00:00Financial crises have long followed the same pattern.
00:03Asset prices fall, collateral loses value,
00:07lenders then pull back and forced selling begins,
00:10and the system collapses into what economists sometimes refer to as a debt spiral.
00:16In 2008, collapsing home values triggered a chain reaction of margin calls
00:21and liquidations across the financial system.
00:24But a new financial architecture is being born.
00:27It's being redesigned so that these spirals can be avoided.
00:32Ever so quietly, central banks and policymakers are exploring a new financial system
00:38built around a tokenized unified ledger and 24-7 markets.
00:44Institutions like the Bank for International Settlements have been studying and reporting
00:49on how a unified ledger could allow assets, payments and collateral
00:54to move across the same digital infrastructure in real time.
00:58In this system, collateral values are visible instantly.
01:02Marginal requirements can be adjusted continuously,
01:05and markets operate continuously around the clock.
01:09Instead of sudden shocks triggering panic selling,
01:12prices and leverage are meant to then adjust gradually.
01:16They realize that the risk of sudden crises can be managed via continuous liquidity adjustments.
01:24And that shift could fundamentally change how governments sustain large debt loads,
01:31especially if short-term sovereign debt, such as treasury bills,
01:35becomes the core collateral asset circulating through the entire digital tokenized ecosystem.
01:43So let's explore why debt doom loops occur in modern finance
01:48and how central banks hope to avert such a scenario via a tokenized unified ledger.
01:54Firstly, let's explore the common concept of a debt spiral in this flow diagram.
02:00Now, in our excessively indebted world, any market shock can trigger a market panic,
02:06which can in turn encourage a bond market sell-off, for instance.
02:10Yields then spike, of course.
02:13Now, we saw this last April with the tariff announcements, which triggered massive volatility.
02:18The impact with regard to sovereign debt then becomes a big spike in yields,
02:24causes a massive increase in refinancing costs,
02:28which causes, of course, the fiscal situation to deteriorate further.
02:33And the cycle can then really accelerate downwards,
02:37forcing the central bank to buy up more sovereign debt via quantitative easing.
02:42Now, we can think of this as a little like a boiler,
02:46which has no thermostat and no warning indicators.
02:50The home may begin to overheat and eventually the pressure grows too great,
02:55causing an eventual blowout.
02:57So we can see this process in a little more detail in this graphic,
03:01which just illustrates the whole logical sequencing of such a debt doom loop.
03:07Credit, that is, debt, expands firstly.
03:11Asset prices then rise.
03:12As collateral values increase, that encourages more borrowing
03:16and higher leverage or indebtedness using those assets as collateral.
03:22So the system is heating up.
03:24Going back to 2008, this occurred via over-leverage in the housing market, of course.
03:30And the end of fixed-term low interest costs help to actually contribute towards a sudden inability
03:38to be able to adequately service the ongoing interest costs attached to those home loans.
03:45See the movie Big Short.
03:47Now, when a shock occurs then, forced selling takes place and asset values fall.
03:52This weakens balance sheets of individuals and companies as their net assets position deteriorates.
03:58Credit is then tightened and the sell-off then accelerates.
04:03In essence, falling prices create more falling prices.
04:07The boiler has exploded and brought the house down.
04:11Yet the new financial architecture promises to solve this issue of overheating
04:16and debt crises through continuous collateral stabilisation.
04:21Now, those assets that have been pledged in order to receive borrowing
04:25receive ongoing real-time valuations.
04:28If you have a mortgage app, check your account.
04:31It will probably now have an estimated valuation which has been updated to current conditions
04:37which is now attached to the property and the loan.
04:40So collateral values are already being updated to reflect real market values.
04:46Now, in this tokenized system, lending rules can be adjusted automatically
04:50and gradually as prices move in real-time.
04:54Now, this helps to prevent sudden sell-offs via continuous adjustments.
04:59No more large emergency payments that are actually needed.
05:03Well, at least that's the principle, of course.
05:06So this system is representative of a house full of smart thermostats
05:11independently adjusting room temperatures and talking continuously to the boiler,
05:18easing its output or shutting it down when necessary.
05:21In effect, it's programmable, administered, monitoring and automated adjustment.
05:28So let's just understand this cycle.
05:30Assets are tokenized, making them embedded with information about the asset
05:36and rules encoded via smart contracts,
05:39which govern the behavior of the token and the margin requirements.
05:44The assets themselves are entirely visible by the regulators of the unified ledger architecture.
05:50So that's governments, central banks and regulators.
05:53So this means continuous margining takes place where as collateral prices are adjusted in real time,
06:00more money can be allocated quickly and easily with high-speed settlement system of instant money
06:08governed by smart contracts.
06:10So that then helps to actually create a system where only minor adjustments needed to actually take place.
06:17And that helps bring the market towards a more orderly rebalancing finance,
06:22which helps to limit false selling.
06:25This is because it can ensure only minor, smaller adjustments,
06:30which settle immediately and prices can then stabilize more quickly.
06:35Thus, when prices change, it simply triggers stabilizing adjustments to actually take place.
06:41In essence, continuous 24-7 collateral markets.
06:45So in sum, continuous 24-7 collateral markets could well reduce sovereign funding shocks,
06:52making large debt piles more refinanceable.
06:56Now, of course, that doesn't actually solve the key issue of solvency.
07:01For one day, that issue will come home to roost.
07:03But for now, the system is stabilized.
07:07And the fundamental difference in this scenario is that the old legacy system enabled shocks to create panic selling and
07:14collapse.
07:15But this newly programmable system means a shock turns into a small adjustment,
07:21which can promote greater stability.
07:24But the danger with such a system is that whoever controls the ledger ultimately and effectively controls the asset.
07:33And this system concentrates power among the financial elite.
07:39Liquidity is being hardened and permissioned.
07:42And that new degree of rigidity can be very dangerous for those that are unaware.
07:47Well, central bank policy and its bias can be now embedded within the code.
07:52So sovereign debt will certainly receive preferential treatment to help maintain solvency of national debt.
07:59But my greater fear there is that this system increases the reach of the banking class to key private assets
08:08with real-time efficiency.
08:10I think that's a danger we all need to be aware of.
08:13Now, I hope this has proven insightful.
08:15Thanks so much for joining me.
08:16Do check out the other videos on the channel, of course.
08:20And there is plenty more on my website as well,
08:23where we've been breaking down the whole macroeconomic thesis for the next five to 10 years or so.
08:29So thanks ever so much.
08:31And I'll see you next time.
08:32Bye-bye.
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