December 11, 2023
Macro Monday

Current market

The US government operates similar to a business - it has revenues and expenses, and utilises debt financing. As with businesses, sufficient revenue is required to cover expenditures. Major outlays include infrastructure, defence, entitlements, and interest on debt, while tax receipts are the primary revenue stream.

The Congressional Budget Office projects 2023 tax revenue of $4.815Tn, compared to projected net spending of $6.35Tn, resulting in a $1.5Tn budget deficit. This will force the US to take on more debt to fill the whole, and outstanding debt recently surpassed $33.8Tn. At current 5.5% rates, interest costs are roughly $1.9Tn, with every $1Tn increase in debt issuance leading to a further increase in debt repayments of $55Bn per year.  

Why does the government issue more debt?

The other options have greater short term drawbacks: reducing deficits requires some combination of entitlement cuts, tax hikes, or GDP growth; entitlement reductions risk voter backlash; tax increases may slow economic activity. Thus, boosting GDP growth has proven difficult with the current 2% average expansion.

Therefire, continued debt issuance has been the de facto solution, and with an election approaching there is likely to be no change until after the election. Essentially, a debt spiral has been created where the US government can only afford to pay off debts by issuing more debt.

By issuing more debt the government is introducing more bonds/treasury bills, and treasury notes to the market (known as ‘treasury issuance’). Treasury issuance has increased to $2.2Tn in the first 3 quarters of 2023 with US debt growing from $31.5Tn at the end of last year. At the current pace, the US is adding around $1Tn in debt every 100 days.

And remember, that causes an extra increase in debt repayments of $55Bn per year.

This raises an interesting question…

Who’s actually buying the treasuries?

Due to political tensions, and worsening economic sentiment globally US Treasury holdings by foreign entities decreased from $4Tn in January 2022 to $3.7Tn in January 2023 with a further decrease since then. The largest decrease in foreign treasuries comes from China and Russia with Russia’s holdings decreasing from $12Bn to $33M whilst China’s holdings fell to the lowest level since May 2009.

Meanwhile, in Europe and Japan due to worsening economic sentiment and the energy market shifting countries are being forced to sell US treasuries to be able to buy oil. The only way to promote the sale of treasuries is to increase returns or for other economies to become more unstable than America’s. By increasing bond returns the US government increases its debt repayment interest increasing expenditure.

This all leads to a vicious debt spiral with no way out. The final option the US has is to let inflation run hot to stimulate GDP growth and monetise debt. This would in theory mean lowering the dollar’s value to pay off debts at a cheaper rate. This would lead to investors demanding higher treasury rates to compensate for the fact they’re earning cheaper dollars.

Unfortunately, for the rest of the world, the US dollar is the bedrock of global financial systems being at the centre of global trade. It is utilised in most global trade and is the most traded currency globally. This means despite the weakening US economy and debt in the US most other central banks are still forced to buy dollars and this is typically done by selling local government bonds. This leads to the same debt spiral issues arising in other countries, and as other countries’ currencies are less demanded than the dollar their bonds are less likely to be bought.

This is known as The Dollar Milkshake Theory which was coined by Brent Johnson, CEO of Santiago Capital, who states the US dollar sucking up liquidity from other currencies and countries worldwide.

How BTC plays a role

Traditionally, countries and individuals have had no other options besides buying the dollar. However, now BTC has the potential to act as a currency which can be used for international trade without giving power to governments to print more of a currency or suck up liquidity.

Bitcoin acts as a revolutionary version of gold. But not the gold we know today. Instead, it's a digital version of the gold coins (Florin) from before the bankers created bills of exchange (debt instruments) in the 13th century as a secondary layer of money used specifically for transactions. Back then, gold coins weren’t fungible and required to be transported physically for international trade – this was cumbersome.

The creation of bills of exchange, and later cash, made transactions easier and turned gold from a medium of exchange to a store of value. The issue with this is governments received the power to print as many bills/cash as they saw fit to make up for the mistakes of the financial sector and to enable insider prosperity.

Bitcoin was created to act as a global currency and medium of exchange (just like gold was) that is fungible, easy to transact, and avoids any dilution or discounting by third parties because of its fixed supply. Whether one believes in Bitcoin or not, it’s the best alternative given that every other currency, including the global reserve currency that replaced gold (USD), is fighting for their lives.

With what appears to be a bull run around the corner, is it possible that the global macro economic sentiment will drive demand into BTC?

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