Beijing Brings Out The Stimulus Bazooka

Why The Treasury’s Huge Cash Grab Could Stress Markets at the Worst Possible Time

• The Fed’s cash cushion is gone - with the reverse repo facility drained, every dollar the Treasury pulls into its account now comes straight out of bank reserves.
  
  
• A rapid Treasury cash rebuild risks repeating 2019’s repo market shock, when reserves slipped below 10% of GDP and funding markets cracked.

What you need to know: The U.S. government plans to rapidly rebuild its cash coffers as spending ramps up - a move that could drain liquidity from the banking system, tighten funding conditions, and stir instability in money markets¹.  

Why it matters: Most investors see the Treasury replenishing its cash buffer as a routine post–debt ceiling exercise, but history shows it can be one of the fastest ways to quietly drain liquidity from markets. A rapid rebuild of the Treasury General Account (TGA – the government’s bank account) doesn’t create new money - it siphons reserves out of the banking system as investors buy treasury bonds with cash. Thus, with the TGA set to nearly double in just weeks, we’re about to see whether markets can handle another liquidity squeeze without something breaking.

Now the Deep Dive: Are U.S. financial conditions about to tighten even further? I believe so.

I recently wrote to you about the Fed’s overnight reverse repo facility (RRP) and how it's fallen from a $2.4 trillion peak in 2023 to just $15 billion as of writing this.

• Long story short – the RRP facility was the system’s cash cushion and a measure of excess. With it gone, there’s less spare money sloshing around.

In that piece, I explained why this matters (when the cash cushion disappears, banks lose reserves, and funding markets can become stressed).

But now, there’s another big risk for reserves. . .

I’m talking about the Treasury itself.

Back in July, the government said it would rebuild its TGA to $850 billion by the end of September - almost double its ~$400 billion level in late July. Moves this big and that fast have only happened a handful of times in the last decade.

Now you may be thinking, “Why should anyone care?”

Because the TGA is basically the government’s checking account at the Fed. When it refills that account, it doesn’t create new money - it drains it out of the banking system until it’s spent.

• It’s like your parents moving money from the family cash jar into their own envelope. The money isn’t gone, but no one else can use it until they decide to spend it.

Normally, the RRP would soak up some of that drain. But with the RRP empty, there’s no buffer. The full weight of the TGA rebuild now falls directly on bank reserves - which are already shrinking under the Fed’s quantitative tightening (QT).

That’s a dicey situation – because the last time reserves slipped below ~10% of GDP was in 2019 when repo markets froze up, overnight funding rates spiked, and the Fed briefly lost control of short-term rates.

• Today, reserves are at 10.41% of GDP ($3.16 trillion vs. $30.35 trillion GDP).

Put simply, every bond the Treasury issues to refill its checking account works like a suction pump - pulling cash out of banks and tightening funding markets. And it’s happening in a huge amount and at a time when excess liquidity is running dry.

Most people don’t pay attention to “monetary plumbing” (who can blame them?). But when the pipes run dry, the consequences hit markets, funding, and eventually asset prices.

I’ll keep you in the loop as this develops. 

Figure 1: Bloomberg, September 2025

Is France the Eurozone’s Next Debt Crisis?

• France’s soaring deficits, rising debt, and political paralysis are flashing warning signs that the eurozone’s second-largest economy is drifting toward crisis.
  
  
• With over half its debt held by foreign investors, France is uniquely exposed — a bond sell-off could hit its banks, ripple across Europe, and spill into U.S. markets.

What you need to know: French bond markets are flashing red as debt climbs, deficits widen, and politics unravel - stoking fears that a core pillar of the eurozone is starting to crack².

Why it matters: France’s debt-to-GDP ratio is ~113%, paired with one of the largest primary deficits in the developed world. As the eurozone’s second-largest economy, it carries significant weight. But unlike Japan, France doesn’t have a captive domestic investor base - more than half of its sovereign debt is foreign-owned. That leaves it exposed. If capital keeps fleeing and foreign investors pull back, borrowing costs could spike and trigger a doom loop between French banks, government debt, and the broader economy.

Now the Deep Dive: I wrote to you two weeks ago highlighting the U.K.s financial troubles. But it’s certainly not alone in Europe.

In fact, France’s case is potentially even worse.

Here’s the gist why:

• Politics in turmoil: Macron’s government is anemic at best. Fiscal reforms are stalled, constant threats of “no-confidence votes”, and new elections keep the country unstable. The political climate is very tense – worsening the economic outlook.
  
  
• Deficits keep growing: France is spending far more than it earns - running one of the biggest budget gaps in the developed world. Debt has already climbed to about €3.4 trillion and keeps rising (no slowdown in sight).
  
  
• Debt is everywhere: It’s not just the government that’s in a huge deficit. Private debt stands at 212% of GDP - one of the highest in the world. That combination of public and private leverage makes France uniquely fragile.
  
  
• Money is leaving the country: Since 2020, more than €170 billion has flowed out of France into “safer” places like Germany (with more than half of outflows happening since Macron called snap elections in 2024). This shows investors want out.
  
  
• Banks are under pressure: Here’s the big wild card - French banks own a big slice of government debt (about 15%). Thus, if bond prices fall, their balance sheets take a hit. And because French banks also lend heavily overseas - including $750 billion to U.S. borrowers - any stress at home could spread abroad.
  
  
• Ripple effect: Those that lent to France are also on the hook – especially in the U.K. (British banks have lent almost $450 billion to French borrowers, with German, US and Spanish banks the country’s next largest creditors).

“Sure,” some say, “But France’s debt isn’t as big as, say, Japan’s (nearing 240% of GDP). So why worry?”

Well, for starters, France doesn’t borrow in yen from a loyal domestic base (most Japanese debt is owned internally). It borrows in euros - and more than half its debt is held by foreign investors who can sell at a moment’s notice – such as rotating capital to Germany or Italy instead. That’s the key risk.

• Yes, the European Central Bank (ECB) can step in as a backstop. But every time it does, the market is reminded that France needs the support. Thus, confidence erodes, and yields rise anyway.

Secondly, France runs chronic trade deficits - whereas Japan runs surpluses. Surpluses give Japan extra savings that stay at home and fund its debt. Deficits drain money out of France, leaving fewer domestic buyers and forcing it to rely on fickle foreign investors.

France - long seen as the mom of Europe if Germany is the dad - is starting to look more like the canary in the coal mine. Its fiscal unraveling would not stay contained to Paris. With so much debt owned abroad, a French crisis would quickly become a European and even global problem.

• For perspective: French 10-year government bonds are already trading at higher yields than the so-called PIGS (Portugal, Italy, Greece, Spain). That’s a striking signal for the eurozone’s second-largest economy.

Now, don’t expect France to implode. The ECB still has tools. And France still borrows in a reserve currency (the euro), and intervention would come fast to prevent contagion.

But with bond markets waking up across the world - from the U.K. to Japan to the U.S. - France may be the one to watch most closely.

Figure 2: Bloomberg, Zerohedge, September 2025 

Fragile Giant: China’s Price Wars, Weak Demand, and the Risk of a Deflationary Spiral 

• China’s slowdown is accelerating as weak demand, collapsing property investment, and record-low credit growth expose deep structural fragility.
  
  
• Aggressive price wars in autos, e-commerce, and restaurants may look like affordability, but they are eroding profits, jobs, and confidence — pulling the economy deeper into a deflationary spiral.

What you need to know: China’s slowdown deepened in August as weak domestic demand dragged and Beijing’s attempted crackdown on overcapacity throttled output across key sectors³.  

Why this matters: China’s economy kept decelerating in August as