Liquidity is at the core of the current cycle. In rising markets, liquidity is never an issue. Why not leverage when liquidity is ample? You can always get out. When liquidity vanishes, so do those assumptions. Liquidation risk is far greater in the current cycle, as detailed in the last wknd notes. The policy response to the 2008 financial crisis was to make banks ultra-safe, pushing risk to capital markets for investors to manage. The trouble is asset allocation through capital markets is highly pro-cyclical. Who is to absorb flows in reverse? Nobody. The result is a potential air pocket – a crash. We saw this clearly in March 2020 – simple Treasury ETFs traded at a shocking 10% discount. QE is an amplifier when easing, which is well-known. Less appreciated is the amplifier when tightening – the reverse repo facility that drains liquidity. The rush for the door is a rush to cash. That adds to RRP demand and reduces liquidity in the banking system. It is a new dynamic. And it is one microcosm. Liquidity amplifiers are broad. The most damaging of pro-cyclical flows is housing, where households can most easily engage in leverage. This amplifies declining home prices. Policy is left with bad choices that are largely beyond their control. Either reset the financial system, a choice from 2009, or a multi-decade period of repression where nominal activity is targeted higher than borrowing costs, popularized by the post-war period. It is a rich country problem – non-financial debt is 295% of GDP in developed economies, comfortably higher than in emerging countries. Banks become nothing more than agents of repression. A reset of extreme austerity – deflation, budget cuts, pension reform – will challenge all assets. Digital assets would be no exception. Repression is a far more likely outcome – policy easing to this new path after a financial “shock.” Digital assets are a repression unlock.