US Debt Crisis and the Future of Bitcoin

At the beginning of the new year, the scale of U.S. national debt has exceeded 36.4 trillion dollars. How can the U.S. debt crisis be resolved, and can the international hegemony of the U.S. dollar continue? How will Bitcoin react, and how will future international settlement units be replaced?

We will start with the debt economic model of the United States, exploring the debt risks currently faced by the internationalization of the US dollar, and analyzing whether the US debt repayment plan is feasible. Looking at the past and present, let’s see where US debt points the way for Bitcoin.

Establishment of the Economic Model of U.S. Debt

After the collapse of the Bretton Woods system, the hegemony of the US dollar grew recklessly in the debt economic model.

After World War II, the Bretton Woods system was established, linking the US dollar to gold and forming an international monetary system centered around the dollar. However, the "Triffin Dilemma" accurately predicted the collapse of this system: the demand for international settlements continued to grow, the dollar flowed out of the United States and accumulated overseas, and the U.S. faced a long-term trade deficit; yet, as an international currency, the dollar must maintain stable value, which requires the U.S. to have a long-term trade surplus. In 1971, President Nixon announced the decoupling of the dollar from gold, transforming the dollar from a commodity currency to a fiat currency, with its value no longer backed by precious metals but rather by the national credit of the United States.

On this basis, the U.S. debt economic model is established: global trade is settled in U.S. dollars, and the U.S. must maintain a huge trade deficit, allowing other countries to acquire large amounts of dollars; countries around the world purchase U.S. Treasury bonds to preserve and increase the value of the dollar, and then reinvest in U.S. financial products, causing the dollars to flow back to the U.S.

The US dollar, as the world's currency, is considered an international public good and should maintain stable value. However, after abandoning the gold standard, US monetary authorities gained the power to issue currency and can change the value of the dollar according to their own interests. The hegemony of the dollar has been strongly sustained through a debt-based economic model.

The Internationalization of the Dollar Faces Risks

The US dollar faces risks from the economic model of US Treasury debt and commercial real estate debt.

The debt economic model of the United States is an important support for the internationalization of the dollar, but it is not sustainable. The Triffin dilemma still exists. On one hand, the internationalization of the dollar requires maintaining long-term trade deficits, exporting dollars and accumulating them overseas. Once overseas investors become concerned about the repayment capacity of U.S. Treasury bonds, they may turn to other alternatives and demand higher interest rates on U.S. Treasury bonds to balance future repayment risks, leading the U.S. into a vicious cycle of "dollar credit weakening - rising prices of dollar-denominated goods - strengthened inflation resilience - U.S. Treasury interest rates remaining high - increased interest burden for the U.S. - elevated repayment risks of U.S. Treasury bonds - dollar credit weakening."

On the other hand, the United States needs to adopt a combination of economic measures to promote the return of manufacturing, which will reduce the trade deficit and lead to a demand-supply imbalance for the dollar, resulting in a significant long-term appreciation. This will hinder the dollar's role as an international settlement currency. It is unrealistic to expect both dollar hegemony and a strong manufacturing sector. Currently, the pressure for dollar appreciation is not yet clear, and it is expected that there will not be a fundamental change in the trade deficit in the short term, with depreciation pressure primarily dominating the dollar.

In addition, apart from the risks associated with U.S. Treasury bonds, commercial real estate also carries debt risks. According to a report from a research institution, due to the ongoing expansion of remote work, it is expected that by 2026, the vacancy rate of office buildings in the U.S. will rise from 19.8% in the first quarter of this year to 24%. Compared to before the pandemic, the demand for office space in the white-collar sector has decreased by about 14%. A consulting firm predicts that by 2030, the demand for office space in major cities worldwide will decline by 13%, and in the coming years, the market value of global office properties may shrink significantly by $800 billion to $1.3 trillion.

A study by a financial institution shows that by the end of 2023, commercial real estate loans accounted for 26% of the total loans in the U.S. banking system, while large banks had only 13% of their loans in commercial real estate, and small and medium-sized banks reached as high as 44%. The U.S. has experienced waves of bank bankruptcies and restructurings due to real estate risks in the late 1980s and in 2008. The risks in U.S. commercial real estate still exist after the pandemic and have not improved. The $1.5 trillion in commercial real estate debt in the U.S. will mature next year, and if small and medium-sized banks face significant issues, it could trigger a financial crisis.

Analysis of US Debt Repayment Plans

How to break this vicious cycle mainly depends on how the enormous U.S. national debt should be repaid. Borrowing new debt to pay off old debt is similar to a "Ponzi scheme"; the dollar will eventually lose its credibility and thus lose its status as a world currency, which is clearly not feasible. We will analyze whether the following repayment plans are viable.

Sell gold to pay off US debt?

The main assets held by the Federal Reserve are bonds, including government bonds and quasi-government bonds, totaling approximately $6.57 trillion, accounting for about 94.45% of total assets.

The gold holdings amount to 11 billion dollars, but this figure is calculated based on prices after the collapse of the Bretton Woods system. Referring to the exchange rate when this system completely collapsed, 1 troy ounce of gold = 42.22 dollars, and using the spot price of approximately 2700 dollars/ounce on December 11, the value of this batch of gold is approximately 704.358 billion dollars. Therefore, the adjusted gold accounts for about 10% of the total asset value.

Therefore, some have proposed selling gold to pay off U.S. debt. Although it seems that the scale of gold is large, it is actually not feasible. Gold is a universal currency with an internationally spontaneous consensus, playing a key role in stabilizing currencies and responding to economic crises. The massive gold reserves give the U.S. a strong voice in the international financial market, making its position very important. If the Federal Reserve sells gold, it would indicate that the Federal Reserve has completely lost trust in U.S. debt, appearing to be "backed into a corner". It would rather weaken its own influence than use it to fill the "pit" of U.S. debt, which undoubtedly would cause a liquidity crisis for U.S. debt, amounting to self-destruction.

Sell Bitcoin to repay US debt?

A former president once said, "Give them a little cryptocurrency check. Give them a bit of Bitcoin, and then wipe out our $35 trillion." Although Bitcoin serves as a store of value in the cryptocurrency realm, it still experiences greater volatility compared to traditional fiat currencies. Whether the check can be cashed at a recognized value by the counterpart remains to be seen, as holders of U.S. debt may not necessarily acknowledge it. Furthermore, economies holding U.S. debt may not implement Bitcoin-friendly policies; considering the regulatory issues within those economies, they may not accept Bitcoin checks.

Secondly, using the Bitcoin held by the United States is not enough to solve the debt crisis. According to data from a certain institution on July 29, the U.S. government holds 12 billion USD worth of Bitcoin, which is merely an ant's leg in repaying the 36 trillion USD national debt. Some speculate whether the U.S. could manipulate Bitcoin prices. This is unrealistic; extracting money is a concern for the speculators, while the U.S., facing the terrifying scale of 36 trillion USD in national debt, could not come up with a solution using 12 billion USD, even if it manipulated Bitcoin prices.

In the future, it is possible for the United States to establish a Bitcoin reserve, but it cannot solve the debt problem. A certain senator has proposed that the U.S. establish a reserve of 1 million Bitcoins, but this plan remains controversial.

Firstly, establishing a Bitcoin reserve will undermine the world's confidence in the US dollar, and the global community will see this as a signal of an imminent collapse of US debt risk, with interest rates likely to soar significantly, leading to a financial crisis.

Secondly, the United States is currently negotiating whether to implement Bitcoin reserves through laws or executive orders. If a candidate enforces the purchase of Bitcoin through an executive order, it is highly likely to be interrupted due to not aligning with public opinion. The American public does not have a deep understanding of the potential upcoming dollar crisis. If the government uses administrative means to acquire large amounts of Bitcoin, it may face public skepticism: "Would this expenditure be better spent on other matters?" Even saying, "Is it necessary to spend so much money on Bitcoin?" The challenges faced by legislative measures are obviously even more daunting.

Thirdly, even if the United States successfully establishes a Bitcoin reserve, it can only slightly delay the debt collapse. There are viewpoints supporting the use of Bitcoin reserves to repay U.S. debt that cite the conclusions of an asset management company: establishing a reserve of 1 million Bitcoins could reduce the national debt by 35% over the next 24 years. It assumes that Bitcoin will grow to $42.3 million by 2049 at a compound annual growth rate of 25% (CAGR), while U.S. national debt will rise from $37 trillion at the beginning of 2025 to $119.3 trillion during the same period at a compound annual growth rate of 5%. However, we can convert the remaining 65% of the debt into a specific amount, which means that by 2049, approximately $77.3 trillion of U.S. national debt will still exist that cannot be resolved with Bitcoin. How will this huge gap be filled?

Is the dollar anchored to Bitcoin?

Another bold idea is that if a certain candidate continuously releases positive news to drive up the price of Bitcoin, and then uses other methods to enable countries around the world and the United States to settle transactions using Bitcoin, it could decouple the dollar from national credit and link it to Bitcoin. Could this solve the huge US debt problem?

Linking to Bitcoin is a roundabout return to the Bretton Woods system, similar to the link between the US dollar and gold. Supporters believe that the similarity between Bitcoin and gold lies in: mining costs rise with supply, limited supply, decentralization ( and de-sovereignization ).

The mining cost of gold rises as the shallower gold is mined, similar to the rising difficulty of Bitcoin mining. Both have a supply limit and can serve as good stores of value. Both exhibit characteristics of decentralization. Modern fiat currency is enforced by sovereign nations, while gold naturally becomes currency, and no country can control it. Due to the global and relatively stable distribution of gold supply and demand across various regions and industries, gold priced in different currencies has very low correlation with local risk assets. Bitcoin, needless to say, can avoid regulation by sovereign governments due to its decentralized operation.

The unreasonable aspect is that the peg of the US dollar to Bitcoin would threaten the internationalization of the US dollar.

Firstly, if the US dollar is pegged to Bitcoin, it means that any group or individual has the right to issue their own currency using Bitcoin. Just like during the free banking era from 1837 to 1866, before the establishment of the Federal Reserve, the right to issue currency was free, and "wildcat banks" were prevalent------ various states, cities, private banks, railroads, construction companies, shops, restaurants, churches, and individuals issued approximately 8,000 different currencies by 1860, often located in remote and sparsely populated areas, which earned them the nickname "wildcat banks" due to their extremely low feasibility.

Today, Bitcoin has the characteristic of decentralization. If the US dollar is linked to Bitcoin, it will greatly undermine the international status of the dollar. The interests of the United States require the defense of the dollar's internationalization and the promotion of dollar hegemony, so it will not be counterproductive, nor will it implement a dollar-Bitcoin peg.

Secondly, the volatility of Bitcoin is significant. If the US dollar is pegged to Bitcoin, the real-time transmission of international liquidity could amplify the volatility of the US dollar, affecting the international community's confidence in the stability of the US dollar.

Thirdly, the Bitcoin held by the United States is limited. If there is a need to peg the US dollar to Bitcoin, and the United States does not hold enough Bitcoin reserves, it will lead to restrictions on its monetary policy.

Manipulating the US dollar through Bitcoin?

There is another voice saying that Bitcoin is the future "digital gold", so can the United States manipulate Bitcoin like it manipulates gold, thereby controlling the US dollar?

After the Jamaica Agreement in 1976, the interests of large investment banks, governments, and central banks were aligned. Fiat currency is based on confidence; if the price of gold rises too quickly, it undermines confidence in the currency, making it difficult for central banks to control liquidity and inflation targets.

Therefore, the United States