Steve Bain

Rethinking Brent Johnson’s ‘Credit System’

November 9th, 2025

Brent Johnson of Santiago Capital has built a reputation for explaining the inner mechanics of our modern financial system, a vast, self-referential web of credit, collateral, and confidence. In his October 26th, 2025 presentation, Johnson argues that our monetary architecture is inherently fragile because it rests not on tangible savings or production, but on debt and the belief in repayment.

When the system is functioning, new loans create new money, lubricating trade and asset values. When it falters, when velocity of money circulation slows or credit growth stalls, the entire edifice trembles. Credit defaults, collateral values drop, and the ‘money’ that never really existed vanishes into thin air.

Johnson’s diagnosis is compelling and largely correct. But his conclusion that the system must be perpetually supported through new credit creation or risk collapse, deserves scrutiny. From the perspective of Austrian economics, this belief confuses symptom with cause.

The problem is not that too little credit exists today. The problem is that too much credit has been created for decades, since the world abandoned the last vestige of monetary discipline in 1971. Every ‘rescue’ since, from the Latin American debt crisis to the GFC to the pandemic stimulus, has compounded the underlying distortion.

And while Johnson sees deflation as the primary risk, the next crisis may reveal the opposite: a flight from paper promises into tangible assets, commodities, and foreign markets, as confidence in the ultimate ‘safe asset’ (US government bonds) begins to fracture.

Brent Johnson’s Framework: The Pyramid of Credit

In Johnson’s view, the modern monetary system operates on a simple but dangerous principle i.e., that money is debt. When banks issue loans, they create deposits, and new purchasing power that didn’t exist before. The central bank provides the base layer of reserves and liquidity, but the vast majority of ‘money’ in the economy is private credit.

This pyramid is inherently unstable. Each level of credit creation rests on the assumption that the debt below it can and will be serviced. The moment that assumption falters, the structure begins to contract.

Johnson explains this with characteristic clarity: interest-bearing debt requires more money later than exists today. The only way to satisfy this condition, he argues, is through either increased velocity (money circulating faster) or continued credit expansion (more debt).

When either slows, defaults rise, and the system enters a deflationary cascade. Credit disappears, prices fall, collateral weakens, and further lending halts. This is what Johnson calls the credit death spiral, and it is a similar viewpoint to that expressed by his friend Jeff Snider, which you can read about via this link:

  • Jeff Snider’s Eurodollar Theory

The Deflationary Logic

The core of Johnson’s argument is that our system is mathematically dependent on growth. Because every dollar of debt carries an interest burden, the system must continually expand or implode.

In his formulation:

  • The money supply is not fixed; it’s elastic, driven by credit creation.
  • Interest creates a demand for more money tomorrow.
  • Velocity or new credit must fill that gap.
  • When neither can, defaults destroy ‘money.’

In this light, deflation is not a random shock but the natural consequence of the system’s internal logic. The destruction of credit equals the destruction of money, leading to collapsing asset prices and widespread insolvency.

For Johnson, this explains why central banks have become the ultimate backstop. When private credit falters, the Federal Reserve steps in to ‘re-collateralize’ the system by creating new reserves, buying assets, and guaranteeing liquidity. In his view, this is not moral hazard; it’s a structural necessity. Without intervention, the system would seize up completely.

The Austrian Response: You Can’t Solve Leverage With More Leverage

Austrian economists would agree with Johnson’s diagnosis but reject his prescription. They would accept that the fiat system is inherently unstable, but argue that its instability is not due to an occasional shortage of credit. It is due to the chronic excess of credit that distorts prices, misallocates capital, and postpones economic truth.

The Austrian theory of the business cycle, first articulated by Ludwig von Mises and Friedrich Hayek, explains how artificially low interest rates and credit expansion not backed by real savings create booms built on money illusion.

When the central bank or the fiat based fractional reserve banking system expands credit beyond genuine savings, new money enters specific markets like housing, tech, and government debt, driving prices higher and encouraging investment spending in projects that appear profitable only under those distorted conditions.

When the illusion breaks, these malinvestments must be liquidated. That liquidation, the recession, is the cure, not the disease. It is the process by which the economy realigns money and credit with real productive capacity.

From this perspective, the tightening of credit that Johnson sees as catastrophic is actually the economy’s attempt to heal. The pain of deflation is the price of returning to sanity.

To an Austrian, Johnson’s system does not fail because it runs out of credit, it fails because it had too much credit for too long. Each rescue merely compounds the misallocation. Each bailout preserves the unproductive and punishes savers.

In other words, the system doesn’t collapse because of ‘too little liquidity.’ It collapses because its foundations are rotted by decades of forced liquidity.

The 1971 Betrayal of Gold Convertibility

A major pivot away from monetary restraint began in August 1971, when President Nixon closed the gold window and severed the dollar’s convertibility into gold. What followed was the era of unanchored fiat credit, and expansive monetary policy without any natural limit.

From that point forward, every economic downturn was ‘solved’ by credit expansion.

  • In the 1980s, the Latin American debt crisis prompted the IMF and U.S. Treasury rescues.
  • In the 1990s, the Greenspan Put saved Wall Street after LTCM (a large hedge fund) collapsed in 1998, with the Asian financial crisis ensuing.
  • The 2000s saw the housing bubble fueled by ultra-loose credit and securitization.
  • The 2008 crisis birthed QE – the explicit monetization of assets by the Federal Reserve.
  • The 2020 pandemic response turned the dial to maximum, with trillions in fiscal and monetary injection.

Each of these episodes prevented liquidation and allowed more leverage to accumulate.

In 2025, the world’s debt load exceeds $350 trillion – triple global GDP. The US national debt alone is past $38 trillion, and the Treasury market, once the deepest and most liquid in the world, now shows signs of stress at the first hint of policy uncertainty.

Johnson calls this a system that ‘must expand or die.’ The Austrian calls it a system that must eventually die because it was forced to expand.

The Velocity Fallacy

Johnson’s ‘two symbols’ i.e., velocity and new money, lie at the heart of his thesis. He argues that because interest requires more nominal money later, the system must rely on either faster circulation or continual expansion.

But this rests on a Keynesian fallacy; that economic health depends on the speed of money rather than the soundness of its foundation.

Austrians would counter that interest payments are not a monetary issue at all, they are a real economic phenomenon. Interest is the price of time preference; it rewards saving and coordinates production across time. In a sound-money economy, interest is paid out of real profits, not from an ever-expanding pool of new money.

The need for higher velocity arises only when the monetary system itself is dysfunctional, when debt is required to sustain debt, and when money is created ex nihilo rather than earned.

In such a world, slowing velocity isn’t a cause of crisis; it’s a symptom of saturation. When too much credit has been extended to unproductive ends, confidence wanes, turnover slows, and the illusion of perpetual motion collapses.

Deflation is Not a Disaster – it’s a Reset

Johnson’s fear of deflation is understandable within the context of the existing system. Deflation destroys credit, and since credit is money, deflation looks like the end of the world.

But from an Austrian standpoint, deflation is precisely the medicine the economy needs. It clears bad debts, disciplines borrowers, and restores purchasing power to savers.

The tragedy of the modern age is that every attempt to prevent deflation merely amplifies the distortions that make the next crisis worse.

Instead of allowing capital to be reallocated to productive uses, central banks perpetuate the zombification of entire sectors (banks, governments, corporations) that survive only because new credit replaces old.

This is the deeper meaning of the ‘everything bubble.’ When even sovereign debt becomes a speculative instrument rather than a store of safety, the system has reached the logical end of fiat expansion.

The Fed as the Great Enabler

Johnson describes the Federal Reserve as the ‘re-collateralizer’ of last resort, the only institution capable of offsetting private sector deleveraging with new base money.

This is true, but it’s also the core problem. The Fed’s repeated interventions since 2008 have blurred the line between private and public risk. In doing so, they’ve transformed the US Treasury market into the lynchpin of global collateral, and simultaneously its greatest vulnerability.

For decades, ‘risk-off’ meant buying Treasuries. Their yields fell whenever fear rose. But this reflex is beginning to break down.

In 2024 and 2025, the Federal Reserve cut rates twice in response to slowing growth. Instead of rallying, Treasury prices fell and yields rose sharply. The bond market, once the world’s flight-to-safety asset, is now perceived as a source of inflation and potential default risk.

This inversion marks a profound shift. It suggests that global investors may no longer view US debt as the ultimate safe haven. If that confidence cracks, the traditional deflationary response to crisis i.e., buy bonds, yields fall, dollar strengthens, may reverse. The next crisis could bring inflation instead of deflation.

Inflation: The Next Safe Haven Paradox

In a debt-saturated world, inflation is not just a monetary event, it’s a political inevitability. Once debt levels exceed what can be serviced through productivity, governments face a binary choice: default outright, or default implicitly through devaluation.

Historically, they choose the latter.

Johnson sees deflation as the greater risk, but the Austrian would argue that the deflationary impulse, though real, is constantly overridden by political pressure to reflate. Every credit crisis invites a bigger intervention, a bigger rescue, a bigger fiscal expansion.

Yet, unlike in previous cycles, the bond market itself is starting to resist. The assumption that Treasuries always rally in downturns depends on the belief that inflation will remain low and the government’s credit unquestioned. But when debt exceeds 120% of GDP and deficits run north of 7% even in ‘peacetime,’ that assumption erodes.

This is why, paradoxically, the next crisis may trigger not a collapse in prices, but a flight from paper. Investors, domestic and foreign, may seek safety in commodities, gold, energy infrastructure, and even foreign currencies or emerging-market assets that still offer positive real yields.

The idea that ‘there is no alternative’ to US bonds may soon be tested.

The Dollar’s Double-Edged Sword

Johnson’s famous ‘Dollar Milkshake Theory’ argues that in a global crisis, capital will flee toward the dollar, squeezing foreign borrowers who owe in dollars and driving the US currency even higher.

There is truth in this – the dollar remains the world’s dominant funding currency. But the Austrian critique goes deeper; a currency can only remain a safe haven so long as it represents sound money.

The dollar’s strength has long rested on its role as the least dirty shirt in the laundry, not on inherent discipline. As the US government’s debt and deficit trajectory becomes untenable, the rest of the world may begin to view dollar assets not as safety, but as risk.

That shift won’t happen overnight, but the bond market’s behavior hints that the tide is turning. The same investors who once ran to Treasuries during turmoil may soon run from them, not toward them.

When that happens, the ‘deflationary collapse’ Johnson warns of may instead manifest as a stagflationary flight from confidence; rising consumer prices, falling asset values, and collapsing trust in sovereign paper.

Gold and Real Assets: The Refuge and the Warning

To his credit, Johnson recognizes the importance of gold. He rightly notes that it cannot default, cannot be printed, and has preserved purchasing power through every prior collapse.

Austrians would agree, but with a crucial distinction. For Johnson, gold is a hedge against the malfunction of the credit system. For the Austrian, gold is not a hedge, it’s the anchor that should have prevented the malfunction in the first place.

The reason we need gold today is the same reason we abandoned it in 1971 i.e., political convenience. Gold imposes discipline; fiat enables expedience.

If investors begin to doubt the credibility of sovereign debt, the migration toward tangible stores of value like gold, other commodities, productive land, and energy, will accelerate. That migration itself will be inflationary, as capital exits paper and seeks refuge in things with intrinsic scarcity.

The Bond Market as the Canary

Perhaps the clearest signal of transition lies in the U.S. bond market itself.

Historically, every Federal Reserve rate cut lowered yields, meaning bonds rallied because investors anticipated slower growth and lower inflation. But in the last two cycles, the opposite occurred: yields spiked higher after cuts.

This reversal implies that investors now see easing not as a deflationary response, but as an inflationary trigger – an admission that monetary policy and fiscal policy are losing control.

If this pattern persists, it would mark the end of the 40-year bond bull market that began in the early 1980s. In that environment, the traditional portfolio mix of 60% equities, 40% bonds, fails. Both sides of the ledger lose simultaneously.

And when bonds can no longer perform their role as risk dampeners, capital will reprice everything else i.e., stocks, housing, private equity, even the dollar itself.

The Real Endgame: Liquidation or Inflation

The modern monetary order faces an unavoidable choice. Either it allows the liquidation of bad debt with a deflationary reset, or it continues to inflate and thereby debases the currency to preserve the illusion of solvency.

Johnson’s model describes why deflation is mechanically plausible. The Austrian critique explains why deflation is politically impossible.

Every institution (governments, banks, pension funds, corporations) is leveraged to the assumption that nominal values will not fall. Allowing them to collapse would mean immediate insolvency. And so the path of least resistance is always inflation.

But this time, the inflation may not be controlled. It may not even stem from domestic stimulus. It may arise because the world no longer trusts the paper.

When the next crisis hits, investors may not buy Treasuries, they may sell them. They may not flee to the dollar, they may diversify away from it. They may seek refuge in the tangible, the real, the scarce.

That, ironically, would mark the final stage of Johnson’s deflationary pyramid: not a collapse into nothingness, but a collapse into inflation, with the recognition that paper promises cannot be rolled forever.

Conclusion: The Credit Cycle That Ate the World

Brent Johnson’s analysis of the credit-based monetary system captures its inner mechanics with precision. He shows why it must constantly expand, why deflation is feared, and why central banks have become its lifeblood. His recent thoughts about the effects of stablecoin further support his position.

Yet, through the Austrian lens, his argument reveals a deeper truth, that the system’s fragility is not an accident of design but the inevitable result of monetary moral hazard. Each bailout since 1971 has replaced prudence with leverage, savings with speculation, and discipline with dependence.

The next tightening of credit, whether triggered by defaults, liquidity shortages, or market panic, will not occur because there is ‘too little money.’ It will occur because decades of too much money have hollowed out the system’s productive core.

And when the reflexive rush to US bonds no longer offers safety, when the supposed safe asset becomes the epicenter of risk, the consequences will be global. Inflation will not come from excess demand but from fleeing confidence.

At that point, the world will rediscover a truth the Austrians never forgot:

Real wealth cannot be printed. Credit cannot substitute for capital. And no amount of monetary engineering can repeal the laws of economic gravity.

When the promises finally exceed belief, the correction is not optional. The only question is whether it arrives as cleansing deflation or, as may be the case this time, through the fire of inflation.

Sources:

Related Pages:

Show / Hide