The Most Mispriced Sovereign Credit on Earth
The Verdict
The United States is the most mispriced sovereign credit in the world. At Liberty 48 with Debt/GDP 126%, its implied fair yield is 9.2% — yet it borrows at 4.5%. The 470 basis point gap is sustained entirely by an exorbitant privilege worth $2.2 trillion per year — a privilege that every structural indicator shows is eroding. The bond vigilantes have not fallen asleep. They have been replaced by a reserve currency mechanism that has decoupled price from risk. When that mechanism reprices — and the historical base rate across 225 years says it will — the adjustment will be the defining financial event of a generation.
The Story in One Chart
The argument is simple. Since the founding of the Republic, American borrowing costs have tracked American institutional credibility. When liberty rose, yields fell. When institutions weakened, yields rose. This was the bond vigilante mechanism — the market's immune system against fiscal and political decay.
That mechanism broke in 2008. Between 2010 and 2025, the United States experienced the fastest democratic erosion of any consolidated democracy in the 225-year dataset — Liberty 94 to 48, a collapse of 46 points in 15 years. Yet yields barely moved. The 470 basis point gap between implied and actual yield is the largest structural mispricing in the history of sovereign credit.
Five parts of analysis converge on the same explanation: the reserve currency privilege has replaced market discipline with structural demand insensitive to political risk. This creates the most dangerous configuration in sovereign finance — a country that receives no market signal that anything is wrong, precisely when everything is.
Markets Are 2–4 Years Behind
Political signals (elections, institutional capture, judicial erosion) precede market repricing by 24–48 months. The 2010–2025 US liberty collapse has not yet been priced. The lag is not an anomaly — it is structural: bond markets price cash flows, not constitutions.
The Highest Conflict Index Ever Recorded
The US trilateral power balance (Government–Public–Bankers) scores 87/100 on the Conflict Index — higher than any sovereign in the dataset. The current "deal" classification: undefined, between Populist and Oligarchic. No country has sustained this internal tension without resolution through one of the four crisis roads.
75% Probability of Further Decline
The US is on the Extend & Pretend road (45% probability). Combined with Devalue/Inflate (30%), three-quarters of probability-weighted outcomes lead to further liberty decline. Only Restructure (15%) leads back above the Event Horizon. Expected Liberty 2040: 31 — firmly autocratic territory.
The Last Institutional Defence Is Failing
The Federal Reserve — the final guardrail — scores 49/100 on the Composite Guardrail Index, with every indicator trending downward. The US is at Steps 1–2 of the six-step central bank capture sequence, comparable to Turkey 2016 and Hungary 2012. Below Liberty 50, central bank independence collapses — a sigmoid threshold, not gradual erosion.
$2.2 Trillion at Stake
The exorbitant privilege is five interlocking layers generating 761 basis points of GDP in yield subsidy ($2.2T/year, 44% of federal revenue). No privilege in history has survived the political configuration the US now occupies. Probability-weighted annual cost of repricing: $890 billion. The closest structural parallel: British Empire 1914–45 (72% match).
Zero Historical Precedent for Survival
Since 1800, zero consolidated democracies at Liberty 48 with Debt/GDP above 100% have avoided sovereign crisis. Since 1990, zero democracies experiencing significant erosion have recovered. The 0% recovery rate across eight comparable episodes is the most important number in this entire analysis.
The Five-Dimensional Risk Profile
When Does It Break?
Four Futures
The Company America Keeps
The bottom line is mathematical. At Liberty 48, the regression model implies a yield of 9.2%. The US pays 4.5%. That 470 basis point gap, applied to $36 trillion of outstanding debt, represents $1.7 trillion per year in mispriced political risk. It is the largest store of unrealised credit risk in financial history.
The question is not whether the mispricing corrects. Across 225 years, 91 countries, and 203 defaults, it always does. The question is whether it corrects gradually — through institutional reform that rebuilds the credibility the data says is gone — or suddenly, through the kind of market event that reshapes the global financial architecture.
The data cannot tell us when. But it tells us, with unusual clarity, that.