Debt Market Woes Bring Good News for Bitcoin

by Juan Villaverde
By Juan Villaverde

In a shocking twist nobody saw coming — he says sarcastically — the U.S. is in debt. A lot of it. So much so that it will never be paid back.

Turns out, most Americans struggle with the concept. Maybe it's all that prosperity. It's hard to picture doom and gloom when you're used to being the world's financial superhero.

But here we are, facing the music that Uncle Sam's wallet isn't bottomless after all.

The Federal Reserve, facing inflation like a deer in the headlights a couple of years back, did what any sensible central bank would do: hike rates. But while this works if inflation is driven by the private sector taking on excessive credit, it’s as effective as a chocolate teapot if the problem is federal-level spending.

It's like trying to fix a leaky faucet with duct tape. And yet, here we are, with inflation stubbornly lounging above 2%.

That affects America’s bond market — the financial world’s equivalent of “safe as houses.” Analysts rush to U.S. Treasurys like moths to a flame whenever the economy coughs.

But that’s where the plot twist lays: If the government is the problem this time, is parking your cash in U.S. Treasurys still the equivalent of financial comfort food?

When government spending is responsible for our debt, turning to Treasurys is a bit like trusting the person who caused the mess to clean it up.

As for the U.S. dollar and Treasury market, they're entwined in a dance as old as time like a snake eating its own tail. Each one backs up the other.

Market dynamics don’t often reflect this, but if everyone truly grasped the depth of U.S. debt, we'd see these two moving in sync like a well-rehearsed ballet.  But they don’t … which indicates that the full impact of U.S. debt woes has yet to be reflected in the value of U.S. debt and the currency.

By contrast, China — which is also grappling with its own gigantic debt issues — has a more transparent situation.

The Chinese economy faces its own version of “House Hunters: Bubble Edition,” with enough properties to host a small planet. Indeed, properties outnumber the Chinese population 2-to-1.

This $50 trillion bubble is proving to be as controllable as a bull in a china shop, leading to a cascading economic crisis. Moody’s is handing out downgrades like they're going out of style, and the CPI is so low it's practically screaming “deflation!”

Chinese investors who are wise to the game are voting with their wallets and heading for the exits, causing the yuan to sink.

But look closer and you’ll see they’re not flocking to the “safety” of Chinese government bonds. Far from it, this exodus is fueling the fire under save haven assets insulated from government contamination — such as gold and Bitcoin (BTC, “A”) and causing their rising prices.

So, as the U.S. and China play “who's got the bigger debt bubble,” gold and Bitcoin are sitting pretty, watching the chaos unfold.

And if the rallies we’ve seen in both assets is due to the Chinese bubble, can you imagine what will happen when American investors realize our Treasury notes are just as useless?

It's only a matter of time before American investors wake up and smell the fiscal coffee. When they do, expect a gold and crypto rush that'll make the California Gold Rush look like a leisurely stroll in the park … and U.S. Treasurys to sink faster than a led balloon.

I hope you’re well-positioned to ride the wave when it does happen … or else you’ll be left behind.

Best,

Juan

About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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