The crypto market isn’t the only one surging this new year: the US national debt is also skyrocketing.
The national debt has reached $38.5 trillion, the highest amount the country has ever owed to domestic and foreign lenders, according to debt dashboards.
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 doesn’t tell the whole story; it’s how it compares to the economy. U.S. GDP, which represents the total value of everything produced in a year, is closer to $30 trillion, which equates to a debt-to-GDP ratio of more than 120%. Think of it like your personal debt: borrowing $120 for every $100 you earn each year.
The increase stems from significant 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 this mean for BTC?
The implications for BTC and other assets, such as gold, are generally considered bullish due to how authorities typically respond to such high debt levels.
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 Fed to quickly cut rates to 1% or less. Low rates generally bode well for BTC, gold, and overall risk sentiment.
Recently, prominent U.S. officials, including former Treasury Secretary and Federal Reserve Chair Janet Yellen, have said that growing debt could prompt the Fed to keep rates low to minimize interest costs, rather than control inflation, in a move called fiscal dominance.
As debt increases, the government must borrow more and lenders demand a higher return (interest rate) to lend to the government. Ultimately, central banks step in as buyers of last resort, acquiring short-term debt to meet immediate financing needs and market liquidity. This leads to a steeper yield curve, where yields on long-duration bonds continue to rise while yields on short-duration bonds remain depressed.
The US yield curve has steepened, according to analysts at Bitfinex.
“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 fueled fears of currency depreciation, or a weakening dollar, sending gold up 60% last year. Currency depreciation is not necessarily new. The Roman Empire is said to have implemented the same thing, deliberately reducing the precious metal content of its coins to finance increasing spending, which led to runaway inflation.
When governments face high and persistent debt, central banks often inject money into the economy to help finance it. This process risks triggering inflation, which gradually erodes the purchasing power of the currency, like your dollar buying less bread or gasoline over time, and fuels demand for alternative investments like bitcoin.
Analysts are confident that bitcoin will catch up with gold this year, easing fears of currency depreciation.
