As Bitcoin’s resurrection takes center stage, the U.S. tempts Tokyo’s fate by entering the crypto race, paving the way for a thrilling battle of economic powerhouses in the digital realm.
As economists analyze different nations’ handling of debt, the United States stands out for its view on the matter. With a national debt surpassing $33 trillion, the divide between Democrats and Republicans further complicates the situation. The potential chaos of a government shutdown could even lead to Moody’s Investors Service downgrading America’s AAA credit rating. These uncertainties have fueled the increase in U.S. Treasury yields, as well as the resurgence of bitcoin and other cryptocurrencies, which is concerning in itself.
The main driver of this situation is the exponential growth of Washington’s balance sheet, fueled by political squabbles and a lack of collective strategy to address the national debt. Japan serves as a cautionary example, as it has been grappling with a mounting debt-to-GDP ratio of 260% despite numerous attempts at fiscal consolidation over the past three decades.
While some argue that Japan has managed to avoid a full-blown crisis despite its massive debt burden, it has become clear that growing economies cannot rely solely on economic growth to achieve fiscal health. Bold policy changes are necessary. The United States understood this in the 1990s when Janet Yellen, now the Secretary of the Treasury, was part of the Clinton administration that successfully balanced the U.S. budget through a spending and revenue deal with Congress.
However, the current fiscal year is projected to have a federal budget deficit of $1.7 trillion, and growing America’s way out of this debt seems unlikely. The Peter G. Peterson Foundation argues that given the large primary deficits, demographic trends, and the Federal Reserve’s focus on controlling inflation, rapid GDP growth cannot be expected to solve the debt issue. Lawmakers need to wake up to the approaching all-time high debt-to-GDP ratio and explore policy solutions designed for the current fiscal and economic outlook.
According to the Congressional Budget Office, the U.S. debt-to-GDP ratio is expected to reach 98% by the end of this year, and the trajectory suggests it could reach 107% by 2029, surpassing the record set after World War II. The U.S. managed to recover from that situation thanks to a postwar economic boom, but similar circumstances are unlikely today.
Complicating matters further are the Federal Reserve’s aggressive rate hikes, geopolitical risks, and the significant amount of U.S. securities held by Asian central banks, particularly Japan and China. The U.S. benefits from the dollar’s reserve currency status, allowing it to live beyond its means. However, there may come a point when the dollar’s status is insufficient to prevent a reckoning, especially if the Fed tightens monetary policy excessively or if former President Trump’s allies in Congress undermine government functions.
Maintaining investors’ trust in Washington’s ability to handle the debt is crucial, but the U.S. debt has grown 56% larger since S&P downgraded the country in 2011. Secretary Yellen and her team need to develop a plan to address the national debt, whether through tax hikes or spending cuts, and communicate it to the public. Failure to do so could further fuel fears of a U.S. debt reckoning and lead to even more significant bitcoin rallies.
Japan serves as a stark reminder of the consequences of inaction. Its national debt continues to grow unchecked, and the United States must learn from this example and take decisive action to prevent a similar fate.
