A U.S. debt default would dramatically reshape the global financial system in a way that could enhance Bitcoin’s role as a global financial infrastructure.

Source: Coindesk

Compiler: Mary Liu, Bitui BitpushNews

US lawmakers are currently engaged in an intense, high-stakes and utterly "ridiculous" fight over the "debt ceiling". The U.S. legally determined the U.S. debt ceiling in 1917, and the Constitution gave Congress the power to set a ceiling on U.S. government debt. Treasury Secretary Janet Yellen has said the U.S. government could default — including stopping interest payments on the national debt — if new debt is not approved by June 1.

This unusual process has become a very attractive tool and seems to be a political "show" favored by the media. Over the past three decades, fiscal conservatives have increasingly used votes to raise the debt ceiling as an opportunity to drum up lower spending. It's like a good TV series, with looming deadlines and intense negotiations, but without the political risk of getting into specific elements of the U.S. budget.

While the end result is meaningless, the debate over the debt ceiling has had real consequences in traditional finance, most notably making borrowing more expensive for everyone. In the longer term, recurring debt-ceiling discussions are having a more systemic impact on the US's status as a global financial pillar.

Both consequences have implications for Bitcoin.

The Theater of Fiscal Responsibility

Many see the so-called debt-ceiling game as pure political drama. First, because lawmakers who are said to have taken a bold stance on the spending have already voted in favor of it. Second, because an actual default on U.S. Treasuries would be so disastrously unacceptable that economists can hardly imagine any lawmakers actually allowing the threat to happen.

This theory is less reassuring when you realize that some of the loudest voices in the debt-ceiling game come from the House Freedom Caucus, a coterie of far-right populists who seem to think a U.S. debt default is a risk. According to. That reality has led Democrats to try to strike a deal with more conservative factions of the Republican Party, including House Speaker Kevin McCarthy (R-CA.), who is less secure in office and needs protection from his own right.

The chances of a US national debt default remain slim. But if it does happen, bitcoin's price won't be one of every investor's top concerns. Janet Yellen's description of the fallout as "serious hardship for American families" is deliberately downplaying that a U.S. default would trigger the equivalent economic fallout of a nuclear bombing.

Like a cascade of nuclear weapons, the devastation will occur in two stages. The initial impact would include an interruption to various government payments, potentially anything from Social Security checks to big-money military contracts. This would lead to an immediate and sharp decline in traditional indicators such as GDP [gross domestic product] and the stock market. Given recent evidence of a strong correlation between Bitcoin and tech stocks, this is sure to hit Bitcoin's short-term price as well.

Again, the chances of default are slim. But its potential impact is so great that even the slightest chance is already priced in the market. Yields on 10-year and 30-year U.S. Treasury bonds have been slowly rising, reflecting the increased risk of owning these bonds. The Dow Jones Industrial Average and Bitcoin have both been negative over the past two weeks, although other uncertainties in the market make it difficult to directly link these moves to the debt talks.

But the second phase of default-induced economic doomsday will be more complex and long-lasting — as deadly as invisible nuclear fallout lingering after the mushroom cloud clears.

Debt Multiple Crisis

A U.S. debt default would dramatically reshape the global financial system in a way that could enhance Bitcoin's role as the global financial infrastructure. Here's another example of Bitcoin's role as a theoretical hedge against a catastrophic scenario: what's good for Bitcoin is precisely because it's very bad for human society—"Bitcoin's neutral currency properties are likely to form important support, just Because it is not subject to the risk of national debt".

A default on U.S. debt would first dampen international interest in holding U.S. debt. That would balloon the cost of servicing existing debt, potentially forcing the US into a brutal austerity regime. This, in turn, would significantly slow down the entire global economy—another downward pressure on Bitcoin.

But by the same token, a U.S. default would hasten international efforts to wean itself off the dollar as a trade and investment tool. The dollar's biggest draw is its strength and stability, and a default would clearly damage that confidence. Saudi Arabia, Russia and China have all recently made significant moves to decouple the key oil trade from the dollar, but a default could bring those efforts closer to rhetoric.

This anxiety will likely create at least some additional marginal demand for Bitcoin as a tool for international trade.

But that's not all.

When we tease the debt-ceiling standoff as pure political showmanship, it's not because we disagree with the nominal goal of cutting government spending. Instead, our complaint is that the semi-annual debt ceiling discussions are a very poor way to meet fiscal responsibility.

This is unacceptable because debt and deficits are very serious problems, not just in the United States, but around the world. In the US, a staggering 7% of federal spending goes to servicing debt. These taxpayer dollars are no longer going to strengthen the economy or improve people's lives, and every time we run an annual budget deficit, debt service payments increase.

We are clearly on an unsustainable path, but so are other countries. Global national debt levels now stand at 102% of GDP, an all-time high and slightly above the roughly 100% debt/GDP ratio considered sustainable for a country. That has sparked growing concern about what some are calling the "Great Reset," a cascade of interconnected national defaults that wipes out creditors on a massive scale.

With Treasuries accounting for a large portion of global balance sheet assets, the impact would be catastrophic, and instability in the US debt market could well set off a knock-on effect.

This situation is part of a broader argument for the rise of Bitcoin as a global reserve and instrument of exchange (setting aside very real technical limitations for a moment). In a rising default environment, Bitcoin's neutral currency attributes are likely to be an important support, because it is not limited by the risk of national debt. The impasse over the US debt ceiling, with its childish absurdity, underscores the seriousness and unpredictability of this risk.