Polar Sun

QuoteIntroduction

I read an article that I saved as a PDF at Polar Sun (including a link to the original) on Tether, which lead to other of the same author concerning the GENIUS Act, Larry Kutnick, and Scott Bessent; which gave me the impetus to read the GENIUS Act for myself.

QuoteThis week's letter is a bit different, as I've primarily focused on one piece that I've wanted to write for many months. It all started when I came across the graph below on social media, which traces the roots of many of today's leading private credit firms back to Drexel Burnham Lambert.

• 1963-1974= 11y
• 1974-1984= 10y
• 1984-1994= 10y
• 1994-2005= 11y
• 2005-2016= 11y
• 2016-2021= 5y

• The Tail End of the Great Depression: The U.S. was recovering from the severe "Recession of 1937–1938" within the broader Great Depression.
• Outbreak of WWII (Sept 1939): Nazi Germany's invasion of Poland triggered World War II, rapidly transitioning global economies into wartime mobilization and ending mass unemployment.

• Post-WWII Inflation Spike & Reconversion: Demobilization led to high U.S. inflation (peaking near 20% in 1947) as wartime price controls ended and pent-up consumer demand surged.
• The Marshall Plan: Proposed in 1947, this massive foreign aid initiative began pouring billions into rebuilding Western Europe's shattered industrial infrastructure.

• Post-Korean War Recession (1953–1954): A minor U.S. economic downturn caused by a drop in military spending following the 1953 Korean War armistice.
• Start of the Post-War Boom: The Federal Reserve lowered interest rates, fueling a massive 1950s suburbia construction and consumer spending boom.

• 1960–1961 U.S. Recession: A brief downturn marked by high unemployment (peaking at 7.1%), leading President John F. Kennedy to enact economic stimulus measures.
• Bretton Woods Pressure: The U.S. dollar faced its first major balance-of-payments pressures relative to global gold reserves, leading to the creation of the London Gold Pool in late 1961.

• The "Great Inflation" Onset: Following JFK's assassination (Nov 1963), the Johnson administration expanded social programs ("Great Society") and escalated Vietnam War spending without raising taxes, laying the groundwork for 1970s inflation.
• 1964 Tax Cut: Congress passed a massive tax cut in early 1964, sparking a decade-mid boom in corporate profits.

• 1973–1975 Stagflation Recession: Triggered by the October 1973 OPEC oil embargo, crude prices quadrupled, sending the global economy into a severe combination of high inflation and deep recession ("stagflation").
• Stock Market Crash of 1973–1974: The S&P 500 lost nearly 50% of its value, marking one of the worst bear markets since the Great Depression.

• Volcker Deflation & Recovery: Federal Reserve Chair Paul Volcker's aggressive interest rate hikes (reaching 20% in 1981) successfully crushed 1970s inflation, ushering in the "Great Moderation."
• Strong Dollar & Savings & Loan (S&L) Crisis: A soaring U.S. dollar hurt exports, prompting the 1985 Plaza Accord to devalue the dollar, while deregulated S&L institutions began experiencing high failure rates.

• The Great Bond Market Massacre of 1994: The Fed unexpectedly raised benchmark rates twice as fast as anticipated, causing a historic crash in global bond prices.
• Tequila Crisis (Mexican Peso Crisis): A sudden devaluation of the Mexican peso in December 1994 triggered a capital flight across emerging markets, requiring a massive IMF bailout.
• NAFTA Takes Effect: The North American Free Trade Agreement went into effect in January 1994.

• U.S. Housing Bubble Peak: Housing prices hit historical record highs driven by loose subprime mortgage lending standards.
• Fed Rate Hiking Cycle: The Fed raised interest rates from 1.0% (2004) toward 5.25% (2006) to cool the overheating housing and credit markets, setting the stage for the 2007–2008 Global Financial Crisis.

• U.S. Presidential Election & "Trump Trade": Donald Trump's November 2016 election win triggered a stock market rally driven by expectations of corporate tax cuts and deregulation.
• Brexit Referendum (June 2016): The UK voted to leave the EU, sending shockwaves through global currency and bond markets.

• Post-COVID Global Inflation Surge: Central bank stimulus and pandemic supply-chain bottlenecks sparked a decade-high global inflation surge, pushing U.S. CPI past 5%.
• 2022 Fed Rate Hiking Cycle: To combat inflation, the Fed embarked on its fastest rate-hiking cycle in 40 years (0% to over 5% by 2023), causing a major stock and bond market correction.

• Context: Published following the radical transformation of the central bank during the New Deal.
• Key Events:
• • Banking Act of 1935: Created the modern Federal Open Market Committee (FOMC) and shifted power away from individual regional Fed banks to the Board of Governors in Washington.
  • Gold Reserve Act (1934): The Fed surrendered its official gold holdings to the U.S. Treasury, ending the domestic gold standard and establishing government control over exchange rates.

• Context: The transition from wartime financing to post-WWII monetary management.
• Key Events:
• • Employment Act of 1946: Officially mandated the federal government (and by extension the Fed) to foster maximum employment, production, and purchasing power.
  • Wartime Yield Pegs: The Fed was actively managing high post-war inflation while still constrained by its WWII agreement with the Treasury to peg interest rates at artificially low levels to keep government borrowing cheap.

• Context: The birth of modern, independent Federal Reserve open-market operations.
• Key Events:
• • The Treasury-Fed Accord of 1951: A landmark agreement that ended the Fed's obligation to peg government bond yields, giving the Fed full operational independence to combat inflation via interest rate policy.
  • Bills-Only Policy (1953): Under Chairman William McChesney Martin, the Fed established a policy of conducting open-market operations exclusively in short-term Treasury bills.

• Context: Adapting to international currency pressures and economic downturns.
• Key Events:
• • Abandonment of "Bills Only" / Operation Twist (1961): The Fed began buying longer-term Treasuries alongside short-term debt to lower long-term interest rates while preventing short-term capital outflows (protecting the U.S. gold stock under Bretton Woods).

• Context: Expansion of the U.S. financial system and international central bank cooperation.
• Key Events:
• • Creation of Currency Swap Lines: In the early 1960s, the Fed established swap lines with foreign central banks to stabilize the U.S. dollar and the Bretton Woods system against international speculativeness.
  • Expansion of Regulation S & Bank Supervision: Rapid growth in bank holding companies led to stricter supervisory oversight.

• Context: The post-Bretton Woods monetary era and severe stagflation.
• Key Events:
• • Collapse of the Bretton Woods System (1971–1973): President Nixon suspended gold convertibility ("Nixon Shock"), shifting the world entirely onto a fiat standard and floating exchange rates.
  • 1973–1974 Oil Embargo & Stagflation: Forced the Fed to confront simultaneous high inflation and rising unemployment for the first time in modern history.

• Context: The aftermath of the Volcker Anti-Inflation Campaign and financial deregulation.
• Key Events:
• • Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980: Expanded Fed authority, requiring all depository institutions (not just member banks) to hold reserves with the Fed, while giving all banks access to the Fed's discount window.
  • Shift to Reserve Targeting (1979–1982): Chairman Paul Volcker shifted focus from targeting the federal funds rate to directly controlling money supply growth to crush double-digit inflation.

• Context: A shift toward monetary transparency and global financial integration.
• Key Events:
• • First Explicit FOMC Statements (Feb 1994): Under Alan Greenspan, the FOMC began explicitly announcing changes to its target federal funds rate immediately following meetings, ending decades of policy opacity.
  • 1994 Rate Hike Cycle: The Fed doubled benchmark interest rates in a single year to preemptively cool inflation, triggering a massive bond market sell-off and the Mexican Peso Crisis.

• Context: Pre-GFC monetary policy and financial innovation.
• Key Events:
• • Introduction of Prescriptive Guidance: The Fed began using specific language in FOMC statements (e.g., policy moving at a "measured" pace) to influence long-term interest rate expectations.
  • Rise of the Shadow Banking System: Rapid proliferation of asset-backed commercial paper, complex derivatives, and subprime mortgage securitizations, which fell outside traditional Fed bank supervision.

• Context: Codification of post-2008 unconventional monetary policy tools.
• Key Events:
• • Dodd-Frank Wall Street Reform Act (2010): Significantly expanded the Fed's supervisory authority over systemically important financial institutions (SIFIs) and established the Financial Stability Oversight Council (FSOC).
  • Ample-Reserves Regime & Unconventional Policy: Formalized the Fed's shift from a scarce-reserves regime to an ample-reserves regime, utilizing Interest on Reserve Balances (IORB) and Overnight Reverse Repurchase (ON RRP) facilities as primary rate-control tools alongside Quantitative Easing (QE).

• Context: Modernizing the operational framework and post-pandemic intervention.
• Key Events:
• • Flexible Average Inflation Targeting (FAIT) Framework (2020): Announced at Jackson Hole, allowing inflation to run moderately above 2% for some time to offset periods when it ran persistently below target.
  • Standing Repo Facility (SRF) & FIMA Repo Facility (July 2021): Created permanent backstop facilities to ensure smooth money market functioning and prevent liquidity crunches in Treasury markets during stress events.
  • Massive Post-COVID Balance Sheet Expansion: Unprecedented expansion of the Fed's balance sheet through emergency lending programs and broad asset purchases in response to the pandemic shock.

• PLAW-119publ27.pdf: the text of the law downloaded from the official site at https://www.congress.gov/bill/119th-congress/senate-bill/1582/text.
• The GENIUS Act of 2025 Stablecoin Legislation Adopted in the US.pdf: a PDF of the webpage using the browser print dialog found at https://www.lw.com/en/insights/the-genius-act-of-2025-stablecoin-legislation-adopted-in-the-us.

• Intro_To_ISO-20022.pdf: a general introduction using slides that is non-technical
• swift_iso_20022_for_dummies_6th_edition_dec_2022.pdf: an introduction book that is 65 pages that does go deep into the technical aspects of the standard.