The cryptocurrency market isn’t the only one surging this new year: the US national debt is also skyrocketing.
The national debt has risen to $38.5 trillion, the largest amount the country has ever owed to domestic and foreign lenders, according to debt monitoring panels.
More than 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 compares to the economy. The United States’ GDP, which is the total value of everything produced in a year, is approaching $30 trillion, which is equivalent to a debt-to-GDP ratio of more than 120%. Think of it as your personal debt: borrowing $120 for every $100 you earn annually.
This increase is due to 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 a year, more than defense spending.
What does it mean for BTC?
The implications for BTC and other assets, such as gold, are generally considered bullish due to the way authorities typically respond to such high levels of borrowing.
It is common for governments to pressure central banks to lower interest rates to keep debt servicing costs low. It’s no surprise that President Donald Trump has repeatedly called on the Federal Reserve to quickly cut rates to 1% or lower. Low rates generally bode well for BTC, gold, and general risk sentiment.
Recently, prominent US officials, including former Treasury Secretary and Federal Reserve Chair Janet Yellen, said rising debt could lead the Fed to keep rates low to minimize interest costs, rather than control inflation, in a move called fiscal dominance.
As borrowing increases, the government has to borrow more and lenders demand a higher return (interest rate) to lend to the government. Over time, central banks step in as buyers of last resort, purchasing short-term debt to address the market’s immediate funding and liquidity needs. This leads to a steeper yield curve, in which yields on longer duration bonds continue to rise while yields on short duration bonds remain depressed.
The US yield curve has steepened, according to Bitfinex analysts.
“This setup, combined with a structurally weaker dollar, rewards assets with real or defensive characteristics,” Bitfinex analysts said in an email.
High debt has already stoked fears of a currency devaluation or dollar depreciation, sending gold up 60% last year. Currency debasement 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 rising expenses, leading to rampant inflation.
When governments face high levels of persistent debt, central banks often inject money into the economy to help finance it. This process risks causing inflation, which gradually erodes the currency’s purchasing power, as if the dollar buys less bread or gasoline over time, and fueling demand for alternative investments like bitcoin.
Analysts are confident that bitcoin will catch up with gold this year, discounting fears of currency devaluation.
