June 21, 2024

The pandemic, economic instability, and geopolitical tensions drove many governments to unprecedented fiscal spending and debt issuance.

Data from the Kobeissi Letter shows that the Treasury has issued a staggering $21 trillion in T-Bills in the United States alone. 

These funds have been disbursed over the past 12 months—the most on record. This is in addition to the over 60% increase in the total US Treasury market to $27 trillion since the end of 2019.

This Debt Explosion is Not Limited to the United States

Prominent macro investor Tapiero described the current situation as the “most remarkable macro correlation break” recently. This suggests that the market is showing “extreme concern about monetary debasement” driven by the rapid expansion of the Treasury market.

The fear is that the unprecedented government spending and debt accumulation levels will lead central banks to resort to more aggressive monetary easing policies. This will include quantitative easing (QE) and low interest rates to maintain financial stability and support economic growth. 

This, in turn, could result in a devaluation of fiat currencies and a loss of confidence in their ability to hold their value over time. A market analyst, Spencer Hakimian, pointed out that G7 nations are all facing a similar story of rising government debt. 

“Which nation isn’t facing the same problem?” “G7 all the same story. China has the same story—especially when you include LGFV debt and SOE debt,”

He noted.

China, the world’s second-largest economy, is also struggling with debt challenges. Off-balance sheet liabilities from local government financing vehicles (LGFVs) and state-owned enterprises (SOEs) add to the country’s total debt burden. This, which some estimate, places at over 300% of GDP.

This surge in government debt issuance has fueled growing concerns about the potential for monetary debasement. It has also placed worries on the erosion of the purchasing power of fiat currencies.

The Implications for Gold and Bitcoin

Investors increasingly turn to “hard assets” like gold and Bitcoin as a hedge against currency debasement. Tapiero noted that the market’s concerns about monetary debasement are “bullish for gold” and even more so when interest rates drop. 

The reason is that investors seek to protect their wealth as fiat currencies lose value. This can be done by shifting their holdings into assets that are perceived as less prone to eroding purchasing power.

Bitcoin, in particular, has gained attention as a potential solution to the problem of monetary debasement. Bitcoin’s appeal lies in its scarcity, decentralization, and programmatic monetary policy. 

Unlike fiat currencies, which central banks can print, the supply of Bitcoin is capped at 21 million coins. Bitcoin is also governed by an algorithm that ensures a predictable and transparent issuance schedule. 

This makes Bitcoin an attractive alternative for investors concerned about the potential for central bank policies to erode the value of their holdings.

The debt crisis is not confined to any single country or region; it is a global phenomenon. As Hakimian pointed out, the G7 nations—the world’s most advanced economies—are all facing similar challenges regarding rising government debt levels.

Emerging and developing economies are also grappling with the consequences of the debt explosion. Tapiero believes the factors driving the concerns about currency debasement could propel Bitcoin to prices well above $200,000.

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