Part IV-G — The American Domestic Convulsion
Walpurgis ends the illusion of a resilient United States. The federal government clings to household budget myths, Congress weaponises shutdowns, and the states face an unbackstopped funding shock. The domestic convulsion is a convergence of fiscal paralysis, municipal credit failure, social unrest, and nuclear narrative sabotage. When the monetary and military backstop of the liberal order fractures at the source, global confidence collapses.
Key Judgments - The US municipal bond stack totals roughly USD 4.2 trillion. There is no permanent lender of last resort for state debt; the 2020 Municipal Liquidity Facility was temporary.1 - A failed Treasury auction cascades into state and local bond fire sales. Mutual funds and ETFs dominate flows; when redemptions spike, market access closes within days.1 - Case studies such as the Tricolor Chapter 7 bankruptcy expose double pledge fraud in warehouse lines, undermining confidence in securitisation plumbing. Losses already run into the hundreds of millions.2 - Political leadership normalises coercive rhetoric, including repurposing Russian nuclear narratives to force diplomatic concessions. That erases the assumption of rational stewardship and collapses E-MAD.3
| Failure channel | Mechanism | Timeline |
|---|---|---|
| Federal fiscal paralysis | Ideological refusal to use balance sheet; shutdown threats block automatic stabilisers | Immediate (T+0 to T+30 days) |
| Municipal refinancing crisis | Bidless auctions, failed VRDO rollovers, insurer downgrades | T+7 to T+60 days |
| Social fracture | Pension freezes, service cuts, activation of militia and protest networks | T+30 to T+180 days |
| Deterrence narrative collapse | Nuclear coercion rhetoric, alliance distrust, Pentagon split | T+60 to T+180 days |
Why it matters
The dollar cannot serve as risk free collateral if the issuer’s political core is seen as irrational and incapable of collective action. Domestic instability removes the foundation for swap lines, NATO coordination, and humanitarian leadership.
1. Federal Paralysis: The Policy Vacuum
1.1 Household budget fallacy as doctrine
Complete Walpurgis documents how the state is run like a household on purpose.4 Once the Treasury market fails, Congress defaults to cuts rather than stabilisation. Automatic stabilisers such as unemployment insurance or SNAP are suspended, amplifying the demand collapse.
1.2 Institutional erosion
The Federal Reserve faces legal and political attacks for any attempt to restart large scale asset purchases. Treasury cannot rely on the Fed as unquestioned buyer; the panic spreads to all dollar credit.
2. States and Cities: The Funding Cliff
2.1 The domino setup
The Domino Scenario on state debt shows how investor redemptions hit single state mutual funds and ETFs.1 Variable rate demand obligations fail to roll; monoline insurers cannot backstop losses. Without a statutory bankruptcy path, states face de facto payment suspension as markets refuse to refinance.
2.2 Securitisation cracks
Tricolor Holdings filed for Chapter 7 on 2025-09-10. The double pledge of collateral shattered trust in warehouse funding, forcing banks like Fifth Third and JPMorgan to book large impairments.2 Once securitisation shuts down, sales taxes and employment collapse in affected states, widening deficits.
3. Social Order and Security Forces
- Pension payments and healthcare obligations are delayed; unions litigate while emergency powers expand.
- Urban centres experience rolling brownouts and water cuts because infrastructure budgets evaporate.
- Militias and protest movements fill the vacuum; National Guard deployments strain already hostile civil military relations.
4. Deterrence Without Credibility
The DR-THP deterrence brief warns that a second Trump administration could adopt Russian style nuclear coercion to strong arm allies.3 NATO partners then treat US guarantees as optional, accelerating independent nuclear programs or hedging toward China. The international system interprets US instability as reason to unwind dollar exposure.
5. Monitoring and Actions
5.1 Indicators
- Yield ratios (M/T) breach 150 percent for states such as Illinois or California.
- VRDO remarketings fail in consecutive weeks; SIFMA index spikes above 6 percent.
- Treasury General Account drains below USD 100 billion without legislative relief.
- Senior Pentagon officials issue public statements distancing the military from political directives.
5.2 Defensive measures
- Short high beta muni ETFs; hedge with payer swaptions on USD rates.
- Relocate critical operations and data centres outside at risk states; map National Guard activation timelines.
- Build redundancy for federal program exposure; assume delays on Medicare, Medicaid, and federal contracts.
- Coordinate with allies on alternate deterrence frameworks (E-MAD playbooks, regional compacts) that can function without US leadership.
1 Source: Domino Scenario: US State Bond Default Dynamics (2025-09-05). 2 Source: Systemic Risk Alert: Tricolor Bankruptcy and Warehouse Fraud (2025-09-12). 3 Source: DR-THP “Invisible American Seat” deterrence assessment (2025-09-11). 4 Source: Complete Walpurgis: Chain Reaction Analysis (2025-09-12).