US government bonds and the US dollar have been seen as safe havens for investors for decades. However, the debt pile is becoming an increasing problem for its economy, both for monetary policy as well as fiscal policy. A lot of believers in Bitcoin see this as a reason that people will lose faith in both the US economy and its currency. This article will explain the basics of what the issue is with the US government debt.
The last time that the US government ran a budget surplus was back in 2001. The budget deficit it has run since then has caused its debt pile to grow massively and recently surpassed $25 trln.
Total debt (millions)
It has far outrun the growth rate of the economy, resulting in a surging Debt to GDP ratio which has not been seen since the Second World War. By now, the Debt to GDP ratio stands well above 100%.
Debt to GDP (percentage)
As time progresses, this debt pile becomes an increasing problem for the US and its currency as it stands in the way of monetary policy that is needed to stimulate steady growth while also putting pressure on the government’s budget.
The organization that is tasked with monetary policy and stimulating steady economic growth is the Federal Reserve, the central bank of the US.
The Federal Reserve’s mandate was established by the US Congress as
- Maximizing employment
- Stabilizing prices
- Moderating long-term interest rates
In order to achieve these goals, the Federal Reserve has multiple tools at its disposal.
- Interest on reserves
- Reserve requirements
- Discount rate
- Open market operations
- Forward guidance
- Large-scale asset purchases
A lot of these tools involve manipulating interest rates to either stimulate growth or dampen it.
The high debt load makes it extremely difficult to raise interest rates. Since there is no sign that the government budget deficit is declining, the debt pile is expected to keep increasing. This results in higher interest payments even if the interest rates keep steady. The Federal Reserve needs to be able to raise the interest rates in case of out of hand inflation, for example. But it must also have the possibility to lower the interest rates in case of surging unemployment and low inflation numbers.
Lowering interest rates much further in case of economic hardship is becoming increasingly difficult as the rates are already close to 0.
Raising the interest rates puts the US government at risk of severely increasing the budget deficit and therefore the debt pile. This would then become a vicious circle.
Source (percentage of GDP)
The Congressional Budget Office (CBO) sees interest payments as a growing portion of the budget deficit in at least the coming ten years. It could become a possibility that higher interest rates will ultimately lead people to start to lose faith in the US economy. As investors lose faith, interest rates will increase as well, leading to even higher interest bills for the government.
There is still the possibility of negative interest rates such as we are currently seeing in Europe. However, this is not without risks either. As mentioned earlier in the text, the Federal Reserve has to be able to have enough room to implement certain policies in times of economic distress. If interest rates are already negative while the economy is suffering, there is not much it can do to drive growth as most of its tools involve lowering interest rates.
Losing confidence in US economy
These issues could ultimately lead to less confidence in the US economy and therefore the US dollar. Should this happen, investors would look for a new currency safe haven. Investors in Bitcoin often believe that this strengthens the case for wider adoption of Bitcoin.