On the surface, the U.S. debt-to-GDP ratio does not seem too bad. In 2023, it was below the G7 average (123%) and about half lower than the world's most indebted country, Japan, which had a debt-to-GDP ratio of 255% that year.
But in reality, the two countries have very different economic conditions, and the significant difference between the two is the structure of debt ownership. In Japan, nearly 90% of debt is held by domestic citizens and institutions, but about a quarter of U.S. debt is held by international debt buyers. So in order to ensure that this debt remains attractive to them, the United States needs to pay a higher rate of return (i.e., a higher interest rate) relative to its global competitors, especially as the debt-to-GDP ratio continues to increase, which means The risks of lending to the government also increase.
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Japan's net debt is well below its debt-to-GDP ratio, meaning it holds more foreign assets than it owes to other countries, while the opposite is true in the United States, making it easier for Japan to manage its growing debt.
Japan also isn’t plagued by inflation like the United States, which the Federal Reserve has controlled by raising interest rates and keeping them high, making soaring debt levels particularly dangerous.
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It’s no secret that the answer to inflation is tighter monetary policy. But higher interest rates mean higher debt payments, unhappy consumers, and, ultimately, a slower economy. The Fed already has all of these problems. Consumer confidence is starting to falter, debt payments topped $1 trillion last year, and growth in the first quarter of this year was far less than anyone expected.
So much so that there are now expectations of stagflation: inflation continues to rise while economic growth stagnates. In this situation, higher debt also poses a problem because it limits the government's ability to use fiscal power to alleviate economic slowdowns. With the debt-to-GDP ratio high and expected to continue to rise rapidly in the coming decades, the government will sooner or later have to face reality.
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In other words, it is inevitable that the United States will continue to raise its debt ceiling and continue to print money on a large scale.
So what does this mean for cryptocurrencies? It could be a net benefit for assets like Bitcoin. As concerns grow about the growth of U.S. debt, Bitcoin could become a safe haven asset. Typically, rising debt levels also lead to currency depreciation. While the U.S., like Japan, may be able to avoid this due to global reliance on the dollar, the high proportion of foreign debt also makes the dollar particularly vulnerable.
Combined with expected rate cuts later this year, the dollar is unlikely to maintain its current strength, which is good news for Bitcoin, which is widely seen as a hedge against dollar weakness.
Therefore, the US debt woes are not necessarily bad news for the cryptocurrency market, depending on how the situation develops. For example, if the US defaults — although this is an unlikely scenario — it would be catastrophic for all markets, including digital assets. However, a depreciating dollar and a certain loss of confidence in the US, massive money printing, could be exactly what drives the next wave of cryptocurrency price increases.