Project Walpurgis: An integrated analysis of political corruption and global financial collapse

executive summary

This report presents the core proposition that the most significant systemic risks faced by the global financial and political order lie not in the fragility of technological markets but in the intentional and systematic erosion of institutional trust within the United States. This analysis elucidates the causal chain that leads to market collapse, and outlines major transmission routes, such as the eurozone, China and emerging markets. Furthermore, we quantitatively present the probability of a crisis that has been reassessed by incorporating political factors, and provide high-level strategic recommendations focusing on building resilience in a world where trust is lost.

The root of the crisis lies in the political dynamics that use economic errors that equate national finances with household account books as political weapons, and normalize fiscal brink policies. In parallel, unprecedented attacks on central bank independence are undermining the reliability of the Federal Reserve, which is at the heart of its crisis response capabilities. These political corruption significantly increases the probability of the technical trigger ("Walpurgis") of a failure to bid on September 30, 2025 in US Treasury Bids.

Once the financial shock has occurred, it will transform into a self-amplifying "liquidity death spiral" through the regulatory framework introduced after the 2008 crisis, particularly the complementary leverage ratio (SLR) and the central clearing agency (CCP) margin model. This crisis will lead to a serious global US dollar shortage, exploiting the inherent vulnerabilities of each region (eurozone banks rely on dollar funding, China's capital flight risk, and emerging dollar debt), leading to a global financial and political disaster ("complete Walpurgis").

According to the analysis in this report, when political stressors are taken into account, the probability of a catastrophic L2 scenario jumps 10 times from 1% to 10% of the baseline, taking into account technical factors alone. This indicates that political risk has no longer been a side component in financial risk assessments, but a dominant variable.

In conclusion, this report proposes specific defensive strategies, including reduced duration, maximizing liquidity, and asset allocation based on political stability. From a long-term perspective, the end of the concept of "risk-free assets" and adaptation to a new era in which political risk analysis is central to macro strategies will be the key factor in separating success and failure in the coming decades.

Chapter 1: Political Powder Reservoir: Prerequisites for the Crisis of Institutional Corrosion

This chapter establishes the political foundation for the crisis. We argue that financial triggers are not exogenous shocks, but endogenous consequences that arise from a particular corrosive political environment.

1.1. The fallacy of "household books" as a political weapon

In debates on national finance management, the metaphor is frequently used: "The government should live within revenues, like household finances." However, this "government and household analogy" is a powerful political tool that has long been pointed out to be an error in economic terms. There is a fundamental difference between the two. The sovereign government that issues its own currency will not fall into nominal insolvency, and has the ultimate means of securing revenue, the right to collect taxes, and the planning period is virtually endless. Furthermore, government spending plays a macroeconomic role in creating demand for the entire economy and creating its own tax revenue base.

When this economic fallacy is adopted beyond mere rhetoric, it transforms into concrete policies that destabilize the market. This worldview, which views national debt as a moral failure rather than as a financial product that underlies the global financial system, inevitably encourages financial brink policies, such as conflicts over debt caps. This strategy is extremely politically effective as it reduces complex economic issues to a simplified moral narrative that resonates with the financial pressures that voters face in their households. This creates a political incentive structure that is more appropriate for fiscal confrontation than stability, increasing the likelihood of policy mistakes that trigger a crisis.

The most serious consequence of this political dynamic is the erosion of trust in America's creditworthiness. The question is not whether the US has the "ability" to repay debt, but whether there is a consistent "will" to repay debt. The normalization of brink-based policies instills doubts among domestic and international investors about this "will." This gradual, chronic decline in trust is what effectively reduces the threshold for overseas demand for US Treasury and leads to a technical failure of failing to place government bond bids, as detailed in a later section.

1.2. Systematic attack on the independence of the Federal Reserve

In evaluating the probability that the "narrow Walpurgis" crisis will escalate from a manageable market shock (L1 scenario) to a systemic collapse (L2/L3 scenario), the single variable most important is the systematic and unprecedented political attack on Federal Reserve's independence. Historically, tensions have arisen between the president and the Fed, but the ongoing campaigns are fundamentally different in their nature and degree. It includes an open personality attack on the Fed chairperson, threats to remove the director (e.g. Lisa Cook), and attempts to send politically loyal figures onto the board that blurs the line between the executive branch and the central bank (e.g. Stephen Milan).

This attempt at institutional control is the most powerful mechanism to escalate the crisis. Politically subordinated central banks lose their most powerful policy tool: "reliability." If the market recognizes that the Fed's decisions are influenced by political whims rather than economic data, the Fed's "forward guidance" and "reaction functions" will lose confidence, and market participants will no longer be able to effectively price risks. This growing uncertainty serves as a kind of "shadow monetary tightening" in itself, destabilizing the market even before the Fed makes any decisions.

What's even more serious is the paradox that "firemen are arsonists." When a financial crisis occurs, the very agency that should be fighting the fires is being blamed by political leadership, which has been fueling the issue for months, for the cause of the problem. Essential crisis responses, such as quantitative easing (QE) and large-scale liquidity supplies, will be immediately labelled as "wall street relief" or "deep state conspiracy." Fearing this political condemnation, the Fed is likely to fall into fatal hesitancy and underreaction in the crucial hours of the crisis. This politically-caused policy paralysis is the core factor that leaves the amplification mechanism described below unchecked and transforms manageable shocks into uncontrollable collapses.

When we consider these political dynamics in an integrated way, we can see a deeper structure. The "household account book" fallacy and the attack on the Fed are not separate phenomena. They are two fronts of the same populist political warfare against institutional expertise and established norms. The former dejudifies financial norms, and the latter dejudifies financial norms. This creates a coherent (but destructive) political ecosystem in which the very concept of sound and independent governance is portrayed as the enemy of the people. As a result, the very nature of financial risk is fundamentally transformed. Risks will no longer be influenced by economic data such as inflation and employment, but also by political outcomes such as Fed personnel, presidential tweets and congressional threats. This is a paradigm shift that could be called "politicization of risk-free interest rates," and it overturns the framework of financial models and risk management over the past decades. The most important prices in the global financial system will no longer be determined by economics, but by politics, a much more unstable and unpredictable force.

Chapter 2: Sparks of Finance: Anatomy of the "Narrow Sense Walpurgis"

This chapter shifts the focus from the political assumptions outlined in the previous chapter to the technical mechanisms of crisis. We argue how the political environment can be directly transformed into quantifiable market failures.

2.1. Four Knights who fail to bid

The fire event in the "narrow sense of Walpurgis" is a technical failure to achieve US bond bids. This "non-success" is defined as the simultaneously breaching the threshold of at least two of the following four important auction indicators:

1. Tail ≥ 8–12bp : The difference between the highest winning bid yield at an auction and the expected yield on the When-Issued market just before bidding. While the normal tail is 1-2 basis points (bp), this level means that demand at the expected price has completely collapsed.

2. Bid-to-Cover Ratio ≤ 2.00 : The ratio of the total bid amount divided by the amount offered to show the strength of demand. This level suggests a catastrophic lack of demand from end customers, as healthy bids usually exceed 2.0.

3. Indirect bidder share ≤ 50% : Share of indirect bidders, including foreign central banks and others. If the market share is normally 60-65% below this level, it is a clear signal for capital flight from overseas.

4. Primary Dealer (PD) allocation ≥ 40% : Shows that the ultimate buyer, the primary dealer, has been forced to absorb an unusually large share. While the normal allocation is around 10-15%, this level means that the dealer community is forced to take on an indigesible risk.

The deterioration of these technical indicators is a direct result of the political environment detailed in Chapter 1. The decline in confidence in the US due to a fiscal brink policy will structurally reduce demand from overseas investors and directly push down "indirect bidder share." The uncertainty brought about by an attack on the Fed's independence increases the market risk premium and expands the "tail." These two factors combine to disrupt the "bid rate," and force "primary dealers" to fill the gaps in demand that result in the resulting shortages.

Therefore, failure to bids is not the cause of the crisis, but is merely a "symptom" that has been observable for the first time, a more serious and deep-rooted existing medical condition, namely a fundamental loss of confidence in the US political and institutional framework.

2.2. Cascade of Amplification: How Regulations Become Weapons

How will a limited failure to bid be amplified into a systemic crisis? The mechanism is ironically incorporated into the very regulatory framework introduced after the 2008 financial crisis.

Mechanism 1: A strait jacket called SLR

The first amplifier is the complementary leverage ratio (SLR). This was introduced to prevent excessive leverage in banks, but does not distinguish between high-risk assets and extremely secure US Treasury bonds. When primary dealers are forced to absorb government bonds of more than 40% of their bids, their leverage indicators violate the regulatory cap. This would force them to legally sell more asset in a declining market to reduce their balance sheet, rather than absorbing the shock. In this way, regulations aimed at the soundness of individual banks transform dealers from absorbing shocks to amplifying them.

Mechanism 2: CCP's fluidity death spiral

The second and more powerful amplifier is a procyclical feedback loop through the central clearing agency (CCP). The sharp decline in government bond prices and sudden volatility lead to large-scale, simultaneous margin calls from major CCPs such as CME (futures) and FICC (physical and reporting). This margin model is essentially designed to be procyclical (business cycle amplification), and the more volatility the market becomes, the more margin it requires. This has the fatal side effect of sucking up liquidity from the system at the very moment when liquidity is at its most tight.

To secure cash to pay margin, market participants are forced to sell their most liquid assets: US Treasury. This throw-off seller further pushes down government bond prices and increases volatility, which induces further margin demand. This self-enhancing feedback is the true nature of the "liquidity death spiral" and the engine of the market collapse.

This crisis exposes the fundamental design flaws inherent in regulatory architecture in 2008. These regulations were designed to prevent a recurrence of credit-driven crises (such as the Lehman shock), but their premises implicitly assume that U.S. Treasury bonds are always liquid and risk-free, and that reasonable and non-political crisis managers can suspend the rules in emergencies. The Walpurgis scenario shows that both of these assumptions are no longer valid. This is because the cause of the crisis is a loss of confidence in "risk-free assets" itself, and the political paralysis mentioned in Chapter 1 prevents the initiation of circuit breakers, such as the temporary exemption of SLR. The fundamental paradox of micro-health pursuit of micro-health (SLRs of individual banks, margin models of individual CCPs) interact in systemic shocks, creating macro-instability. Rules designed to prevent a recurrence in 2008 will become the main communication mechanism for the 2025 collapse.

Chapter 3: Worldwide Great Fires: Routes of Financial and Political Contagion

This chapter tracks the process of shock waves spreading internationally in the US and developing into financial and political disasters along the inherent vulnerabilities of each region.

3.1. Major Propagation Route: "Global Dollar Death Loop"

The major vector driving the international propagation of the crisis is the severe global US dollar shortage caused by dysfunction in the US repo market. Banks outside the US, particularly European banks, rely heavily on this market for short-term US dollar funding (the so-called "Eurodollar" system). A market freeze will immediately put these banks in a dollar financing crisis.

The severity of this dollar shortage is measured by the rapid expansion of cross-currency basis swaps (in the L3 scenario, the EURUSD basis is projected to reach -70bp). Foreign financial institutions that have lost access to dollar funds will be forced to sell their most liquid US dollar denominated assets: US Treasury in order to survive. This massive international selling pressure further exacerbates the original crisis within the United States, creating a self-reinforced vicious cycle, namely the "global dollar death loop."

Furthermore, this situation could lead to the "weaponization" of global financial safety nets, such as the Fed's dollar swapline. In an extremely politicized environment, access to swaplines may no longer be pure technical decisions, but as a political judgment associated with support for US foreign policy. If access to countries deemed unfriendly is delayed or restricted, they will be forced to sell more destructive assets, making the crisis even worse. This means a fundamental shift from a rule-based global order to a bare power-based order, leading to geopolitical fragmentation of the global financial system.

3.2. Regional impact analysis

Eurozone (Germany and France)

• Fragility : The extreme reliance of a major globally active bank (G-SIB) on short-term US dollar funding in the US wholesale market.

• Crisis Dynamics : The dollar shortage caused an immediate and serious liquidity crisis for major European banks, reminiscent of the return of 2008. This financial stress could easily rekindle the sovereign debt crisis in the eurozone as markets begin to question the financial stability of Southern European countries and the political will to support them by core countries (Germany, France). Existing political rifts within the EU will be exposed and widened.

China and Hong Kong

• Fragility : A huge amount of US Treasury holdings (approximately $759 billion) as an official preparation, and a managed currency system that is vulnerable to capital outflows. Hong Kong's fatal vulnerability is the currency peg system itself to the US dollar.

• Crisis Dynamics : China faces a trilemma of either tolerating a catastrophic devaluation of the yuan (inducing capital flight and domestic panic), spending valuable foreign currency reserves to defend the exchange rate, or impose strict capital regulations that isolated the economy. This crisis challenges the very narrative of the Chinese Communist Party's governance, with capabilities and stability at its core. The L3 scenario assumes the collapse of the Hong Kong dollar peg, which will evaporate Hong Kong's wealth and mark the end of an era.

新興国市場（EM）

• Fragility : High levels of dollar-denominated debt (sovereign and private sector) and dependence on capital inflows from overseas.

• Crisis Dynamics : Emerging countries face a sudden halt in capital inflows, a so-called "sudden stop." Initially, the dollar rose due to a escapism towards liquidity, and global trade collapsed, making it impossible to repay dollar-denominated debts. This leads to a chain of sovereign and corporate defaults, causing serious economic recessions, currency crashes and widespread social and political unrest in developing countries around the world.

What this analysis shows is that the crisis serves not only as a financial contagion, but as a "geopolitical stress test" that exports political instability along existing faults in each region. The US-born financial shock violently accelerates the inherent political vulnerabilities faced by each system, such as the sovereign debt problem between the north and south in the eurozone, state capital controls in China, and debt crisis in emerging countries.

Chapter 4: Vicious Cycle: How a Financial Collapse Promotes Political Extremism

This chapter is the analytical core of this report, elucidating the feedback loop of how the consequences of the financial crisis can strengthen and amplify the political dysfunction that has caused it.

4.1. The Rise of Responsibility Game and the Rise of Extremism

The destruction of wealth, estimated at $12 to $18 trillion, estimated in the L2 scenario, creates fierce rage among the people. In a highly polarized political environment as mentioned in Chapter 1, politicians who are the ones who caused the crisis will pass the blame on existing targets: the Fed, globalist bankers, and foreign forces (especially China). Necessary but unpopular crisis responses, such as supplying liquidity to banks, are portrayed as evidence that corrupt systems are bailing out the elite, further incite populist rage and harbor political forces that promise radical, simple solutions.

4.2. Policy paralysis and the political "doom loop"

Overcoming the crisis requires rapid, large-scale, collaborative, and professional responses, including unlimited quantitative easing, exemption from SLRs, and expanding international swap lines. However, the aforementioned political environment makes it impossible to do just that kind of response. This is because proposing these solutions itself is a very politically harmful act.

This creates a fatal "doom loop." Policy inaction will make the financial crisis worse, and the worsening economy will create even more public anger. This anger increases the power of the very political forces that are hampering policy responses, which leads to further inaction and makes the crisis even more serious. This vicious cycle destroys the system's ability to repair itself from within.

This dynamic shows that this crisis creates a peculiar political environment that allows disease (populist institutional destruction) to market itself as a cure. The politicians who laid the foundations of the crisis point to the resulting collapse and can convincingly argue that "the system we were attacking was corrupt and needed to be destroyed." This self-fulfilling prophecy is a powerful tool for strengthening political power.

4.3. The end of institutional orthodoxy

The ultimate victim of "complete Walpurgis" is not only the economy, but the very concept of institutional orthodoxy. When all the institutions that modern nations have built to manage complex crises, such as the central bank, the Ministry of Finance, and the framework of international cooperation, are successfully portrayed as enemies of the people, the very ability to govern.

This represents a critical crossroads that could be a "phase transition" for Western democracy. The political debate could shift from "policies" such as high or low taxes to "government systems" themselves, such as liberal democracy or authoritarianism. The magnitude of economic failure is so enormous that a significant portion of the population may pave the way for a political movement that seeks to conclude that the entire democratic framework is a failure and completely replace it. The collapse of finance will serve as a catalyst for the collapse of politics.

Chapter 5 Quantification of major disasters: Probability and damage assessment by scenario

This chapter integrates previous political and technical analyses into a unified quantitative risk assessment.

5.1. Political Stress Multiplier (PSM): Reassessment of Probability

First, we set baseline probabilities based on purely technical models, under the assumption that the political environment is "normal." Under these conditions, the probability of an L1 (severe) scenario being estimated at 5%, L2 (catastrophic) is rated at 1%, and L3 (systemic collapse) is rated at 0.1%.

Next, we introduce the concept of "Political Stress Multiplier (PSM)," which is a concept that captures the effects of a corrosive political environment detailed in this report. The true power of the PSM lies in dramatically increasing the "conditional probability" of a crisis escalating from L1 to L2 and then L3, rather than the probability of the initial trigger event (L1). This is because the identified political factors work primarily by numbing the mechanisms of crisis containment.

The application of PSM derives a more realistic probability assessment that incorporates political reality. The probability of being reevaluated is 15% for L1, 10% for L2, and 5% for L3. This quantitative change, particularly the fact that the probability of an L2 scenario jumps tenfold, is the core conclusion that the analysis of this report brings, clearly indicating that political risk is now the dominant variable in financial risk assessment.

Table 1: Reevaluation of probability of occurrence by "Walpurgis" scenario (adjusted by political stress)

Export to Google Sheets

Note: Loss amount is based on the document, and scenario definition is based on the document. Probability is the evaluation value based on an integrated analysis of this report.

5.2. Damage assessment matrix

The table below breaks down the global impact of the crisis by country and region, showing the specific routes of vulnerability and estimated financial losses. This translates abstract risks into actionable strategic risk maps.

Table 2: Matrix of global vulnerabilities and estimated financial losses

Export to Google Sheets

Note: The amount of loss is based on the estimates stated in the document.

This risk map is of crucial importance to decision makers. For example, it is clear that Japan's risks are primarily solvency issues on the balance sheet, while the risks in the UK and EU are liquidity issues in the funding market. This difference suggests that different leading indicators need to be focused on different leading indicators (for example, bank capital adequacy ratios in the former and cross-currency basis swaps in the latter) when monitoring each risk and building hedging strategies. This allows for more refined and effective risk management and opportunity identification rather than a uniform global strategy.

Chapter 6: Strategic Essentials in the Post-Walpurgis World

The analysis in this report goes beyond just warnings, but provides actionable intelligence to sail through a world where the foundations of the post-World War II financial order have fallen apart.

6.1. Evaluation of countermeasures: feasibility vs. effectiveness matrix

In evaluating crisis responses, it is essential to consider not only its theoretical validity but also its realistic viability in the current political environment. Analysis shows that the most effective measures (large international cooperation, such as the G7's coordinated government bond purchases) are extremely low political feasibility due to geopolitical fragmentation. On the other hand, the most feasible measures (measures completed within Japan, such as the Ministry of Finance's shortening of the publication period) may be insufficiently effective against the scale of the crisis on their own.

This "effectiveness and feasibility gap" suggests that there is a high possibility that there will be no "silver bullets" in this crisis. Therefore, rather than expecting the best possible action that is impossible, strategies must focus on combining viable suboptimal actions and above all, increasing the resilience of their portfolio.

6.2. Actionable recommendations

Pre-event portfolio position

The transition from passive risk management to a proactive defensive position is justified.

• Reducing duration : This crisis is essentially a violent reassessment of duration risk, or a "term premium shock." Proactively reducing the duration of the entire portfolio is the most direct and effective defense to reduce price sensitivity to interest rate increases.

• Enhanced fluidity : It is essential to maximize the cash and cash equivalent ratio to survive the "liquidity death spiral" caused by CCP margin requests. This will ensure that "dry powder (waiting funds)" is used to avoid forced asset sales during a crisis and to capture investment opportunities after the crisis.

• Targeted tail risk hedge : Build hedges targeting dynamics unique to this crisis. These include long positions in gold as traditional safe assets, long positions in the currency of countries with strong foreign net assets (yen, Swiss franc) and structured products to bet on the most vulnerable nodes (e.g. the collapse of the Hong Kong dollar peg and credit uncertainty in the UK banking sector).

Real-time Crisis Monitoring Dashboard

For the weeks leading up to September 30th, 2025, we need to specifically monitor the following key high frequency indicators and establish a system to raise alert levels based on defined thresholds.

• Auction-related indicators : The most important indicators that directly indicate the market's expectations and demand for bids, such as when-issued spreads and bid ratios.

• Funding Market Indicators : Indicators showing the stress of piping in the financial system, such as SOFR interest rates and fail-to-delivery.

• Global Dollar Deficit Indicator : The most sensitive indicator of the severity of the global dollar shortage, such as cross-currency basis swap.

• Federal Reserve Facility Usage : The surge in SRF/FIMA facility usage is a clear indication that the private market is becoming dysfunctional.

Long-term strategic relocation

The ultimate strategic implication of this report is the recognition that political risks, particularly the institutional health of democracies, have now become a central analytical target in risk assessments of financial markets, are no longer exogenous "tail risks."

• The end of "risk-free assets" : Recognizing that the concept of truly risk-free assets is over is the starting point for all strategies. All sovereign debts are now subject to credit analysis of the country's political stability and institutional reliability.

• Adapt to a multipolar world : The unipolar domination of the US dollar has ended and the capacity to operate in a fragmented, multipolar world of currency, where the euro and yuan play a bigger role. This includes a reassessment of the role of gold as an alternative reserve asset.

• Advantages of political risk analysis : The central variable driving macro risk in the future will be political risk rather than economic data. Building deep expertise in geopolitics and domestic politics within the organization and putting it at the heart of the investment process will be the most important long-term investments to survive this new paradigm.