The United States’ debt to GDP ratio may not seem alarming on a global scale, especially when compared to other G7 nations. In 2023, the ratio was 123%, which is much lower than Japan’s staggering 255%. However, a closer look reveals significant differences between the two countries that make the situation in the US more concerning.
The key difference lies in the ownership of debt. In Japan, nearly 90% of debt is held domestically, while only a quarter of US debt is owned by international buyers. This means that the US needs to ensure that its debt remains attractive to these buyers by offering high yields. As the debt continues to increase as a percentage of GDP, lending to the US government becomes riskier.
Last year, Fitch Ratings downgraded US government debt from AAA to AA+. This was followed by Moody’s downgrade of the US debt outlook to negative. These downgrades should not be ignored, as the US cannot afford to let its debt reach the levels seen in Japan.
One important factor is that Japan’s net debt is much lower than its gross debt-to-GDP ratio, meaning it holds more foreign assets than it owes to other countries. This gives Japan more flexibility in managing its growing debt pile.
Another difference is the level of inflation. Japan has not struggled with inflation to the same extent as the US. Its inflation rate is currently at 2.7%, compared to the US’s peak of 9.1%. The Federal Reserve is still grappling with controlling inflation, and the high debt levels pose a significant risk.
The solution to inflation is often restrictive monetary policy, which means higher interest rates. However, this leads to higher debt repayments, unhappy consumers, and a slowing economy. The Federal Reserve is already facing these challenges, with consumer confidence declining and lower-than-expected growth in the first quarter of this year.
The US debt situation also limits the government’s ability to use fiscal powers to mitigate a slowing economy, creating a catch-22 for the Federal Reserve. Additionally, both Democrat and Republican candidates in the upcoming election have largely ignored the growing US debt pile and have not proposed any meaningful policies to address it.
Interestingly, this predicament could be beneficial for cryptocurrencies like Bitcoin. As concerns over soaring US debt grow, assets like Bitcoin could become a safe haven. Rising debt levels often lead to currency devaluation, and the high proportion of foreign debt ownership makes the US dollar vulnerable. Coupled with expectations of interest rate cuts, the dollar’s strength may not last, which could benefit Bitcoin as a hedge against dollar weakness.
However, it’s important to note that if the US were to default on its debt, it would have disastrous consequences for all markets, including cryptocurrencies. A weaker dollar and some loss of confidence in the US, on the other hand, could contribute to the next crypto rally.
In conclusion, while the US debt to GDP ratio may not appear concerning at first glance, the differences between the US and Japan’s debt ownership and inflation levels make the situation in the US more precarious. This could potentially benefit cryptocurrencies like Bitcoin in the face of growing US debt.