The cryptocurrency market is not the sole entity experiencing growth this year; the national debt of the United States is also rising sharply.
The national debt has reached $38.5 trillion, marking the highest amount ever owed by the country to both domestic and foreign creditors, as per debt dashboards.
More than 70% of this debt is owed to domestic lenders, while the remainder is to foreign lenders, primarily Japan, China, and the United Kingdom.
The staggering figure is not the complete picture; it is crucial to consider it in relation to the economy. The United States GDP, representing the total value of goods and services produced in a year, is around $30 trillion, resulting in a debt-to-GDP ratio exceeding 120%. This can be compared to personal debt: borrowing $120 for every $100 earned annually.
This increase is a consequence of significant spending during the pandemic and years of fiscal outlay on infrastructure, military, and social programs. Interest payments now surpass $1 trillion each year, outpacing defense spending.
What are the implications for BTC?
The potential outcomes for BTC and other assets like gold are generally perceived as optimistic due to the usual responses from authorities to such elevated debt levels.
Governments often urge central banks to reduce interest rates to keep the costs of servicing debt manageable. It’s not unexpected that former President Donald Trump has consistently pushed for the Fed to quickly lower rates to 1% or lower. Low interest rates generally favor BTC, gold, and overall risk sentiment.
Recently, key U.S. officials, including former Treasury Secretary and Federal Reserve Chair Janet Yellen, indicated that the increasing debt may compel the Fed to maintain low rates to reduce interest expenses rather than focus on curbing inflation, a situation termed fiscal dominance.
As debt levels grow, the government needs to borrow more, leading lenders to seek higher yields (interest rates) to lend to it. Ultimately, central banks may step in as the last resort buyers, purchasing short-term debt to meet immediate funding needs and ensure market liquidity. This scenario results in a steeper yield curve, where the yields on long-term bonds rise while those on short-term bonds remain low.
According to analysts at Bitfinex, the U.S. yield curve has indeed steepened.
“This situation, together with a structurally weaker dollar, favors assets that possess real or defensive qualities,” analysts at Bitfinex stated in an email.
The overwhelming debt has already heightened concerns about currency devaluation or dollar depreciation, contributing to a 60% increase in gold prices last year. Currency devaluation is not a novel concept; it is reported that the Roman Empire enacted similar measures, intentionally diminishing the precious metal content in coins to fund rising expenses, ultimately causing widespread inflation.
When governments grapple with persistently high debt, central banks frequently inject capital into the economy to help finance it. This practice poses a risk of triggering inflation, which gradually diminishes the purchasing power of the currency—akin to your dollar buying less bread or gas over time—and increases the appeal of alternative investments like bitcoin.
Analysts remain optimistic that bitcoin will align with gold in value this year, reflecting the fears surrounding currency devaluation.
