The crypto market is not alone in climbing this new year – the US national debt is also rising.
The national debt has risen to $38.5 trillion, the highest amount the country has ever owed to domestic and foreign lenders, according to debt dashboards.
Over 70% of the national debt is owed to domestic lenders, while the rest is owed to foreign lenders, led by Japan, China and the United Kingdom.
The raw number is not the whole story; that’s how it relates to the economy. US GDP, which is the total value of everything produced in a year, is closer to $30 trillion, which equates to a debt-to-GDP ratio of over 120%. Think of it as your personal debt: Borrow $120 for every $100 you earn annually.
This increase stems from heavy spending during the coronavirus pandemic and decades of fiscal spending on infrastructure, the military and social programs. Interest payments alone now exceed $1 trillion annually, more than defense spending.
What does this mean for BTC?
The implications for BTC and other assets such as gold are generally seen as bullish due to how authorities typically react to such high levels of indebtedness.
It is common for governments to pressure central banks to lower interest rates to keep debt servicing costs low. Not surprisingly, President Donald Trump has repeatedly called on the Fed to cut interest rates quickly to 1% or lower. Low rates typically bode well for BTC, gold and overall risk sentiment.
Recently, prominent US officials, including former Treasury Secretary and Federal Reserve Chair Janet Yellen, said rising debt could prompt the Fed to keep interest rates low to minimize interest costs rather than control inflation, in a move called fiscal dominance.
As indebtedness increases, the government has to borrow more, and lenders demand a higher rate of return (interest) to lend to the government. Finally, central banks step in as buyers of last resort, taking on short-term debt to meet immediate funding needs and market liquidity. This leads to a steepening of the yield curve, with longer bond yields continuing to rise while shorter bond yields remain depressed.
The US yield curve has steepened according to analysts at Bitfinex.
“This configuration, combined with a structurally weaker dollar, rewards assets with real or defensive characteristics,” analysts at Bitfinex said in an email.
The high debt has already fueled fears of currency depreciation or dollar depreciation, sending gold up 60% last year. Currency depreciation is not necessarily new. The Roman Empire is said to have implemented the same, deliberately reducing the precious metal content of its coins to finance escalating spending, leading to rampant inflation.
When governments face persistently high levels of debt, central banks often inject money into the economy to help finance it. This process risks triggering inflation, which gradually erodes the currency’s purchasing power, like your dollar buying less bread or gas over time, and stimulates demand for alternative investments like bitcoin.
Analysts are confident that bitcoin will catch up with gold this year, pricing in fears of currency depreciation.
