U.S. Growing Debt Crisis May Boost Bitcoin and Cryptocurrency Markets
Summary:
The United States' mounting debt could become an advantage for cryptocurrencies like Bitcoin. The debt-to-GDP ratio of the US, at 123% in 2023, is half of Japan's but remains concerning due to substantial foreign ownership of the debt. Despite downgrades by Fitch Ratings and Moody's, officials have largely ignored the escalating debt pile. The situation could lead to currency devaluation and possible loss of confidence in the US, both factors potentially beneficial for cryptocurrencies, particularly known for being a buffer against dollar weakness.
At first glance, the ratio of the United States' debt to its GDP doesn't appear alarming on the global scale. In 2023, it was lower than the G7 countries' average - recorded at 123% - and nearly half the debt of the world’s most heavily indebted nation, Japan, where the ratio hit an astonishing 255% of GDP the same year.
On its own, these figures may seem insignificant. After all, Japan has effectively navigated its expanding debt over time. Its economy remains stable as the Nikkei 225 index sees an approximate 31% increase over the last year (as of May 10), exceeding the S&P 500. However, the economic conditions in Japan and the US are vastly different, suggesting what's successful for one may not be ideal for the other.
A critical disparity between the two countries lies in the nature of their debt owners. In Japan, nearly 90% of their debt is domestically owned by its citizens and institutions. Conversely, approximately a quarter of U.S. debt is in the hands of international buyers. Therefore, the U.S. must ensure its debt remains appealing to these buyers by providing a competitive yield, especially as this debt continues to grow, becoming riskier for lenders.
Last year, Fitch Ratings downgraded U.S. government debt from AAA to AA+. However, this news was dismissed by U.S. officials as an "arbitrary" decision based on outdated data. Furthermore, Moody's shifted its U.S. debt outlook to negative, another warning largely overlooked by markets. Investors, however, should take heed, as the U.S. cannot afford to let its debt skyrocket like Japan. Japan’s net debt is significantly lower than its gross debt-to-GDP ratio, meaning it possesses more foreign assets than it owes to other nations - the exact reverse of the U.S. This discrepancy is what makes it easier for Japan to manage its expanding debt.
Japan hasn’t dealt with inflation on the same scale as the United States. It's currently sitting at 2.7% after reaching a high point of just 4.3% in January 2023. This figure pales in comparison to the U.S., which reached an alarming 9.1% in June 2022. The Federal Reserve continues to grapple with inflation, which exacerbates the growing debt issue.
The solution to inflation involves stricter monetary policy. However, heightened interest rates mean greater debt repayments, unhappy consumers, and a potential slowdown of the economy. The Federal Reserve is face to face with these problems, as faltering consumer confidence along with soaring debt repayments surpassed $1 trillion last year, and first-quarter growth this year was lower than expected. These factors contribute to the looming prospect of stagflation, making more significant debt a problem as it limits the government's capacity to mitigate an economic slowdown.
Unfortunately, the elephant in the room has been completely ignored in this election year, with neither Democrat nor Republican candidates offering viable plans to address the growing U.S. debt. With the ratio well above 100% and projected to rise rapidly in the future, the government will have to confront this challenge sooner or later.
Interestingly, this might turn out to be beneficial for assets like Bitcoin as concerns over the U.S.'s escalating debt intensify. Typically, rising debt levels result in currency devaluation. While the U.S., like Japan, might avoid some of this due to the world's reliance on the U.S. dollar, the large portion of foreign debt ownership makes the dollar particularly vulnerable. With interest rate cuts anticipated later this year, the dollar's current strength seems unlikely to hold, which could be beneficial for Bitcoin, seen as a buffer against dollar weakness.
While this situation might seem daunting, it may prove advantageous for cryptocurrency markets unless things go awry. Should the U.S. default on its debt - which is highly unlikely - it would be catastrophic for all markets, including digital assets. However, a weaker dollar and some loss of confidence in the U.S. could be precisely what's needed for the next upswing in the cryptocurrency rally.
Published At
5/15/2024 3:02:39 AM
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