Debt Dynamics and Monetary Policy

US non-growth fiscal spending has surged to 55% of government expenditure. That is the highest level in nearly 40 years. Monetary policy is increasingly evolving into a crucial tool for reducing interest payments on government debt, thus allowing fiscal stimulus to be more strategically channeled towards fostering economic growth, in our opinion. A key factor behind the exceptional economic performance of the United States over the past decade, particularly when compared to the rest of the world, has been its ability to deploy substantial fiscal spending to stimulate real GDP growth. This capacity is underpinned by the dollar’s role as the global reserve currency, which has granted the US a unique privilege to operate with less fiscal discipline for longer periods than other nations. My primary concern, however, is that the rising share of interest payments and entitlement spending pose a serious challenge to the sustainability of this dynamic. To understand the challenge of stimulating real GDP growth through fiscal policy, i.e., government spending, we consider a framework in which the government has two primary levers: 1. It can further increase overall spending to offset the increase in the share of its non-productive growth expenditures; and/or 2. It can attempt to reduce interest rates to release more of its existing relative outlay toward growth-oriented initiatives versus debt servicing. Both strategies could be implemented concurrently, and each is inherently inflationary in our assessment.

The US as crossed the Rubicon of debt sustainability where the costs of higher debt levels increasingly outweigh the benefits, signaling a new era of diminishing economic returns. Remember the proponents of MMT? It sounded great in theory but like all fairy tales, it got gobsmacked by the harsh economic realities. Deficits do matter. The US now faces growing skepticism about the sustainability of its fiscal posture—a shift that could have far-reaching consequences for economic growth, financial markets, and monetary policy. Historically, borrowing has allowed the US to finance growth by stimulating consumption and investment. However, as debt levels soar—projected to rise from 99% of GDP in 2024 to 116% by 2034—the stimulative effects of debt appear to be waning. When excessive credit growth, especially beyond 100% of GDP, begins to crowd out productivity and stifle growth. When borrowing becomes the primary driver of economic activity, risks such as resource misallocation and reduced output per worker become more pronounced. This "debt drag" is observable in the increasing gap between credit expansion and GDP growth. The US, with its $33 tril federal debt and rapidly rising interest costs, reached this critical inflection point. One of the clearest indicators of unsustainable debt is the snowballing cost of interest payments. In the 2023 fiscal year alone, the federal government spent nearly $1 tril on interest payments, consuming 22% of federal revenue—a sharp increase from previous years. At this pace, interest expenses are projected to dwarf critical expenditures like national defense and discretionary spending, locking the US into a "fiscal trap" where more borrowing is needed simply to service existing debt. Our privileged position as the issuer of the world's reserve currency has historically allowed it to accumulate debt without facing prohibitively high borrowing costs. However, recent events suggest this era may be ending. In 2023, Fitch Ratings downgraded US debt from AAA to AA+ due to "fiscal deterioration" and growing political dysfunction. The notion that the US could borrow without consequence—a belief bolstered by decades of low interest rates and unmatched global financial influence—is now being tested. As the balance tips from debt-driven growth to debt-driven stagnation, policymakers face the unenviable choice of either tightening fiscal policy or risking even more severe economic consequences. The era of seemingly unlimited borrowing may have come to an end, and the U.S. must now grapple with the reality of its fiscal and monetary constraints. Without meaningful reforms—be it through spending reductions, revenue increases, or structural changes in entitlement programs—the economic costs of excessive debt will continue to mount, potentially leaving future generations to pay the price. https://lnkd.in/gzEmWGtb

Bullish Catalysts for BTC - Macro, Government Deficit Spending, Interest Rates: Bitcoin, as an open, public ledger, provides us with a transparent view of ETF flows and on-chain HODL’ing behavior. Macroeconomic factors are far more opaque and difficult to predict. Expectations about global liquidity, government deficit spending, and Fed policy are constantly evolving. Fiat liquidity is the primary driver of asset prices, BTC included, as we measure prices with $ in the denominator (BTC / USD). Despite the rate-hiking crusade by the Fed, global liquidity increased 2.4% in 2023. Notice the tight correlation between BTC price action and global liquidity. The big-picture macroeconomic story remains the mounting global debt burdens. US debt has eclipsed $34 trillion and debt-to-GDP sits at 120%. In a recent interview on 60 Minutes, Fed Chairman Jerome Powell confessed to the negative long-term consequences of US fiscal policy. He described the situation as “unsustainable”, and said that the United States is “borrowing from future generations.” Barring an unprecedented boom in domestic productivity, the only mathematical way for the US to service the growing debt in nominal terms is through monetary expansion. Inject new units of currency into the economy → nominal GDP increases → nominal tax receipts increase → service debt. Monetary policy from the Fed & fiscal policy from Congress are pulling opposite directions; with the former having a net-negative effect on liquidity and the latter being net-positive. Annual deficit spending began declining after the pandemic, however spending has since reversed and the annual deficit is back north of $1.5 trillion.