The Machine We Built

Issue 22

By David Thomas Graves

The Illusion of Control

For more than a century the Federal Reserve has sold itself as the master of balance. The story it tells the public is simple. The Fed has levers it can pull. When the economy slows, it pumps money in. When the economy overheats, it pulls money out. Expansion and retraction. Stimulus and tightening. A machine that can always be tuned like an engine, keeping the system running smoothly.

And for decades, that illusion held. When growth was too fast, the Fed raised rates, sold Treasuries, and soaked up liquidity. When growth was too slow, it reversed course. To the outside world, the Fed always looked like the calm adult in the room. Technical. Detached. In control.

But here is the truth no one in Washington wants to admit. The brakes no longer work.

The Fed’s ability to retract money, to pull liquidity out of the system, has collapsed under the weight of the very debt it helped create. On paper the tools still exist. It can raise rates. It can sell bonds. It can pay banks to lock money inside the central bank. But every time it tries, the shockwaves ripple so violently through the economy that the Fed is forced to reverse course almost immediately.

Why? Because the system has become too dependent on liquidity to survive without it.

Look at the last decade. In 2018, the Fed tried “quantitative tightening,” letting its balance sheet shrink and debt roll off. The markets convulsed. Stocks tanked. Credit wobbled. Within months, the Fed reversed course. After COVID, it tried again, hiking rates hard in 2022 to fight inflation. Banks collapsed. Housing froze. Washington stared at another crisis. The brakes were slammed, and the system buckled.

This is fiscal dominance in motion. It is what happens when the needs of government debt, Wall Street liquidity, and political perception overwhelm the Fed’s mandate. The Fed may pretend to control money. In reality, it is trapped. It cannot pull liquidity without breaking the machine it built.

The public is told the Fed is fighting inflation. In truth, the Fed is fighting to preserve the illusion of control. Retraction has become impossible. Expansion has become inevitable. Debt is the only constant. The machine we were promised as stability has turned into a self-perpetuating disease.

Liquidity Demystified

If there is one word economists and politicians love to use without explaining, it is liquidity. For most Americans, the word means nothing. It sounds like water. At the household level, it might mean cash in the bank or being able to sell your car quickly. But in finance, liquidity means something very specific, and understanding it explains why the U.S. market dominates the world.

Liquidity is the ability to turn an asset into cash quickly without destroying its value. If you sell your home tomorrow, you’ll probably have to cut the price to get a buyer. That’s low liquidity. If you sell shares of Apple tomorrow, you can unload them instantly at nearly the same price you paid. That’s high liquidity.

Now scale this to trillions. If you manage a massive pension fund or sovereign wealth fund, you cannot invest in markets that lack liquidity. You need to be able to enter and exit positions without crashing the price. The rough rule is that your position should never exceed about one percent of daily trading volume. That way, you can sell if you need to.

This is why the U.S. stock market is the dominant market in the world. It isn’t because American companies are always better. It’s because the U.S. market is liquid enough to absorb global money. If you’re not investing in America, you’re not really investing. No other market, Europe, China, Japan, offers the same depth.

And what makes U.S. markets so liquid? Debt. The constant flow of money created by the Federal Reserve and pumped into the system through easy credit, repo markets, margin loans, and quantitative easing. Debt keeps cash sloshing through the system. Debt guarantees there’s always a counterparty ready to buy or sell.

Liquidity isn’t just a feature of the system. Liquidity is the system. And like oxygen, once you’re addicted to it, even a small reduction feels like suffocation. That’s why every attempt at retraction causes panic. Liquidity is life support.

How the Fed Prints and Pulls Money

When people hear that the Fed “prints money,” they usually imagine presses spitting out dollar bills. The reality is less cinematic and more powerful. The Fed doesn’t need ink and paper. It creates and destroys money with keystrokes.

When the Fed wants to inject money, it buys government bonds or securities from banks. It pays by crediting the banks’ reserve accounts at the Fed, digital accounts only banks can access. Those dollars didn’t exist before. They exist now because the Fed typed them in. With more reserves, banks can lend more. More loans create more deposits. More deposits mean more money circulating. This is what people mean when they say the Fed “prints money.”

When the Fed wants to pull money out, it does the opposite. It sells government bonds. Banks pay using their reserves, and those reserves are deleted. That money disappears. Liquidity dries up. Borrowing slows. The economy cools.

There are other levers too. The Fed pays interest on reserves, encouraging banks to park money instead of lending it. It runs repo and reverse repo operations, short-term transactions where it swaps cash for collateral to push liquidity in or pull it out. All of these tools are about the same thing; controlling the flow of liquidity.

For decades, this looked like balance. But the more debt the system piled up, the harder it became to pull money out without breaking something. In 2018, tightening caused markets to convulse. In 2022, rate hikes cracked banks. Expansion is easy. Retraction is intolerable.

That’s what fiscal dominance looks like in practice. The Fed talks tough about fighting inflation, but every attempt to retract liquidity smashes against the wall of debt. The more it tries, the more obvious it becomes, expansion is the only path left. The brakes are gone.

Fiscal Dominance Made Simple

Economists describe fiscal dominance as though it’s a technical theory. In reality, it’s not much different from what happens in a household drowning in debt.

Picture a family with maxed-out credit cards, personal loans, and a mortgage that eats half the paycheck. At one point they had choices. They could save. They could cut back. They could invest. But once the debt piled up, those choices vanished. Every decision became about one question: how do we make the next payment?

That’s fiscal dominance

The United States is that family. The government’s debt is so large that the Fed can no longer set policy based purely on inflation or employment. It has to set policy around the cost of debt. Raising rates is like hiking the family’s credit card APR from fifteen to twenty-five percent. Payments explode. The whole household teeters.

So what does the family do? They stop thinking about long-term health and focus on surviving the month. Borrow more just to make the payments. Cut groceries to keep the lights on. Every choice is a compromise. That’s Washington today. The Fed can’t hike too high or the government can’t afford the debt. It can’t pull liquidity too hard or markets seize up. So it keeps printing, keeps borrowing, keeps promising that someday discipline will return.

In a household, this spiral ends in bankruptcy. In a nation, it ends in inflation, debasement, or both. The debt becomes the master. The central bank becomes the servant.

And just like in a household, the cost falls hardest on the workers. Wages don’t keep up. Savings lose value. Every dollar buys less because the system has decided survival of debt matters more than stability of the paycheck.

This is fiscal dominance in its simplest form. When debt takes over, policy is no longer about balance. It’s about survival.

The Worker’s Bill

For Wall Street, fiscal dominance is a panel discussion about yields and ratios. For Washington, it is a spreadsheet of deficits and auctions. For workers, it shows up as a bill that never stops arriving. It arrives at the grocery store, at the gas pump, in the rent, in the tuition notice, and in the health insurance premium.

Start with wages. In a debt driven system, wages rarely lead. Prices move first. Asset prices sprint. Paychecks jog. You see a raise on paper and it disappears in the checkout line. Groceries cost more. Child care costs more. The landlord raises the rent because the market says your neighborhood is hot. By the time the new wage shows up, the new price is already here.

Look at savings. In a healthy system, saving gives you safety and time. In our system, saving feels like standing still in a river that keeps pushing you backward. For long stretches, deposit rates sat near zero while prices crept higher. You could be disciplined for a decade and watch the purchasing power of your savings drift away.

Housing tells the story in sharper lines. Liquidity that props up markets spills into real estate. Investors armed with cheap credit outbid families trying to buy their first home. Owners who stay put feel richer on paper, but to touch that wealth they must borrow against it and step deeper into the debt machine. The house that was once shelter becomes an asset class that lives by someone else’s cycle.

Finally, retirement. Pension funds and 401(k)s are now tied to markets that are tied to the Fed. Safe assets pay little, so retirement money is pushed into stocks and credit. When markets rise the statements look healthy. When markets fall, years of careful saving can vanish in months. You are no longer building a future on steady returns. You are betting on whether the central bank can keep the machine calm.

This is the worker’s bill in a world where debt dictates policy. Wages lag. Savings erode. Housing turns speculative. Retirement depends on perception. The worker is not rescued. The worker is recycled.

The Global Spillover

The story does not stop at the border. The United States issues the world’s reserve currency. That means the decisions of the Federal Reserve set the rhythm for everyone. When the Fed expands, dollars flow outward. Commodities jump. Risky assets rally. When the Fed tightens, dollars rush home. Weaker currencies buckle. Governments scramble to service dollar debts.

The reason the United States occupies this position is not only size. It is liquidity. The dollar trades everywhere. U.S. markets can absorb enormous flows. Global money wants a door that opens and closes on command. That is the crown of the dollar. The price of wearing it is constant temptation to borrow more because the world keeps buying the paper.

Cracks are appearing. More trade is being settled in other currencies. Central banks are adding gold at a pace not seen in decades. No one move dethrones the dollar. The pattern matters. The world is hedging. If the dollar’s dominance slips, the cost of borrowing rises for the United States. When that cost rises, the strain moves quickly from Washington’s balance sheet to the worker’s life. Mortgages get heavier. Groceries get pricier. Retirement runs uphill.

Global spillover is not an abstract geopolitics seminar. It is a reminder that a country that finances itself with the world’s savings must keep the world’s confidence. If that confidence fades, the bill arrives at the kitchen table first.

The Endgame

Systems like this do not implode in a single day. They wear down. Credibility erodes speech by speech. Each rescue demands a larger rescue later. Each promise buys less time. The habit of printing to fix yesterday becomes the need to print to survive today. Inflation stops behaving like a fire to be put out and behaves like a pilot light that never turns off. Markets drift from being a barometer to being the weather itself. Policy stops guiding the economy and starts managing the chart.

The global order frays at the edges. Small experiments in alternative payment systems become normal. Capital learns new routes. The dollar remains central, then a little less central, then a little less again. Nothing obvious breaks until something important does. When it does, it feels sudden even though the path was slow.

The landing for workers is hard. Savings lose purchasing power. Housing stays expensive because liquidity keeps looking for a home. Retirement remains a bet on confidence. Work feels heavier and buys less because the system quietly takes a toll to keep debt afloat.

This is the machine’s last stand. The question is not whether the structure contains contradictions. It does. The question is how long those contradictions can be managed with words and liquidity before they insist on being paid in real terms.

A Worker’s Fix

If money remains at the mercy of human promises, discipline will keep losing to politics. That is not a partisan judgment. It is a human one. Give any committee the power to create money without an external constraint and the constraint will eventually be ignored. The bill will arrive later and someone else will pay it. History is very clear about who that someone is.

The answer is to anchor money in rules that people cannot bend. For most of history that anchor was gold. Convertibility created discipline because it gave savers the right to step outside politics. In the modern world that role can be played by Bitcoin. Not as a meme. Not as a short term trade. As infrastructure. The supply is fixed. The ledger is transparent. The rules are enforced by code rather than by meetings. No chair can add more units to calm a chart. No minister can dilute the stock to buy a news cycle.

For workers, hard money is not a philosophy. It is a tool. A paycheck denominated in solid money holds value across time. Savings compound rather than erode. Retirement planning returns to arithmetic instead of theater. Housing can return to shelter first and collateral second because the incentive to push every store of value into speculation is reduced.

This is not about punishing a central bank. It is about removing the temptation that breaks it. Put discipline in code. Make the monetary base something that cannot be willed into existence. Force policy to live within what people will fund openly rather than what can be conjured quietly. When money is incorruptible, the conversation about budgets, taxation, and investment becomes honest by necessity.

Workers deserve that honesty. They deserve a system where effort builds security rather than feeding a cycle of rescue. They deserve money that is real, stable, and outside of political fashion. The Federal Reserve was supposed to deliver that stability and failed. If workers want something better, they must demand money that cannot be printed to solve yesterday’s mistakes.

The future of stability will not be found in marble halls. It will be found in scarcity, in transparency, and in code. That is how you fix the machine from the worker’s side. You stop trusting people to be disciplined. You require it.

© David Thomas Graves 2025