Follow Mrs Wantanabe to the Escape Valve
The inevitable path to Bitcoin - What's The Problem?
Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly rated sovereigns. Moody’s Rating Action Friday, May 16th, 2025.
On Friday last week, Moody's downgraded the United States' sovereign credit rating from Aaa to Aa1, stripping the world's pre-eminent debt issuer of its last top-tier credit rating among the three major agencies (S&P downgraded in 2011, Fitch in 2023). Citing a $36 trillion debt pile, ballooning deficits (6.4% of GDP in 2024, projected to reach 9% by 2035), and rising interest payments, the timing of Moody's decision inevitably led to cries of political bias and interference. However, while it is right to be sceptical of credit rating agencies, given their role in the packaging of subprime loans during the GFC, it is hard to deny that Moody's has a strong case for its downgrade.
As Moody's made its move, Congress rejected the Republicans' Big Beautiful Bill that proposed to extend Trump's 2017 tax cuts, raise the debt ceiling, and implement spending hikes. The reason cited by those opposing the bill was its inherent lack of fiscal restraint. Moody's estimated that the bill would add $5.2tn to the deficit over a decade, resulting in a 134% debt-to-GDP ratio by 2035.
As if on cue, long-term US Treasury yields that stretch 20 to 30 years moved towards the 5% level. The 5-year/5-year forward swap rate, the tranche of time beyond 2030, suddenly looks very pricey, making Scott Bessent's desire to term out his debt structure increasingly expensive. The world's bond investors are becoming more vigilant, which is one thing when blamed on a rogue UK PM with a life span equivalent to a refrigerated lettuce, but a different matter when it is the mighty US of A.
So, does this mean that the US government is about to default? Have we reached the point where the United States Treasury is no longer good for the money? Are the next coupon payments on your Treasury bonds in doubt? The answer to all these questions is no. But, as financial theory tells us, government debt offers a risk-free rate upon which all other returns are judged. US Treasury bonds are the world's pristine collateral—the most desired asset to back up credit agreements, such as derivative contracts and international trade deals. The dollar and its interest rates matter to us all. We should be taking note.
No, the US is fine; it can print as many dollars as it needs to comply with its growing global debt obligations and, for that matter, to pay for whatever else it needs as well. But as America has told the world before, it might be its currency, but the rest of the world must share its problems. And the problem the dollar now faces is structural monetary inflation, otherwise known as currency debasement. A type of crisis that is more typical of emerging markets than the developed world. How will it all end? Well, in this instance, as they say on all good cookery programmes, there is an excellent example of one we prepared earlier. It's called Japan.
Japan is where the fashionable monetary policy known as quantitative easing (QE), AKA money printing for the developed world, first took hold. Following a decade of fighting economic stagnation, now known as the lost decade, Japan suffered from persistent deflation and a rolling banking crisis stemming from the Japanese asset bubble in the late 1980s. A series of political scandals accompanied by an overwhelming sense of policy exhaustion culminated in March 2001 with a novel experiment to flood its financial markets with liquidity (AKA money) to fund the issuance of Japanese Government Bonds (JGBs).
The lost decade became the lost three decades, and today, Japan is a developed market and economy like no other. With a government debt-to-GDP ratio of 237% and policy rates of 0.5%, the Bank of Japan (BoJ) today owns more than 50% of all JGBs, and Japanese savers own more sovereign debt of other countries than any other country in the world. Japan owns more than $ 1 trillion of US Treasuries. In many ways, it is a leveraged hedge fund engaged in debt arbitrage on an epic scale, masquerading as a nation-state. What could possibly go wrong?
In the first quarter of 2025, Japan had the worst-performing G7 economy (GDP -0.7%), yet this week, it is expected to report the G7’s highest rate of inflation (3.7%). Its policy mix has become so fiscally dominant that its monetary policy options no longer exist. It cannot lower rates to stimulate growth or raise rates to combat inflation. In the parlance of polite English society, it is snookered. Yet, Japan was able to persist with its QE and yield curve control (YCC) policies for so long due to its exceptionally resolute and socially cohesive population. Simply put, Japan, the world's third-largest economy, has endured emerging market-level hardships for over a quarter of a century.
This period of extraordinarily low interest rates, currency weakness, and excess liquidity drove a huge forcing function to buy any overseas-yielding assets as an escape valve for Japan's fictional Mrs Wantanabe. Even US Treasury yields at 0.75% looked attractive in 2020 when the equivalent JGB yielded -0.25%! Today, Japan is locked and loaded with all the world's aggregated sovereign debt crises. It is why Scott Bessant was so keen to conclude an early trade deal with Japan, which intriguingly has yet to materialise.
So, what lessons can we draw from Japan's experience on the path that the US and all other Western countries must take to technical debt default? Like Mrs Wantanabe, investors need an escape valve, and the Buck finally stops with the US dollar. A new form of capital preservation is necessary, one that is politically neutral and not the liability of anyone else: gold and Bitcoin fit the bill.
If you haven't looked at Bitcoin and have questions about why and how it can be considered a serious alternative to conventional monetary assets, I recommend a YouTube video called What's The Problem? by Bitcoin advocate Joe Bryan.
I recently chatted with Joe on an episode of In The Company of Mavericks, which will be out later this week. The podcast is available on all good podcast platforms; subscribe now to avoid disappointment.
Here's a trailer of what to expect. In it, Joe explains why he thinks Bitcoin is inevitable and urges people to critically evaluate its qualities and educate themselves.