Last month, Coindesk discussed detailed how bond market activity challenges the notion that the US government is good for money, raising questions about the long -lasting “Kayfabe” or the illusion of fiscal stability.
Now, billionaire engineering entrepreneur Elon Musk has raised the alarm on x through his [perhaps rightful] Diatribe against President Donald Trump’s big, beautiful tax bill, which is expected to increase the tax deficit by $ 2.4 trillion over ten years.
This is happening at a time when tax problems are already driving investors away from US assets and into alternatives, such as Bitcoin and Gold. From the FY 2024, tax deficits of $ 1.8 trillion amounted to dollars, and from today the national debt is already $ 36 trillion, with annual interest payments amounts to $ 1.13 trillion.
Someone as influential and popular as musk taking tax concerns can result in two things: first, it can speed up the shift away from US assets. Is it just a coincidence that at some point like this, the adoption of the business box of Bitcoin and other tokens, including XRP, has chosen pace?
Secondly, investors who are concerned about the government’s fiscal health will probably require a higher inflation -adjusted dividend to lend money to the government. So expect the yield to remain sticky on the higher side, which further complicates the fiscal situation and economic growth.
Government is bankrupt, at least in theory
Bitcoin
Believers have warned about this day for a long time. To paraphrase a former Coindesk employee, “Crypto may not have all the correct answers, but it asks correct questions.”
The popular tale has been that the US government is bankrupt and the dollar is on its way to a breakdown. According to Musk, the government risks bankruptcy if fiscal caution is not restored.
In theory, the government has been bankrupt for decades. This is evidenced by the repeated debt ceiling-lift-offs over the years.
Congress set the first federal debt limit to $ 45 billion in 1939, giving the Treasury broad estimates of the use of borrowing instruments as long as the total debt does not exceed the self -imposed limit.
Since then, the ceiling has repeatedly been hit and raised, a sign of fiscal crisis and in many ways form of hidden bankruptcy. From 2025 the debt limit is $ 36 trillion! That’s right trillion.
This brings me a joke from an Indian standup comedian about government officials who artificially raise the hazard label during floods to create the illusion of control and normality.
Similarly, the debt ceiling has repeatedly been an attempt to mask the country’s fiscal bankruptcy.
The debt-based Fiat system can be broken
For at least a decade, Bitcoin believers have said that the monetary system is broken and we have to solve the “money”-in the essentials of the debt-based Fiat money.
And they may be right as the state debt-to-BNP relationship across the advanced world has risen over 100%, a sign that the debt-based Fiat money’s ability to generate growth has collapsed.
A blog post about the MISES Institute described the debt-based Fiat money (paper money with a government stamp supported by nothing) as follows:
“The government and powerful bankers established a system in 1913 that typically acts as this: every dollar of the monetary base (or” narrow money “or” high-powered money “) comes to exist with a one-to-one increase in public debt, which together is due to a taxpayer. Then private banks use this base to create more dollars ( increase in debt. ”
“Going the other way if people in the private sector ever paid off all their debts, and the federal government paid all its bond owners, the supply of US dollars would almost turn off.”
“This is the sense where our FIAT money, fractional reserve system uses” debt-based money. “Although market prices are flexible and can respond to deflation much better than most people realize, it is still true that our system is tragically absurd.”
A debt-to-BNP ratio above 100% means that the total government debt exceeds the country’s annual economic production. In such a situation, for every additional dollar borrowed by the government and invested in the economy, the resulting effect (multiplier effect) is less than a dollar – that is, the return on further borrowed funds is reduced.
To explain in the context of the Law on Diminished Returns/Use, the marginal benefit of every extra dollar used to generate growth, negative.
It also means that extra debt no longer generates productive economic growth and can actually be harmful. Imagine gorating on your favorite ice without a break (like governments gorges on borrowed money for decades); Eventually, at some point, you will vomit. This is where we are in terms of fiscal economies and debt-to-BDP conditions in the United States and other advanced nations.
What next?
Economics Russel Napier, known for his expertise in debt and fiscal policy, has discussed several steps that governments are likely to take to reduce debt-to-BNP conditions.
These include technique higher nominal GDP growth through a structural level of inflation, which is what many countries, including the US and the UK, did to inflate debt after World War II.
To allow moderate inflation to erode the real value of the debt and thereby reduce debt service and lower the relationship, galvanizing the demand for assets such as gold and bitcoin.
Other steps may include devaluation of currencies and the implementation of capital control and economic oppression, all of which could bode well to alternative investments, such as cryptocurrencies.
On a lighter note can reduce tax expenses – a strategy originally promoted by Trump – be the only way to get the economy back on track.
Consider this medical analogy.
When your body is exposed to excessive blood sugar over a long period of time, cells tend to develop insulin resistance, leading to type 2 diabetes. Doctors often recommend fasting to help restore insulin sensitivity.
Similarly, the limitation of tax expenses can be the only way to meaningful to lower the ratio of debt and GDP below 100%, thereby restoring the effectiveness of the debt-based FIAT system’s ability to generate growth.
That said, what if governments fail? The debt-based Fiat system can really be over, which intensifies the search for alternatives with blockchain and crypto as potential options.
Let’s see how things take place.
