(This item originally appeared at Forbes.com on May 15, 2026.)
Hank Paulson, former CEO of Goldman Sachs, and US Treasury Secretary during the 2008 Financial Crisis, is a serious fellow. So, when Mr. Paulson shows up in Washington DC and tells people that the US Treasury needs an emergency “break the glass” plan if market demand for US Treasury bonds collapses, maybe you should take it seriously.
During the 2008 Crisis, Paulson bailed out the broader economy (and his old employer, by backing the liabilities of the failed AIG) basically by leaning hard on the Federal Government’s credit. A gigantic amount of Treasury bonds were issued, and the resultant mountain of cash made all the booboos better. The Federal Government’s debt/GDP was about 64% going into the crisis, so this was possible. Besides, the Federal Reserve ended up buying a lot of the bonds, eventually. It was all a big card shuffle, covered up with what amounted to “printing money.”
The macro investor Ray Dalio, in his recent book How Countries Go Broke (2025), found a recurring pattern in countries that get into debt crises. First, there is some kind of private-sector debt crisis, which is patched over by public debt. Government debt/GDP rises to unsustainable levels, and then the government effectively goes bust. I say “effectively” because governments usually don’t go bust the way an individual or corporation does, by failing to make the payments. Rather, if the debt is denominated in a currency that the government itself controls (as with the US), the outcome is typically that the currency’s value falls dramatically, “devaluing the debt away.” This might even happen — as it has been happening — without much additional “money creation.” But, when a government’s back is up against a wall, usually they will “print the money” — fund their revenue needs by money creation, resulting in explosive inflation and often, hyperinflation.
Monetary inflation can get pretty bad even when governments don’t get into the money-printing business. It was pretty bad in the 1970s, when the dollar’s value vs. its old benchmark, gold, fell by 90% (from about $35/oz. in 1970 to around $350/oz. in the 1980s and 1990s). But the really strong stuff — hyperinflation — comes about when governments get into money creation in a big way to pay their bills. It has been happening recently in Argentina, Venezuela, and elsewhere.
“People say, ‘When are you going to hit the wall?’ I obviously don’t know — it’s impossible to know,” Paulson told reporters. “When we hit it, it will be vicious, so we have to prepare for that eventuality.”
Meanwhile, Jamie Dimon, CEO of JP Morgan Chase, recently told an audience in Oslo, “The way it’s going now, there will be some kind of bond crisis, and then we’ll have to deal with it.” Also, Jeff Gundlach, head of giant fixed-income money manager DoubleLine Capital, has been repositioning his portfolio for the risk that the US Treasury may unilaterally reduce its coupon payments on some higher-yielding issues. What this means is: A bond that perhaps pays 5%, will then pay 2%, because the Treasury can just do that. This is a kind of default.
“I’m not saying this is a 30% chance, even,” Gundlach said recently. “But what if they say, ‘You know what? Our interest expense is now $3 trillion. We had a recession. Rates have gone up. We’re now issuing 30-year bonds at 6%. We can’t afford it. We’re drowning here.”
Can you hear what these men — Paulson, Dalio, Dimon, Gundlach, the best of the best — are telling you? They are telling you this sucker is going down, and it is not that far away.
I think that, if yields hit 7% on any issue, that issue is toast. So, if the 30yr hits 7%, forget about it — issuance will move to the 10yr. If the 10yr hits 7%, issuance will move to the 2yr. Dalio, in his book with more than thirty examples of governments going bust, describes that this is an expected path of events. The yield on the 30yr Treasury bond was recently 5%, and it looks ready to head higher.
So what’s the plan? The “break glass plan” that Paulson suggests, or Gundlach fears, is basically some kind of shucking and jiving to keep the rotten business going for a while longer. Probably, this will be accompanied, one way or another, with a continuing decline in US dollar value, evidenced by more and more dollars required to buy gold, commodities, and eventually everything else, just as we described in our 2022 book Inflation: What It Is, Why Its Bad, and How To Fix It.
But, since we all know that isn’t going to work for very long, what’s the plan for after that plan fails?
I basically see two outcomes.
One is the typical Latin American outcome, which is decades of miserable grinding inflationary stagnation, arising from mediocre government policy. This is, regrettably, the norm in human affairs.
The other is a rebirth of American Exceptionalism. A few countries come out of their crises stronger than ever. Japan did in the 1870s, and 1950s. So did Germany, in the 1950s. The US did after the terrible Civil War. France did, once Napoleon brushed aside the ashes of the First Republic. Napoleon was also brushed aside, soon afterwards, but his Napoleonic Code, and the value of the French franc fixed to gold, survived through the 19th century.
In all these cases, there is a specific Break Glass Plan. Basically it is this:
1) The Government goes cash-only. No money is spent unless it is first received. 2) Taxes are reduced dramatically, allowing industry to take off; 3) The value of the currency is stabilized, either vs. a reliable international currency, or gold.
The hyperinflationary Latin American countries of the 1980s eventually stablized their currencies to the US dollar. The hyperinflationary East European countries of the 1990s stabilized their currencies to the deutschmark and later euro. But, that won’t work for the dollar itself. Gold is the only option — just as it was for hyperinflationary France in 1798.
In our case today, the Federal Government should just jettison all of its domestic welfare-type programs: Medicare and all healthcare, all needs-based programs, and even Social Security, which probably won’t be worth much anyway if monetary inflation gets bad. Since the US Constitution today actually prohibits all this (we just ignore it), we don’t even have to pass any laws, we can just follow the Supreme Law of the Land, as it presently exists.
Then, I would get rid of the Income Tax, both the Individual and Corporate versions. I would then get rid of the employee-paid side of the Payroll Tax, leaving only the employer-paid 7.65%. This would provide enough revenue to keep the slimmed-down Federal Government running until a better solution is implemented. I suggest a 7% Federal VAT, which is actually quite similar to the Payroll Tax, but also applies to corporate income.
President Trump likes to remind us that, before the Income Tax was introduced in 1913, the Federal Government paid for itself with some tariffs and a few domestic sales taxes. The reason this was possible was that the Federal Government — following the Limited Government principles of the Constitution — was small. In 1912, the Federal Government’s total tax revenue amounted to 2.44% of GDP. That’s all it takes, once all the welfare stuff is jettisoned. A simple 7% VAT would be more than enough to pay for it.
Since the government would be cash-only (no deficits), and the debt would be either inflated away or perhaps in restructuring, it would be easy to then stabilize the value of the dollar by fixing its value to gold.
We are not yet at the point where this plan is politically feasible. But, Japan got there (1949), and Germany (1949), and France (1798), and people like Hank Paulson are telling us today that we will get there too. In 1872, President Lincoln’s wartime Income Tax was abolished. In 1879, the floating fiat dollar (which Lincoln had literally printed to pay soldiers during the war), was again fixed to gold. From 1880 to 1913, the US emerged from the rubble of the Civil War, and became the wealthiest country in the world.
