Concerns about the rapidly rising U.S. government debt have contributed to recent surges in gold and bitcoin prices, even as the Treasury market remains relatively calm regarding the country’s fiscal path.
The U.S. budget deficit expanded to $1.7 trillion in fiscal year 2023 and is projected to reach $2.6 trillion by 2034, according to the Congressional Budget Office. U.S. government debt held by the public is expected to hit a record 106% of gross domestic product (GDP) in 2028, up from 97% in fiscal year 2023. Government debt has escalated to $27 trillion from $17 trillion in early 2020 and $5 trillion in 2007.
The unchecked growth of U.S. government debt is attracting more attention as interest rate payments consume a larger portion of the government’s budget, sometimes surpassing national defense spending.
This worsening fiscal trajectory has driven demand for bitcoin and gold, which are often used as hedges against inflation and the eroding purchasing power of the U.S. dollar. The rising debt and deficit are particularly alarming during peacetime with a fully employed economy, a period typically associated with budget surpluses, not deficits.
Other significant factors also drive interest in bitcoin and gold. Bitcoin has been buoyed by the introduction of new exchange-traded funds (ETFs) investing in the cryptocurrency, attracting more investors. Meanwhile, gold’s surge is driven by expectations of central bank rate cuts and purchases by foreign central banks diversifying their reserves. These purchases are motivated by inflation concerns and the desire to protect against potential U.S. sanctions in geopolitical disputes.
Source: Gold Price
Despite these other influences, the rapidly worsening U.S. fiscal situation remains a key driver for some investors. Michael Hartnett, an investment strategist at Bank of America, noted in a recent report that the recent highs in gold and tech stocks indicate the “parlous state of U.S. government finances.” He suggested this situation will inevitably lead to policies like yield curve control to prevent a debt crisis. Yield curve control involves a central bank buying bonds to maintain a target interest rate, reducing government borrowing costs.
Many analysts, pundits, and financial advisors often compare the development of gold prices with the growth of America’s total national debt, and for good reason. Since 2000, both have seen significant increases.
Understanding National Debt
National debt is the total amount of money the federal government has borrowed to cover outstanding expenses over time. The government raises funds by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). These securities are financial instruments the government issues to manage its debt and finance various public expenditures.
As U.S. government debt continues to grow, the associated interest payments strain the federal budget, increasing the appeal of assets like gold and bitcoin. Investors view these assets as protective measures against the potential devaluation of the U.S. dollar and rising inflation. This trend highlights the significant impact of fiscal policy and national debt on investment strategies and financial markets.
