side of the trade are not pulled from a vault. They're not taken from taxpayers. They are typed into existence on a keyboard at the Federal Reserve in Washington. One moment they do not exist, the next moment they sit in an account at the central bank of the UAE, ready to be spent. No printing press, no physical paper, simple keystrokes. And that is how every currency swap line in modern history has been funded. The Fed conjures the dollars on demand, lends them out, and the leaning tower of all the dollars ever created grows by exactly that much. But here's the catch, though. If the borrower pays those dollars back at maturity, the loan comes off the Fed's books and the dollars that were typed into existence vanish from the system. So, there's no net growth in the money supply. The cycle closes cleanly. And to date, it's important to know that every currency swap line the Federal Reserve has ever extended has been paid back. But that history is built on a very specific group of borrowers. You see, until recently, the Fed's currency swap line network was restricted to a small list of qualified economies. The European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank. large, mature, stable institutions backed by countries that actually earn the dollars they borrow.

[00:11:38]But last year, that wall came down.

[00:11:40]Argentina, a country with one of the most volatile currencies on the planet and nine sovereign defaults in 200 years of history, was added to that list. And last week, the United Arab Emirates joined them. And on April 22nd, in a testimony before the US senators on Capitol Hill, Treasury Secretary Scott Bass confirmed that many Gulf and Asian allies had requested currency swap lines of their own, and he defended the practice as protecting dollar liquidity in stress scenarios. The longer the list of countries borrowing emergency dollars, the higher the probability that the terms on those loans get adjusted to meet the borrower where they're at. In banking, we call this amend, extend, and pretend. You amend the terms of the loan to extend the maturity date and pretend everything is going to be fine. Loans get extended. New ones replaced.

[00:12:36]Maturity dates slide further into the future. The created dollars stop vanishing. They start accumulating. So, the trap that we've been describing for 3 weeks here on the channel is not theoretical. It's binding. And it's about to land on one man's desk. and his name is Kevin Worsh. On Wednesday, just last week, the United States Senate confirmed Kevin Worsh by vote of 54 to 45 as the next chair of the Federal Reserve. When Kevin Worsh walks into JP Morgan's founding role, and it will be within a matter of weeks, he is going to inherit the most consequential job in global finance at the worst possible moment to inherit it. He'll be taking over from Jerome Powell. Now, he's going to have to walk the United States through one of three doors. All three cost the country something that it cannot really afford to lose. Let's run through all three. Door one, save the dollar. First of all, stop creating new dollars and raise interest rates. Defend the value of the currency. Now, higher interest rates makes US debt more attractive to foreign buyers. When foreigners come back to the auctions, the Federal Reserve doesn't have to step in and create new dollars to absorb the bonds that nobody else wants because higher interest rates incentivize other foreigners to buy that debt. So fewer dollars means less inflation and less inflation means the currency holds its value. A currency's value, like the value of anything else, is set by supply and demand. So scarce, expensive money, holds its value better than abundant, cheap money. And this is the textbook play for any central bank facing a weakening currency and rising inflation.

[00:14:16]But it crushes the economy underneath it. And this is exactly the playbook that Fed Chairman Paul Vker ran in 1980.

[00:14:25]You see, Voker walked into the Federal Reserve building in August of 1979 with a few things going on. American inflation had risen above 11% and it was climbing. The dollar had been losing value for a decade. Washington had been printing money to pay for the Vietnam War and the Middle East had delivered two oil shocks in the last 6 years.

[00:14:48]Americans were beginning to lose faith in their own currency. Does this sound familiar? Now, what Vulker did is he decided the only way out was to defend the dollar and break inflation. So, he raised the federal interest rate to 20%.

[00:15:03]And it worked. He crushed inflation. The dollar strengthened against every major currency on Earth. But the cost was brutal. Two back-to-back recessions.

[00:15:13]Unemployment hit nearly 11%. Farms went bankrupt by the thousands. Homebuilders began mailing Vulker pieces of 2x4 lumber inscribed with the names of the construction workers they had laid off.

[00:15:27]And he received so many death threats that he was assigned a secret service protection detail. Hard as it was though, the economy could afford the cost because American federal debt in 1980 was only 30% of GDP. Today, it's 122%.

[00:15:47]The annual interest bill on existing US debt is already over a trillion. If Kevin Worsh raised interest rates the way Voker did, the interest bill wouldn't double. It would quadruple. The American public, in addition, in 2026, is far more sensitive to interest rates than it was in 1980. Today, housing is leveraged, commercial real estate is leveraged, private equity is leveraged, corporate America has trillions of dollars of debt coming due in the next 3 years that will have to be refinanced at whatever rate lets the system find. So door one saving the dollar by making rates high and dollars scarce triggers a fast death of the American economy. So I would guess he's probably not going to walk the country through door number one. Okay. Door number two, save the bond market. Effectively the opposite of door number one. In this scenario, Kevin Worsh would create enough new dollars to absorb the bonds that nobody else wants.

[00:16:47]Keep funding the American government and keep the economy running. And this is the playbook the Fed has been running in different costumes since 2008. It's the playbook behind every round of quantitative easing. It's the playbook behind every swap line, every emergency facility, every dollar typed into a bank's reserve account to soak up treasuries no foreign creditor will buy at today's prices. And it works. Rates don't have to climb to the true market value because the US prints money and buys its own surplus debt. So the interest bill stays manageable. The lights therefore stay on. But every dollar created this way is one more layer on that leaning tower. The supply of dollars goes up and the value of each dollar goes down. At the grocery store, at the gas pump, in the mortgage payment, in the price of a child's school year, each round of printing pushes another layer of inflation through the American economy. And wages, they don't keep up. Savings shrink relative to what they can buy. Fixed income retirees watch their purchasing power evaporate. The Americans who already own assets, however, stocks, homes, gold, they get richer in nominal terms, but the Americans that don't get poorer in real terms. So, door two saves the bond market by killing the currency.

[00:18:11]If door one is a fast death, door two is a slow death, a problem for another day, a problem that can be disguised as something else. And quite frankly, that is always a politician's first choice.

[00:18:25]And because most people don't understand how inflation actually works, they don't know who to blame for it. They can feel the price of groceries climbing. They can feel the rent going up. They feel their paycheck shrinking, but they can't trace the cause back to a decision made at their Federal Reserve months or years earlier. And so the politicians point blame. They blame corporate greed. They blame foreign countries. They blame immigration. They blame the previous administration. But conspicuously, the central bank is almost never on the bad guy list. Now, let's have a look at DOR 3, the dark horse. Now, this is a bit of an outlier because it's actually outside of the Fed's control, but still would impact the decisions that Kevin Worsh will have to make dramatically, so it's worth covering. In door three, the dark horse, the United States ends the war with Iran. They walk away. They let Hormuz reopen. They let the oil price come down. They let the pressure on the system release. Now, this is obviously, like I said, not the decision of Kevin Walsh, but it is worth covering nonetheless because this is the door where the underlying cause of the pressure goes away. If oil drops back to $60, inflation will eventually cool on its own and the Treasury auctions might normalize. But the price of Door 3 is not paid at the Fed. It's paid in American credibility. Let me explain.

[00:19:51]Although if the Americans were to withdraw from Iran on Iran's terms, although there would be a marketing spin back home to convince the American people that somehow this is mission accomplished, the rest of the world would see what really happened. The United States started a war and then was forced to retreat. And every adversary the United States has, Beijing watching Taiwan, Moscow watching NATO, and every smaller power watching whether American security commitments are worth the paper they're printed on, updates its estimate of what Washington can actually accomplish.

[00:20:27]Because you have to remember something.

[00:20:28]The dollar's premium as the world's reserve currency rests in the end on a single belief and that is that the United States can project force globally and back its commitments. But if you take that belief away, foreigners are going to hold fewer dollars, fewer treasuries, and demand higher returns for the ones they still buy. Door 3 saves the dollar in the technical sense, but destroys the foundation that it stands on. Now you might be asking why only three doors, right? What about raising taxes, defaulting on the loans, restructuring the debt? Look, every alternative is just a subvariant of one of the three above. Every move the Federal Reserve and the Treasury can make either creates dollars, destroys them, or removes the pressure forcing the choice in the first place. There is no fourth door. So three doors. One of them, door one is the fast death. It breaks the bond market and the economy in weeks. Two of them, doors two and three, the slow deaths weaken the dollar over years. Now, here is the rule I want you to remember because it is the most useful single piece of knowledge I can give you for the decade in front of us.

[00:21:40]Every central bank in history when forced to choose between a fast death and a slow death chooses the slow death every single time without exception. A failed Treasury market is a fast death.

[00:21:55]The financial system stops working in days. The federal government cannot fund itself, so banks fail. Pensions seize up. Markets repric everything at once.

[00:22:05]But a weakening currency, that's a slow death. That's inflation. Erosion of your purchasing power. Foreigners gradually back away. Asset prices climb in nominal terms while purchasing power drains away in the background. But it plays out over years, not days. It hurts everyone, but it doesn't happen all at once. When JP Morgan sat in his library in 1907, he made the same choice. He saved the institutions whose failure would have crashed the system next week. And he let the weaker institutions fail in slow motion over the months that followed.

[00:22:38]That's what triage is. You treat the fast threat first and accept the slow loss as the price. The Federal Reserve has run that playbook for over a century and it's going to run it again. Worsh is going to open door two. Why? It's because of the desk he will be sitting at. It's the same desk where Jerome Powell sat in 2020, where Ben Bernani sat in 2008, where Alan Greenspan sat through 1998. And every one of them faced a version of the same choice, and every one of them made the same call.

[00:23:10]They saved the patient bleeding out in front of them and pushed off the patient with the slow disease. The dollar is the patient with the slow disease. Now, Kevin Worsh may dress it up. He may call it something else. He may stretch out the timing, but when forced to choose between a failed Treasury market and an unfunded government or a dollar that loses 30% of its purchasing power over 5 years, he will save the Treasury market and fund the government. And if you understand this, like really understand it, with the mechanics under your fingers and history at your back, you stop being surprised by what is coming.

[00:23:53]You stop trying to time the market. You stop arguing about whether hormuz will open this month or next. And instead, you position yourself for the slow death. And that means hard assets, commodities, gold, energy, real things, productive assets that throw off cash, industries that don't depend on a strong dollar to make their numbers. JP Morgan saved the United States in 1907 with real money, with gold, deposits, hard wealth he and his peers had earned over lifetimes. He could not have imagined the system in which dollars were typed into existence on keyboards to plug the holes in the bond market. He would not have understood it and he certainly would not have trusted it. 119 years later, that is the system that we have.

[00:24:42]And the man on top of it is about to make the only choice central banks ever make. The question is not what will he do. The question is whether you saw it coming. Now, let me ask you an honest question. What am I missing? Let me know in the comments below. My name is Jay Martin and this is the J Martin show. If you enjoy my content, we publish here every single week. Do me a favor, hit like, hit subscribe, but most importantly, share this video with somebody who needs to see it. That's all for today. I'll see you next week.