US Debt Spiral Echoes Liz Truss Debacle, Raising Market Turmoil Concerns

Unattended U.S. debt concerns could trigger market chaos similar to the Liz Truss-induced turmoil in the U.K., warns Congressional Budget Office director Phillip Swagel. Despite elevated interest rates, haven assets like bitcoin and gold have surged, potentially pricing in a crisis scenario, as the U.S. debt-to-GDP ratio is projected to exceed historical highs.

U.S. Debt Spiral Raises Market Chaos Concerns, Echoing Liz Truss Debacle

Unattended concerns over the mounting U.S. debt burden have raised the specter of market turbulence akin to that witnessed in the United Kingdom following former Prime Minister Liz Truss's ill-fated economic policies, according to Phillip Swagel, director of the Congressional Budget Office (CBO).

In a recent interview with the Financial Times, Swagel warned that the U.S. faces a similar risk if the government continues to disregard the growing debt problem. "The danger, of course, is what the U.K. faced with former Prime Minister Truss, where policymakers tried to take an action, and then there’s a market reaction to that action," he said.

While the U.S. is not yet in the same precarious position, Swagel noted that rising interest rates could escalate the cost of debt servicing to $1 trillion in the next two years, potentially triggering a "snap back" in bond markets.

Alternative Asset Boost amid Currency Crisis

A pound-like crash in the U.S. dollar, a global reserve currency with a dominant role in international finance, could amplify demand for alternative assets with haven status, such as Bitcoin and gold. Historical data suggests that trading volumes in Bitcoin-pound pairs surged during the U.K. currency crisis in September 2022.

Both Bitcoin and gold appear to be already factoring in a potential crisis scenario. Despite elevated interest rates and bond yields globally, these two so-called zero-yielding assets have rallied to new record highs, surpassing $70,000 and $2,000, respectively. This surge has occurred despite the previous peaks they reached in 2020-21, when interest rates in the U.S. and other regions were near or even below zero.

Macro Tailwinds for Bitcoin and Gold

According to Kaiko, a Paris-based crypto data provider, rising debt levels and geopolitical instability may have counterbalanced the upward pressure on yields, contributing to the remarkable performance of Bitcoin and gold.

Data from the CBO reveals that U.S. federal debt reached $26.2 trillion at the end of 2023, approximating 97% of gross domestic product (GDP). The CBO forecasts that the debt-to-GDP ratio will exceed the 116% peak recorded during World War II by 2029, escalating to as high as 166% by 2054.

The larger the debt burden, the more pronounced the pressure to maintain artificially low real (inflation-adjusted) interest rates and bond yields. Elevated rates and debt levels exacerbate the government's interest expenses, further compounding debt concerns.

Negative real rates tend to prompt investors to shift funds away from fixed-income investments toward higher-risk, higher-return assets, such as technology stocks, cryptocurrencies, and havens like gold, as witnessed in 2020-21.

Fed's Dilemma and Bitcoin's Potential Surge

The LondonCryptoClub newsletter founders contend that the debt concerns serve as a macro tailwind for Bitcoin and gold, a view supported by Federal Reserve Chairman Jerome Powell's recent decision to adhere to forecasts of three rate cuts in the coming months despite ongoing labor market strength and renewed inflation. This decision, according to the LondonCryptoClub founders, reflects the central bank's focus on "the U.S. debt spiral."

"Gold continues to signal that the macro sands are shifting. Should net ETF inflows turn positive this week, don’t be surprised if Bitcoin catches the macro winds and accelerates to new highs," they observed.

Indeed, the Nasdaq-listed spot ETFs attracted over $15 million on Monday, reversing a five-day outflow streak. Bitcoin was trading at approximately $70,780 at the time of writing, representing a 5% gain on a 24-hour basis, according to CoinDesk data. The broader crypto market, as measured by the CoinDesk 20 Index, exhibited a 5.5% increase.

Conclusion

The U.S. government's mounting debt burden poses a significant risk to the economy and financial markets. If left unattended, this issue could trigger market chaos akin to that experienced in the United Kingdom following former Prime Minister Liz Truss's reckless fiscal policies. The potential for a currency crisis, such as a pound-like crash in the U.S. dollar, could fuel a surge in demand for alternative assets like Bitcoin and gold. Fed policy decisions and market sentiment will continue to play a crucial role in shaping the trajectory of these assets amidst the evolving macro environment.