WALSH'S UNITED STATES FEDERAL RESERVE: A CAPITAL ALLOCATION TO MAKE WAY FOR AI PRODUCTIVITY

Photo by Raoul Pal

Original: AididiaoJP, Foresight News

Today, the Senate confirmed by 54 votes to 45 Kevin Warsh as the 17th Federal Reserve, the closest vote in the Agency ' s history of opposition and approval. The media has interpreted it as a political story: Trump finally got what he wanted, the Democrats fought hard, Feltman voted in favour, and party divisions now extend to the Fed。

It's just surface. The real story is almost unreadable. To see this clearly, you must stop judging the vote with a right-wing scoreboard and ask a different question: who chose Walsh, what they bought when they chose him, and what does that mean for the next two years of the market

Why Walsh

I want to start in an unusual place, because the framework is important。

I've been developing a framework called Universal Code for the past few years. Its first rule is simple: the universe is organized to maximize the intellectual output generated by each unit of energy consumption. Life produces more intelligence than simple chemical reactions, and civilization produces more intelligence than life. AI produces more intelligence than civilization built around human awareness. Because this is the gradient chosen by the universe, and capital will follow it. Capital flows to any configuration that at any given time can generate the greatest amount of intelligence per unit of energy。

THIS IS THE FIRST LAW OF THE COMMON LAW. IT APPLIES TO BIOLOGY, CIVILIZATION, MARKETS AND AI TRAINING OPERATIONS. AT PRESENT, ON THE TRAJECTORY IN WHICH THE WORLD IS ACTUALLY SITUATED, THE CONFIGURATION THAT WON THIS GRADIENT IS A HALF-CONDUCTOR CYCLE THAT IS ACCELERATED BY ARTIFICIAL INTELLECTUAL SUPERDITION, FOLLOWED BY ACCELERATED ENERGY CONSTRUCTION, ALL OF WHICH ARE GROWING IN COMBINATION DURING THE INDEX PHASE. CAPITAL IS BEING PULLED TO THIS CONFIGURATION BY AN UNEXPLAINABLE FORCE OF A CONVENTIONAL MACRO MODEL, BECAUSE THERE IS NO FIRST LAW IN THE CONVENTIONAL MODEL. SO EVERYTHING ELSE IS BEING FOLLOWED, AND POLITICAL ALLIANCES ARE BEING REORGANIZED AROUND WHO CAN PROVIDE ACCESS TO THE BOTTOM BASE. THE GEOPOLITICAL ALLIANCE IS RESHAPING AROUND WHO CONTROLS CHIPS, ENERGY AND THE DOLLAR PIPELINE THAT FINANCES ALL OF THIS. THIS WEEK’S BEIJING SUMMIT, THE GULF REGION’S CALCULUS-BUILDING, THE WESTERN SEMICONDUCTOR REFLOW, AND THE ALLIANCE OF DONORS THAT IS RESHAPING WASHINGTON’S POLITICS ARE NOT INDEPENDENT STORIES。

They are expressions of the same gradient at different scales, and countries and alliances aligned with the gradients will grow at a composite rate, and countries and alliances competing with them will decline。

IF YOU ACCEPT THIS FRAMEWORK, THEN THE MOST IMPORTANT VARIABLE IN THE MACRO-ENVIRONMENT OVER THE NEXT DECADE IS WHETHER MONETARY POLICY IMPEDES OR RESPONDS TO THIS PATH. A FED BUILT AGAINST AI AT RESTRICTIVE INTEREST RATES WILL STIFLE THE FUNDAMENTAL TRANSFORMATION ON WHICH THE GLOBAL ECONOMY NOW DEPENDS. A FED THAT RESPONDS TO IT WILL MAKE THE PRODUCTIVITY WAVE WORK。

KEVIN WALSH IS THE PERSON WITH THE MOST PERSONAL INSIGHT INTO THIS PATH AMONG THE CANDIDATES FOR THE PRESIDENCY OF THE FED. FOR MOST OF THE PAST DECADE, HE WAS NOT A CENTRAL BANK OFFICIAL, BUT A DIRECTOR AND AN INVESTOR IN TECHNOLOGY. AS A MEMBER OF THE BOARD OF DIRECTORS, HE HAS ALLOCATED CAPITAL TO THE AI INFRASTRUCTURE BANK AS A PRIVATE INVESTOR. HE LOOKED INSIDE THE BUILDING ROOM, NOT IN THE FOMC BRIEFING BOOK. HE WAS NOT MAKING OPTIMISTIC PREDICTIONS WHEN HE SAID HE BELIEVED THAT PRODUCTIVITY PROSPERITY WOULD LEAD AMERICA TO WIN THE 21ST CENTURY. HE WAS BASED ON AN INVESTOR'S BELIEF THAT HE HAD SEEN AND INVESTED。

This is the part of the media that has been overlooked, and he is not a hawk who has changed his camp because Trump promised his post. He is an investor who has been a productivity miracle for many years and is now in control of the institutions that determine whether this miracle can compound growth or be strangled by tight currency. The other main candidates considered by Trump had no such background. One is an academic economist, and the other is a community banker, Kevin Walsh being the only three who have actually deployed capital to the next decade's base。

This makes him a first-rate candidate, whose public conviction and personal portfolio point to the operator who keeps the smart combination of the fastest path open。

What's Walsh been saying

over the past 12 months, walsh has put forward an unusually specific monetary policy agenda in his public record. he explicitly called for what he called "regime change" in the fed. he explicitly called for a new fed agreement modelled on the 1951 agreement. he proposed to reform the inflation data used by the fed. he proposed removing forward guidance from communication, and he suggested encouraging more internal dissent in interest rate decisions. he proposed reducing the fed ' s balance sheet and coordinating the stance with the treasury ' s debt management。

Read them alone, they sound like a well-thought-out technical preference of a former Fed board member. Together, they describe an operational model that combines two different historical contexts. One was the financial repression strategy of 1946-1955, and the other was the productivity-led strategy of Greenspan in the late 1990s. The combination of the two is now being required。

Greenspan's strategy is the real template

The 1951 framework was a rhetorical cover, and Greenspan's strategy in the late 1990s was the operational template。

HERE'S WHAT GREENSPAN DID IN 1996-2000. THE ECONOMY IS HOT AND UNEMPLOYMENT IS LOWER THAN THE SO-CALLED NATURAL RATE OF THE CONVENTIONAL MODEL. DURING THE PERIOD, CPI GENERALLY EXPERIENCED HIGH OIL AND FOOD PRICE VOLATILITY AT CERTAIN TIMES. BUT THE IMPORTANT DATA POINT IS THAT REMOVING CORE INFLATION IN FOOD AND ENERGY HAS NOT ACCELERATED AS PREDICTED BY THE PHILLIPS CURVE. GREENSPAN LOOKS AT PRODUCTIVITY DATA AND CONCLUDES THAT STRUCTURAL THINGS ARE HAPPENING。

IT INVESTMENT CYCLES ARE DRIVING PRODUCTIVITY GROWTH AND CURB UNIT LABOUR COSTS WITHOUT LAX LABOUR MARKET. EVEN IF THE OVERALL CPI FLUCTUATES, THE CORE CPI REMAINS ANCHORED. HE CONCLUDED THAT HE COULD IGNORE THE NOISY OVERALL DATA BECAUSE THE BOTTOM CORE WAS BEING SUPPRESSED BY PRODUCTIVITY. THE CONVENTIONAL DOGMA SAYS A SUBSTANTIAL INCREASE IN INTEREST RATES TO PREVENT IMPENDING INFLATION. GREENSPAN REFUSED, HE KEPT INTEREST RATES LOW, AND HE LET THE ASSET PRICE RUN. HE MADE THE EXPANSION COMPOUND FOUR YEARS MORE THAN THE CONVENTIONAL REACTION FUNCTION ALLOWED. HIS COORDINATION WITH THEN FINANCE MINISTER RUBIN AND LATER SUMMERS WAS CALLED THE "SAVE THE WORLD COMMISSION"。

The Fed and the Treasury actually operate a strategy as an institution. Greenspan’s final interest rate hike for 1999-2000 is now widely understood as a policy error, and productivity could have absorbed more inflation。

BENSONT AND TRUMP WANT THE 2026-2030 VERSION OF THIS OPERATION. AI IS THE EQUIVALENT OF AN IT CYCLE BUT MUCH LARGER EQUIVALENT. AI CAPITAL EXPENDITURE IS RUNNING AT MULTIPLE RATES OF SCIENCE AND TECHNOLOGY CAPITAL EXPENDITURE IN THE LATE 1990S. IF THE PRODUCTIVITY WAVE IS REAL, THEN THE FED CAN RUN A MORE LIBERAL POLICY THAN THE CONVENTIONAL MODEL SUGGESTS, BECAUSE EVEN IF THE ECONOMY IS HOT, PRODUCTIVITY CAN CONTAIN UNIT LABOUR COSTS. JUST A LITTLE DROP, DON'T DO DRAMATIC MOVES. TO EASE PRODUCTIVITY ABSORPTION AND TO TRANSFORM ECONOMIES INTO DEFLATION THAT CANNOT BE ACHIEVED AT ANY RATE。

THAT'S WHY WALSH IS INDISPENSABLE. HE IS A CANDIDATE WHO TRULY BELIEVES IN THE REAL EXISTENCE OF THE PRODUCTIVITY MIRACLE BECAUSE HE HAS BEEN INVESTING IN IT. HE HAS THE INSTITUTIONAL CREDIBILITY OF HIS TERM IN THE 2006 - 2011 GLOBAL FINANCIAL CRISIS AND IS ABLE TO HOLD THE BOTTOM LINE IN THE MEDIA AND IN THE TRADITIONAL FED NETWORK WHEN HE IS ASKED TO RAISE INTEREST ON THE LATEST CPI DATA. HE HAD A RHETORICAL COVER (THE 1951 FRAMEWORK) AND COULD INSTALL A COORDINATION STRUCTURE WITHOUT THE APPEARANCE OF CAPTURE. AND HE HAS A PERSONAL CONVICTION TO "DO NOTHING" OVER AND OVER AGAIN IN THE FACE OF INFLATION DATA THAT WOULD FORCE WEAK-MINDED MANIPULATORS TO REACT。

Greenspan’s strategy can work only if its operators truly believe in productivity miracles. That's the test. Powell's faith is not deep enough. Walsh may be able to read from the data, but there will be no Walsh investor confidence. Walsh is the only available candidate to be present。

Why does this have to happen

The United States federal debt is approximately $36 trillion. Based on the current maturity structure, approximately $9-10 trillion is rolled annually. The Fed has been running a quantitative austerity at a time of interest rate hikes, which means that, while it shrinks its balance sheet, the Treasury is issuing record debt to finance the deficit. Marginal buyers of long-term national debt must be the private sector, most of them foreign buyers。

This works in a world where foreign buyers are structurally overmatched with dollars. In our world, China has sold net national debt for several consecutive years, unlike Japan, which managed its own weak currency through silos that it could not expand significantly. Long-term rates of return drift upwards. Duration premium increases. The cost of refinancing debt is rising faster than economic growth. Every year it gets harder。

You can solve this problem in two ways. You can impose fiscal austerity, which is politically impossible on the scale required. Or you can impose financial disincentives, and there's no third option to face numbers honestly。

The architecture that is being constructed is an option for financial repression, packaged in modern institutional languages and combined with Greenspan productivity bets to make it socially viable. The Ministry of Finance issues short-term national debt at the front end of the curve, where demand is structurally inelastic. Banks rebuild balance sheets under the new regulatory framework to absorb long periods at the back end of the curve. The Fed operates a posture that does not confront this structure through radical interest rate hikes. Stabilizers absorb hundreds of billions of dollars of short-term national debt as part of their reserves. The United States dollar depreciated to the point where it attracted foreign purchases over time。

To achieve this, you need a Chairman of the Fed who understands the situation correctly and does not confront it. It is no coincidence that Walsh has been publicly describing the precise policy posture required by the architecture for the past 12 months。

Bensont's International Operation

Another key player in this architecture is the Ministry of Finance, Becent. Most reports see Becent as a domestic figure with a financial portfolio. This is wrong, and the most important work of Becent is at the international level。

The architecture requires foreign buyers to absorb a meaningful share of long-term bond issues so that rolling mathematics can be liquidated at an acceptable real rate of return. Foreign buyers only intervene when three things are true. The dollar must be depreciated rather than appreciated, otherwise they would bear foreign exchange losses. They must have strategic reasons for holding national debt, not just the rate of return, which alone is not sufficient to offset foreign exchange risk. They needed an institutional channel through which their United States dollar surpluses could be recovered into United States Treasury bonds。

Becent is running these three things simultaneously. Yesterday’s Beijing summit was the most visible part, and the framework for negotiations with China was not primarily a trade agreement. It is a regulatory framework under which China is granted clear access to the United States matrix (chips, capital equipment, AI infrastructure) under specific licensing arrangements in exchange for not selling its dollar reserves, continuing to recycle trade surpluses into national debt through the intermediary chain, and accepting base-access tariffs (the Nvidia 25 per cent cost model is a proven example). This is not a free trade arrangement; it is an age-old industry agreement for financial repression, packaged in trade languages。

Parallel models with Japan and the Republic of Korea (the cleanest source of North Asia surplus recovery from US Treasury debt) are also operating. With the UAE (which is being constructed as a new intermediary pole expanded through the Fed swap line). With Hong Kong (as a traditional channel for China, reserved for continuity). With Singapore (as the remaining trans-Asian clearing centre). The architecture is designed to be multipolar rather than bilateral. Bilateral arrangements have a failure point and multipolar arrangements are redundant. Becent is in the process of connecting redundant foreign purchases to rolling structures。

This is where Walsh and Besent coordinate, and why the Fed agreement that Walsh constantly invokes is important in substance. By means of bilateral agreements and foreign exchange management, Becent ensures long-term foreign purchases. Walsh ensured that the Fed's policy did not break the buy-out by being too restrictive. If the Fed operated with tight monetary policies, real rates of return in the United States rose, and foreign holders incurred heavier currency losses, making long-term foreign purchases more difficult to liquidate. If the Fed operated a liberal monetary policy, the real rate of return in the United States fell, and the dollar depreciated, foreign buyers could absorb public debt with acceptable terms. The agreement was an institutional document that allowed the Fed to operate a second posture rather than the first。

The Save the World Commission operated this coordination 25 years ago by Greenspan and Rubin, with the Long-Term Capital Management Corporation rescue, the Asian crisis response and the productivity boom in the late 1990s in the same coordination framework. Walsh and Becent are 2026 editions of the committee. The difference is that the 2026 edition faces a more controversial international financial architecture than Greenspan and Rubin。

Alliance of Sponsors

UNDER VISIBLE POLITICAL LAYERS, IT'S A DECISIVE CLIENT COALITION SINCE 2024. ENCRYPTION FOUNDER, AI INFRASTRUCTURE OPERATOR, ENERGY CAPITAL MAN. THESE INDIVIDUALS FINANCE THE POLITICAL OPERATION OF DELIVERING THE ARCHITECTURE. THEY'RE NOT BUYING IDEOLOGY. THEY'RE BUYING ENFORCEMENT POWER. THEY WANT TO STABILIZE CURRENCY REGULATORY CLARITY, AI CAPITAL SPENDING POLICY STABILITY, FASTER ENERGY LICENSING, AND A MONETARY POLICY ENVIRONMENT THAT AI DOES NOT BUILD WITH RESTRICTIVE INTEREST RATES。

The Trump Government is the manipulator, and Becent of the Ministry of Finance is the architect of the international leg. The Fed Walsh is the domestic institutional anchor. The Republican Senate majority is the formal delivery mechanism. The Alliance of Sponsors is the deeper foundation under all of this。

When you read Walsh in this framework, it's no longer like a partisan struggle, but it's beginning to be like an ongoing contract. The Federation of Sponsors wanted the Fed ' s presidency, and they had the Fed ' s presidency, with the result of the vote being delivered as an official document。

What does this mean for the market

If you accept this framework, a few things will follow。

THE FIRST FOMC MEETING UNDER WALSH'S LEADERSHIP WAS JUNE 16-17. HE CAN'T GET OVER 4% OF THE TOTAL CPI AND THE HIGH ENERGY PRICES ARE FALLING WITHOUT IMMEDIATELY DESTROYING HIS CREDIBILITY. THE CONFERENCE WOULD THEREFORE NOT DELIVER A REDUCTION IN INTEREST, AND IT WOULD DELIVER A SIGNAL, WHICH WOULD BE MORE SPECIFIC THAN THE MEDIA EXPECTED. WALSH WILL BEGIN TO SHIFT THE INSTITUTIONAL FOCUS FROM THE OVERALL CPI TO THE CORE, DESCRIBING THE SOARING US-IRAQ WAR-DRIVEN ENERGY PRICES AS TEMPORARY. HE SHOWED THAT THE TARGET HAD MORE SWING SPACE THAN THE CURRENT MARKET PRICE, AS A LONG-TERM AVERAGE RATHER THAN A HARD MONTHLY CEILING TO WHICH EACH PRINT DATA HAD TO BE SUBJECT. HE WILL SOFTEN FORWARD-LOOKING GUIDANCE AND USE A MORE DISCRETIONARY TONE OF REACTION. HE WILL ALMOST CERTAINLY INITIATE A FORMAL REVIEW OF THE MONETARY POLICY FRAMEWORK AIMED AT ITS COMPLETION IN 2027. THESE ARE NOT INTEREST RATES, BUT ALL OF THIS IS A RESTRUCTURING OF INSTITUTIONS THAT ALLOW INTEREST RATES TO COME LATER WITHOUT BEING INTERPRETED BY THE BOND MARKET AS POLITICAL CONCESSIONS。

THE FRAMEWORK REVIEW WILL BE MADE PUBLIC BY THE END OF 2026. BY MID-2027, THE FFA AGREEMENT WILL BE ANNOUNCED OR FORMALLY NEGOTIATED. BY THE END OF 2027, FEDERAL FUND INTEREST RATES WILL BE 250 TO 325 BASIS POINTS BELOW CURRENT LEVELS. THE FED IS CLEARLY IGNORING THE 3-4% INTER-DISTRICT SERVICE INFLATION INDICATOR, WHILE NOMINAL GDP IS RUNNING AT 5-6%. GOLD CONTINUES TO RISE, AS FINANCIAL REPRESSION COINCIDES WITH ITS PRICING. THE UNITED STATES DOLLAR HAS DEPRECIATED ENOUGH TO SETTLE LONG-TERM FOREIGN PURCHASES. THE COMBINATION OF ENCRYPTED CURRENCY GROWTH IS DUE TO THE FACT THAT THE MATRIX TRANSITION OPERATES INDEPENDENTLY OF MONETARY POLICY, AND THE INSTITUTIONAL GUARANTEES OF THE ARCHITECTURE HAVE JUST BECOME MORE SOLID IN THE FED PRESIDENCY. AI COMBINED GROWTH IN CAPITAL EXPENDITURE NAMES AS CAPITAL COST IS NO LONGER A TAIL RISK。

There is a variable that breaks the whole setup. It is not Walsh's policy preference, it is the bond market itself。

If the rate of return on long-term national debt continues to be higher than 5.5 per cent, or the term premium continues to be higher than 1.5 per cent, or the real rate of return over a decade is still higher than 2.75 per cent, then whatever Walsh does in the Fed, the structure will break from the outside to the interior. The bond market was a binding condition, and Walsh's appointment eliminated an institutional risk, but not that one。

THAT IS WHY THE NEXT SIX MONTHS ARE SO IMPORTANT. THEY ARE BOND MARKETS THAT EITHER INSTALL STRUCTURES IN THE SPACE OF THE NEW FED CHAIRMAN OR THAT DO NOT GIVE SPACE. IF GRANTED, THE CYCLE IS EXTENDED TO AT LEAST 2027, POSSIBLY 2028. COMPOSITE GROWTH OF RISK ASSETS. ENCRYPTED CURRENCY AND AI CAPITAL EXPENDITURE NAMES ARE THE LARGEST BENEFICIARIES. IF THE BOND MARKET RESISTS THE HOT INFLATIONARY DATA FOR THE NEXT SIX MONTHS, THERE IS A RISK THAT THE ARCHITECTURE WILL FAIL BEFORE OPERATIONS EXIST。

What do you need to remember

FIRST OF ALL, WALSH IS NOT A PUPPET OF TRUMP, AS THE NEWS SUGGESTS. HE WAS THE STRUCTURALLY CORRECT MANIPULATOR OF WHAT THEY ACTUALLY TRIED TO DO, RUNNING GREENSPAN'S STRATEGY IN THE LATE 1990S OVER THE 1946-1955 FINANCIAL REPRESSION ARCHITECTURE, REPLACING THE IT CYCLE AS AN ENGINE OF PRODUCTIVITY WITH AI. HIS SCIENTIFIC AND TECHNOLOGICAL INVESTOR BACKGROUND IS THE KEY QUALIFICATION, NOT HIS 2006-2011 FEDERAL RESERVE BOARD RECORD. HE'S BEEN DOING THIS MIRACLE FOR YEARS。

Secondly, the international architecture of Besent is the other half of the operation. The FFA agreement, which Walsh constantly invoked, is an institutional document. The real substance is that Becent ensures long-term foreign purchases through bilateral agreements with China, Japan, the Republic of Korea, the Gulf and a broader multipolar network of intermediaries, while Walsh operates a Fed policy that is consistent with the financing needs of the Treasury. I can't do that. This week's Chinese agreement and today's Walsh confirmed two pieces of the same structure, not two separate stories。

THIRDLY, THE REAL TEST WAS NOT WALSH'S FIRST FOMC, BUT THE NEXT TWO QUARTERLY BOND MARKETS. CONCERNED ABOUT ANNUAL RATES OF RETURN, TERM PREMIUMS AND REAL RATES OF RETURN. THESE ARE VARIABLES THAT DETERMINE WHETHER THE ARCHITECTURE IS IMPLEMENTED OR BROKEN。

Markets continue to price conventional inflation. The framework sees conventional struggles as structurally unlikely, as the productivity wave will do deflation that the Fed cannot afford, while long-term foreign purchases will settle the rolling of bond markets that cannot be liquidated alone。

The gap between these two pricing lines is asymmetric. This asymmetry is where the returns will be for the next two years。