The crypto market isn’t alone in climbing this new year — the US national debt is soaring too.
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 overseas lenders, led by Japan, China, and the United Kingdom.
The raw number isn’t the whole story; it’s how it stacks up against the economy. The US GDP, which is the total value of everything produced in a year, sits closer to $30 trillion, equating to a debt-to-GDP ratio of over 120%. Think of it like your personal debt: borrowing $120 for every $100 you earn yearly.
This climb stems from big spending during the coronavirus pandemic and decades of fiscal spending on infrastructure, the military, and social programs. Interest payments alone now top $1 trillion annually, more than defence spending.
What does it mean for BTC?
The implications for BTC and other assets, such as gold, are generally seen as bullish because of how authorities typically respond to such high levels of indebtedness.
It’s common for governments to pressure central banks to lower interest rates to keep debt-servicing costs low. It’s not surprising that President Donald Trump has repeatedly called for the Fed to lower rates rapidly to 1% or lower. Low rates typically bode well for BTC, gold, and overall risk sentiment.
Recently, prominent U.S. officials, including former Treasury Secretary and Federal Reserve Chair Janet Yellen, said that mounting debt could prompt the Fed to keep rates low to minimize interest costs, rather than control inflation, in a move called fiscal dominance.
As indebtedness rises, the government has to borrow more, and lenders demand a higher yield (interest rate) to lend to the government. Eventually, central banks step in as buyers of last resort, snapping up short-dated debt to address immediate financing needs and market liquidity. This leads to a steeper yield curve, where longer-duration bond yields continue to rise while short-duration bond yields remain depressed.
The U.S. 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 stoked fears of currency debasement, or dollar depreciation, sending gold higher by 60% last year. Currency debasement isn’t necessarily new. It is said that the Roman Empire implemented the same, deliberately reducing the precious metal content of its coins to finance escalating expenses, which led to rampant inflation.
When governments face persistent high debt, central banks often inject money into the economy to help finance it. This process risks sparking inflation, which gradually erodes the currency’s purchasing power, like your dollar buying less bread or gas over time, and stoking demand for alternative investments like bitcoin.
Analysts are confident that bitcoin will catch up to gold this year, pricing the currency debasement fears.