From Kenny Hearn, CIO SwissOne Capital
The US Debt situation, where does one begin to try to make sense of it all. Firstly, it is important to point out why the US balance sheet is important relative to Crypto Currencies and the greater alternative financial system that is Decentralised Finance. The US Dollar is currently the global reserve currency and core to a reserve currency is that it has a stable value, however, when the balance sheet backing that currency drastically changes it is only natural that alternatives begin surfacing.
It is hard not to get philosophical when you begin to look at the detail of the data represented in charts that truly depicts what has happened to the US balance sheet over the past 50 years. The bottom line for us as global investment managers is that at some point there is a price to be paid for increasing debt per capita without experiencing a similar increase in productivity (which in turn increases GDP per capita).
It is becoming increasingly obvious that the US government has no intention to ever reduce the size of its debt. The goal then would be to increase productivity and/or use inflation as tools to reduce the size of the debt on a relative basis. We suspect a combination of these two levers will be used in the coming decade or more.
How has the US increased productivity historically without necessarily increasing fiscal expenditure?
- Increase the workforce and productive population. In the past, this has been overcome through loose immigration policy, increasing retirement age, return to in-sourcing production. Currently, we are seeing all of these mechanisms being utilised.
- War increases the demand side of the equation, drives down unemployment, forces indebtedness from countries being saved and strengthens dollar globally. Ukraine the outlet in this cycle and many others in previous cycles. However, can they afford it now?
- Technological advancement through the likes of AI to improve productivity levels in an environment where unemployment levels are already so low. Clearly, a massive growth vector by the worlds strongest economies.
Let’s get into the data then.
This charts depicts the growth in the US cost of debt (relative to its Defence Budget) driven by increased debt and interest rates. The FED is now signaling interest rates to be higher for longer. In the past, war has proven to be a critical mechanism to increase economic productivity by driving the demand side of the equation, technological innovation and with the added bonus of the spoils of war. However, this chart shows the difficult position that US leaders are in to drive the war agenda currently. Indeed, how does the government afford this route without severely impacting its balance sheet?
At a time when fiscal expenditure is needed the most, all excess growth in GDP is being sucked up by servicing debt costs.
The border crisis in the US is being widely documented (most recently by Elon Musk) at just how dire the situation is, yet the government fails to react. However, given the extremely tight labour force in the US coupled with the high pressure to increase productivity it begins to make more sense as to why we are seeing so little action. Time will tell.
While technological advancement presents a real solution to the financial situation that the printer of the global reserve currency finds itself, the numbers are showing the situation is worsening faster than the technology can advance to make the required difference. For example, this month we witnessed the US debt increase by $275bn in a single day and is on track to increasing debt by $1trn in a single month.
US Debt to GDP (%)
We believe that a combination of all of the above will eventually bring the scales of the US economy back into balance, however in the short term given the current rate of increasing debt, something has to pay the price for the lack of growth in productivity. This brings into question the other part of the equation to assist in reducing debt on a relative basis: INFLATION.
The critical question that will be answered in the next 12-18 months is: how long can the US government continue to fight inflation without significant social unrest becoming a bi-product of those measures taken.
In order to combat inflation in 1971, the US severed the Dollars link to the Gold standard which in turn allowed the government to effectively print money out of the Ether and since then inflation never looked back.
Is it about time that we turn back to the ether from where money is currently born for a more sound version based on similar values and principles that gold once brought to global financial markets, a sort of digital gold in a sense that is easily transferred across borders, scalable and permissionless? Perhaps it is time.
Bitcoin Technical Outlook: For now, the BTC price has maintained a «higher low» and is attempting to form a bullish structure for a short term move higher. The recent bounce of $26k after having tested the $27.5k level was a significant short term «higher low» followed by a new short term high of $28.6k. This market behaviour is certainly constructive for a potential retesting of this Bull market’s local high of $31.9k in the coming months so long as the daily close low of $24.7k is not broken. Our on-chain analysis report, technical analysis and 2024 fundamentals are all pointing to strong bull market kicking off late this year. (SwissOne Capital/mc/ps)
Why SwissOne Capital?
SwissOne offers seamless access in to the Crypto Asset ecosystem via traditional market channels. Offering the Top 50 Crypto Assets momentum-weighted as well as Smart Metaverse strategies, SwissOne brings you direct and sensible exposure to this uncorrelated and high growth asset class. Operating with institutional-grade European financial service providers, there is a safe and secure passage from traditional markets into Crypto Assets.