Could Bitcoin Solve America's $35 Trillion Debt Problem?
A crisis is the extreme form of an issue.
The US federal debt is set to surpass its World War II peak in the next several years, which is a problem.
Will that turn into a crisis, and what does that mean for cryptos?
The US faces high debt crisis risks, although many expect the country to avoid an outright crisis.
What Would a US Debt Crisis Look Like?
Economists at the Brookings Institution (a think tank) published a report recently claiming that US sovereign debt will not become a crisis.
Their definition of a "crisis" is "a sudden, large and sustained downturn in demand for Treasury securities."
Despite outlining four possible outcomes, the study finds that none of them are likely.
The four scenarios outlined are:
- The sudden sale of Treasuries by a large holder, such as China, is possible. Not everyone would reevaluate the worth of Treasuries if there were a selloff; after all, China only owns 3% of the US debt.
- The US could fail to raise the debt ceiling. If that were to occur, it might not be for long. Congress would likely reevaluate in light of the market upheaval, and the Fed and Treasury might temporarily soothe the markets.
- Under pressure, the Federal Reserve may indicate it is ready to accept more inflation to reduce the US debt's value. The authors contend that this is impossible to implement due to the high frequency of short-term debt rollovers at higher interest rates in the United States.
- A default could be the best course of action for the United States. A "strategic default" is another alternative that the authors consider improbable due to its lack of a solution. New borrowing would be extremely difficult, if not impossible, and it would affect US investors—who hold 70% of the US government debt.
The problem should be manageable if the United States follows the OECD average, reduces expenditure, and/or increases taxes.
However, Brookings senior fellow David Wessel pointed up a passage that had been "haunting him" during an online session about the research.
The authors said the likelihood of a debt crisis remains minimal as long as the US maintains its strong institutions and a budgetary trajectory that isn't significantly worse than the one currently forecast.
Wessel observed, "There are things I used to assign a zero probability to that are now somewhat higher." Among those things are a worsening budgetary trajectory and a deterioration of US institutions.
Still, soaring debt servicing costs and ballooning deficits are taking the country into unknown terrain.
No amount of austerity, tax increases, or managed inflation will solve the problem.
Unsustainable debt is the root of the problem.
The United States has become overly reliant on short-term Treasury bills because of the trillions of dollars spent during the COVID era, which leaves its finances susceptible to increases in interest rates.
That was seen right after the pandemic when inflation surged along with interest rates.
Just when the Federal Reserve started on a rat-cut cycle, President Donald Trump's tariff rhetoric made the central bank's path uncertain.
The number of individuals who rely on government transfer payments has increased dramatically, and government expenditures are completely unchecked.
Conservatives are understandably worried.
During Trump's second term in office, higher interest rates could threaten a debt spiral.
More borrowing would lead to even greater borrowing expenses.
Even with the drastic budget cuts pledged by the DOGE effort, which Elon Musk is leading, this would put upward pressure on the dollar's value.
Under the fiat system, this negative feedback cycle is difficult to break.
US authorities would initially move to strategic dollar depreciation as they acknowledge the inevitable monetary reset.
The US might counterintuitively preserve the dollar's position as the leading global reserve currency by weakening competing economies' currencies through inflation caused by an influx of dollars into global markets.
However, more and more people are paying attention to the uncontrolled increase of the US national debt because interest payments are eating into the government's budget.
A Bitcoin Solution
Many are looking to Bitcoin and gold as a protection against inflation and the real value of the US dollar.
Foreign central banks are buying gold to diversify their holdings, and anticipation of rate reduction by central banks is also driving the spike.
This measure safeguards against potential US tariffs in the event of a geopolitical conflict and is partially motivated by inflationary fears.
Could a whole new strategy that makes use of Bitcoin lead the way?
Several reports and theories have explored the possibility that Bitcoin might help solve a sovereign debt crisis.
A little creativity and knowledge of how monetary systems change during turbulent times are necessary for this thinking exercise.
Monetary resets have a long history, spanning from the demonetization of the Roman denarius to the dissolution of the Bretton Woods gold standard.
The dollar's value has surpassed its historical optimality, and countries are clearly considering de-dollarization and renegotiating a new international order.
Could Bitcoin be the catalyst for a new era in international finance?
The United States government has been at odds with Bitcoin for well over a decade, engaging in practices such as the denial of sales approval for financial products involving Bitcoin and an offensive against Bitcoin-friendly banks by the Biden-Harris administration.
While the decisions were also based on the collapse of FTX and other crypto-led fraud, it changed dramatically last year.
Bitcoin was promoted and sold by the ultimate Big Finance insider, BlackRock.
Individuals, family offices, and pension funds can now invest in Bitcoin without the required technical understanding.
The Trump administration's pro-crypto stance makes it even more compelling.
With Bitcoin's widespread adoption in capital markets and the readiness of a broader set of investors, the United States can change its stance and support Bitcoin as a reserve asset.
The general public can now, without a doubt, utilize Bitcoin as a hedge against the falling dollar.
If the Strategic Bitcoin Reserve materializes and the United States Department of the Treasury starts buying and keeping Bitcoin, other countries will have to follow suit.
Some would sell US Treasury bonds and other assets.
To buy it, some would even print their own money.
This would hasten the process by which money leaves the currency system and into the Bitcoin ledger.
Now imagine the United States government buying up a ton of bitcoin while the dollar fades.
In monetary terms, the national debt might be neutralized as bitcoin appreciates, perhaps reaching multi-million dollar value.
If the dollar were to hyperinflate and bitcoin reserves were to appreciate, the present debt dynamic would be reversed, enabling obligations to decline relative to assets.
This could be what the President was implying when he said the US could use Bitcoin to pay off its $35 trillion debt. Although it was mocked at the time, may this have been just another instance when Trump's gut feeling was right, even though he didn't say it explicitly?
There would be some suffering involved in switching from dollars to bitcoin.
Worldwide, hyperinflation of the dollar would cause widespread anarchy and displacement.
But Bitcoin would provide a solid base from which to start.
Even amid the chaos, the wealth of governments, financial organizations, and individuals who possess Bitcoin would remain intact.
The United States economy may emerge from the new century well-prepared to maintain its dominance if Americans have made their transitions from fiat to bitcoin, leaving late adopters to fumble for solutions.
The advent of Bitcoin as a worldwide reserve asset would herald a period of stricter government spending controls.
In contrast to fiat currency, the limited supply of bitcoin naturally limits government expenditure and compels policymakers to stay within their financial means.
The unprecedented spending on deficits, endless wars, and debasement of currencies would all fade into oblivion.
A bitcoin-based monetary system would curb waste and incentivize investments in long-term, lofty endeavors.
Bitcoin would fund the creation of energy resources, the rehabilitation of infrastructure, and, most crucially, interplanetary expansion.
If fiat monetary policy were no longer a factor, markets could distribute capital more effectively, leading to a surge in productive output.
For now, the president has asked his team to research a crypto-based reserve, disappointing many Bitcoin enthusiasts as Trump did not explicitly call for one.
Whether the US will act on the spiraling debt with cryptos at the center of its policy is to be seen.
Despite these being theories at the moment, this is not an entirely outlandish option.
Elsewhere
It's All Happening on LinkedIn
Did you know you can now receive Blockhead's juicy daily newsletters directly to your LinkedIn? Subscribe to our LinkedIn newsletters for the latest news and insights in the world of Web3. There also might be the occasional discount code for the industry's hottest events, exclusively for subscribers!