“Inflation is like toothpaste. Once it’s out of the tube, it’s hard to get it back in.” Paul Volcker said that about the last great inflation. He could just as easily have been narrating this one.
Fair warning: today’s Swan Dive is a bit of a doozy. But a significant event happened yesterday — one we believe will kick off another round of inflation and turn “affordability” into an even hotter political potato heading into 2026.
First, the what.
The Moment They Blinked
December 1, 2025 will go down as a pivotal turning point in the monetary regime under the Trump administration.
For months, President Trump and Treasury Secretary Bessent have applied steady pressure on the Federal Reserve to cut rates — even with inflation stuck around 3% and still above target.
Yesterday, Fed Governor Christopher Waller quietly confirmed what the monetary plumbing has been screaming: the long-promised “normalization” experiment is over.
Quantitative Tightening (QT) — the Fed’s attempt to shrink the balance sheet and drain excess liquidity from the pandemic era — has stopped.
The Fed’s balance sheet is frozen at $6.45 trillion. Rate cuts are expected. And the one emergency valve that made QT possible — the Overnight Reverse Repo Facility — is essentially empty.
If you don’t spend your nights curled up with Fed data (good for you), here’s what that actually means:
For years, big money-market funds stashed trillions with the Fed via reverse repos.
Think of it as a government-run parking garage for surplus cash.
In 2022, that garage held about $2.3 trillion. Today, it’s nearly vacant.
The spare liquidity has been drained to keep the financial system humming while the Fed let bonds quietly roll off the balance sheet.
The last time the Fed tried stepping away from extraordinary support — late 2019 — it pulled back too far, too fast.
Overnight funding rates spiked above 10% in a day. The Fed had to sprint back in with emergency injections and a renewed wave of asset purchases.
This time, Waller and company flinched sooner. He’s already warned that if bank reserves fall much below roughly $2.7 trillion, the system starts to seize. As of yesterday, they were getting too close for comfort.
So the Fed has done exactly what it insisted it wouldn’t: it has stopped tightening with inflation still above target, real rates still positive… and the balance sheet still grotesquely bloated compared to anything resembling “normal” before 2008.
We’ve seen this movie.
The Reprise of an Old Mistake 
In the 1970s, the Fed cut rates repeatedly with inflation already north of 3%. Each round of easing tried to cushion recessionary pain without truly killing price growth.
The result wasn’t a soft landing — it was a decade-long slog of stagnation and rising prices that Volcker eventually strangled by jacking rates into the teens.
Again in the early 2000s, the Fed eased aggressively with CPI above 3% as it chased the dot-com bust. That medicine helped inflate the housing and credit bubble that eventually produced 2008.
Today, we’re back in familiar territory: a central bank cutting into lingering inflation and a fiscal authority expecting the printing press — directly or by proxy — to carry more of the burden in the next downturn. Economists call that “fiscal dominance.” It’s no longer hypothetical. It’s how the system now works.
The twist: the monetary pipes themselves are changing beneath our feet.
Dollar 1.0 still runs through banks, reserves, and repo markets. Dollar 2.0 is digital, programmable, and increasingly backed by U.S. Treasuries by law. When the next crisis hits — and it will — the exit ramps for capital may look radically different from 2008 or 2020.
To understand Act II of our inflation episode, we need to understand why QT died — and what replaces it.
QT Is Dead; Long Live Inflation
For three years, the Fed insisted QT was the path back to normal: shrink the balance sheet, drain the excess, then cut rates from a position of strength.
The reality was less cinematic.
The balance sheet fell from ~$9 trillion to ~$6.45 trillion and stalled. The reverse-repo “parking lot” dropped from $2.3 trillion to near zero. Bank reserves are now hovering just above the minimum level the Fed considers “ample.”
They hit a wall. If they pushed QT any further, they risked another 2019-style funding crunch—only this time with more leverage, more political heat, and more fragility in the plumbing.
So instead of draining, the Fed is now pivoting toward easing in the face of still-elevated inflation — just as it did in the 1970s and early 2000s.
That is how you get the Volcker toothpaste problem. Once people internalize that the central bank will always blink first, inflation expectations don’t die. They hibernate.
From an investor’s vantage point, that means the next leg of inflation isn’t behind us. It’s in front of us.
What the Fed Is Cutting Rates Into
Historically, when the Fed has cut into inflation above 3%, one of two outcomes tends to follow:
A brief reprieve, followed by a larger inflation wave (see: 1970s).
A crisis born from cheap money rather than expensive money (see: housing in the 2000s).
We are heading into another round of cuts with:
• A still-bloated balance sheet
• A new digital plumbing that auto-funds the Treasury
• Hard-asset markets flashing warning lights
Paul Tudor Jones summed it up in one dry quip: interest expense is now one of Washington’s largest bills; commodities are “ridiculously under-owned”; and “all roads lead to inflation.”
The Fed’s flip from QT to easing doesn’t end this inflation episode. It likely begins its next season.
Through the Next Looking Glass
So what might the next crisis look like? Maybe it looks like the last time people trusted clever structures and sophisticated accounting a little too much.
On December 2, 2001, Enron filed for Chapter 11 and instantly became the emblem of corporate deceit.
At its height, the Houston energy-trading giant was Fortune’s seventh-largest U.S. company, with $111 billion in annual revenue and 21,000 employees.
By the end, the stock had crashed from $90 to pennies, 5,600 jobs were gone, and $2.1 billion in pension savings had evaporated.
Ken Lay and Jeff Skilling did what many balance-sheet illusionists love to do: hide losses in off-balance-sheet entities, book imaginary earnings, and urge employees to buy more stock even as they themselves sold quietly.
When the structure collapsed, it wasn’t because of a new revelation — it was because the plumbing could no longer bear the pressure.
We aren’t living in 2001. The acronyms are different. The sums are in trillions rather than billions. But the rhyme is unmistakable.
The price of silver briefly touched an historic $59 this morning, and we suspect new highs are ahead.
Tomorrow in Act II, we’re going to take a look and see what silver, gold, bitcoin and Dollar 2.0 are telling us…
Volcker warned that once inflation gets out, it’s devilishly hard to put back in. We’re about to see the act played out again, this time with digital plumbing.
~Addison
P.S. On Grey Swan Live! this week, we sit down with longtime sparring partner Dan Denning from Bonner Private Research to unpack the pivot from tightening to easing, and what Dollar 2.0 means for your own balance sheet — before the next “Enron moment” arrives. Stay tuned.
If you have requests for new guests you’d like to see join us for Grey Swan Live!, or have any questions for our guests, send them here.
