Explosion of American debt scares authorities and investors

Bitcoin and gold may already be pricing in a crisis scenario. Both recently set new record highs amid a high interest rate environment around the world.

In 2022, former UK Prime Minister Liz Truss announced radical economic measures, including deep tax cuts and billions of pounds in spending, even as the government’s mounting debt called for fiscal prudence. The result was chaos in the markets, with the British pound (GBP) plummeting to historic lows against the US dollar (USD) and the collapse of Truss’ government, the shortest in the country’s history.

Now the U.S. faces a similar risk if the government continues to ignore growing debt concerns, according to Phillip Swagel, director of the Congressional Budget Office (CBO).

“The danger, of course, is what the United Kingdom faced under former Prime Minister Truss, where policymakers tried to take action and then there was a market reaction to that action,” Swagel said in interview with the Financial Times.

Swagel added that the U.S. is not yet in the same position, but higher interest rates could raise the cost of servicing the debt to $1 trillion in two years, and bond markets could “pull back.”

A pound-like collapse of the U.S. dollar, a global reserve currency with an outsized role in international finance, could boost demand for alternative assets with safe-haven appeal like bitcoin and gold. Trading volumes in bitcoin-pound pairs soared during the UK crisis in September 2022.

Both bitcoin and gold may already be pricing in a crisis scenario. Despite elevated interest rates and bond yields around the world, these two so-called zero-yielding assets have risen to new record highs above $70,000 and $2,000, respectively. Both surpassed their previous peaks set in 2020-21, when interest rates in the US and other parts of the world were near or below zero.

“Rising debt levels and geopolitical turmoil may have contributed to offsetting the impact of higher yields on both assets,” said Paris-based crypto data provider Kaiko in the Monday edition of its newsletter.

U.S. federal debt totaled $26.2 trillion at the end of 2023, about 97% of gross domestic product, according to the CBO. The independent, non-partisan agency expects the debt-to-GDP ratio to surpass the World War II record of 116% by 2029 and reach as high as 166% by 2054.

The higher the debt, the greater the pressure to keep real – or inflation-adjusted – interest rates and bond yields artificially low. Higher rates and higher debt levels drive up government interest spending, worsening debt concerns.

Negative real rates often lead investors to move money out of fixed income investments and into high-risk, high-return assets such as technology stocks, cryptocurrencies and safe havens like gold, as seen in 2020-21.

“In a highly indebted economy, negative real rates [ajustadas pela inflação] and financial repression are a necessary condition to keep the system running, and the devaluation of fiat currency remains the escape valve,” the founders of the LondonCryptoClub newsletter service said in Monday’s edition, explaining concerns about debt as a macro tailwind for bitcoin and gold.

According to the founders, Federal Reserve Chairman Jerome Powell’s recent decision to maintain forecasts of three rate cuts in the coming months despite continued labor market strength and a further rise in inflation shows that the central bank is now “ focused on the US debt spiral.”

“Gold continues to signal that the macro sands are shifting. If net flows into ETFs turn positive this week, don’t be surprised if Bitcoin captures the macro tailwinds and accelerates to new highs,” the founders noted.

Fonte: Coin Desk