AI, Debt & the Death of Fear
- Jun 2
- 7 min read
June 3, 2026 | This week Goldman Sachs (GS) CEO David Solomon stated the obvious when he noted that there is “more greed than there is fear” in comments to the Economic Club of New York. Solomon’s observation came as Goldman projects that the war with Iran will cause “a modest drag” on U.S. and global GDP while significantly elevating inflation and delaying interest rate cuts.
In fact, we expect the war with Iran to result in higher interest rates, higher inflation and rationing of key petroleum byproducts in coming months, something that nobody in the Trump Administration seems willing to discuss. If Washington was populated by serious people, the federal government would already be making plans for rationing key refined products.
The prospect of such developments is unlikely to change the manic mood on Wall Street, however. Bankers have declared 2026 to be the year of initial public offerings regardless of whether the Fed cuts or raises the target for federal funds or inflation goes to double digits. On Wall Street, it no longer matters. As one reader named Ira notes: "There are four ways to deal with debt loads----repudiate, depreciate, devalue, or a capital levy------where do we go from here?"
The Treasury’s issuance of short-term debt is serving as a rate cut of sorts, forcing down the level of duration in the market even as the amount of total indebtedness grows. Shortening the duration of Treasury debt is a sort of fiscal QE. No surprise then that a surreal atmosphere prevails in Washington as the federal debt now totals $40 trillion, yet the growth of private debt is equally impressive.
The situation on Washington and Wall Street, however, is fundamentally different than a century ago. Rather than an absence of fear, the late 1920s were characterized by overconfidence and an "asset bubble" driven by greed, which ultimately culminated in the devastating Wall Street Crash of October 1929. Today the mechanisms of government provide stability to the system, stability that allows people to take even greater risks with less fear.
Like Herbert Hoover in the late 1920s, Donald Trump in 2024 was elected to preserve the existing order even as the ground was shifting underfoot. While the financial markets climb ever higher, the level of dysfunction in Washington reminds close observers of President Trump’s first term in office. The lack of focus and attention to details in Washington, however, are less troubling than the lack of fear and especially uncertainty in the financial markets.
Banksters are certain that AI-related technology firms will go to the moon, but their lack of fear and loathing is far more terrifying. Morningstar initiated coverage on SpaceX with a fair-value estimate of $780 billion. This is less than half of the $1.8 trillion target valuation for the company's planned initial IPO, just one caution about the valuation of SpaceX.
Of note, SpaceX disclosed this week that it "may issue a significant amount of equity in connection with future transactions," signaling that the company expects additional acquisitions, investments, or other major deals after it reaches public markets. This may include the purchase of Elon Musk's ailing auto company Tesla Motors (TSLA).
Bitcoin crypto tokens seem to have fallen into yet another price collapse. All around there are signs of a reset building. As we noted in the latest edition of The IRA Bank Book Q2 2026, “higher credit risk is becoming more broad-based,” note our friends at MIAC. “Rising delinquencies are most apparent in FHA, but the deterioration has touched all mortgage sectors.”
Today debt spreads are as tight as ever before, usually a positive indication about the health of the metabolism of the US economy. In this case, however, we view the tightness of debt spreads as an indication of inflation, whereby investors are chasing investment assets in a way that is breathtaking in its presumption and lack of fear.
In our work in the mortgage sector, for example, the list of institutional investors looking to put capital to work buying and flipping distressed residential mortgages is scary. Why are investors who usually gallop the globe looking for multi-billion dollar opportunities now focused on defaulted HECM reverse mortgages being auctioned this summer by HUD? Because despite the piles of private debt in the financial markets, government guaranteed assets remain scarce.
William H. Janeway, special limited partner of Warburg Pincus, distinguished affiliated professor in economics at the University of Cambridge, and author of Doing Capitalism in the Innovation Economy (Cambridge University Press, 2018) commented in Project Syndicate this week:
“One highly relevant place to examine how the world really works right now is the extraordinary boom in AI-related investment to fund construction of the physical infrastructure needed to enable the training and deployment of large language models. These investments are motivated by problematic long-term expectations with respect to commercially useful and financially rewarding applications of generative AI. The question from the world of financial economics is whether, in aggregate and with respect to specific players, the cash flows generated by these applications will be sufficient—and sufficiently timely — to validate the investments now committed. In turn, funding from the operational cash flows of the established, monopolistic tech giants has been giving way to rapidly growing issuance of debt securities. The entire phenomenon cries out for analysis in the spirit of Minsky’s Keynes.”
Bill Janeway, who we interviewed previously in The IRA (“The Interview: William Janeway on Capitalism and the Innovation Economy”) reminds us that America today is deep into the third phase of classical finance, the Ponzi phase, when valuations are purely a matter of manipulation and hubris. He recalls that the “Minsky Moment” arrived two years before the collapse of Lehman Brothers, when companies began to pay their debts by issuing more debt. Sound familiar? Like the standard practice today in private equity and debt.
Again, Janeway:
“Minsky had defined a process, not a moment, and the stage that it had reached in 2006 could have been inferred from the fact that banks were funding their customers with “PIK-Toggle” debt instruments. This meant that debtors could service their obligations by issuing more debt (PIK stands for “payment in kind”), and that the decision to do so was entirely within the borrower’s discretion (the “Toggle”). There could have been no clearer evidence that the system was in the Ponzi phase. Moreover, markets were so confident in the illusion they had created that one could purchase a three-year put on the S&P 500 (a bet that the index would fall) for only 2% per year.”
We can understand why many economists believe that the FOMC will be forced to raise interest rates at the next meeting or by the latest July, yet we’d argue that the situation in the financial markets now exceeds the ability of mere policy to control inflation.
After 16 years of QE from the Fed, the only way that we can tame the dragon of inflation and affordability in the US is for a maxi asset price reset in credit a la the 1970s or even the 1930s. In the event, when the surprise event does occur, the FOMC will be forced to drop interest rates dramatically to get ahead of a deflationary tidal wave.
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The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.
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The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.
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