Can Bitcoin solve the sovereign debt crisis?

The United States is facing a financial crisis of historic proportions. Growing deficits, runaway debt servicing costs and the risk of a bond market collapse are pushing the country into uncharted territory. Traditional solutions, be it austerity policies, higher taxes or controlled inflation, are inadequate.

Could a radically different approach using Bitcoin lead the way forward? Thoughtful mail author @stackhodler on X floated the idea that Bitcoin could play a role in solving the sovereign debt crisis.

This thought experiment requires an understanding of how monetary systems evolve in times of turmoil, as well as a little imagination. From the collapse of the Roman denarius to the end of the Bretton Woods gold standard, the monetary reset is nothing new. How can Bitcoin usher in the next chapter in global money?

The debt-based system is on the brink

The problem starts with overwhelming debt. After trillions in COVID-era spending, the US has become reliant on short-term Treasury bills, leaving its finances vulnerable to rising interest rates.

Government spending has completely spiraled out of control, and the number of people who are partially or wholly dependent on government transfer payments has increased. mushroom. For all the consternation among conservatives about Democratic policies leading the United States toward socialism, surprisingly little attention has been paid to the fact that it is already here.

As stated in our earlier analysisthere is a danger that rising interest rates could lead to a debt spiral during a second Trump term. Higher borrowing costs will lead to more borrowing, which in turn will lead to even higher costs. This will put inflationary pressure on the dollar that will be difficult to counter, even despite the radical spending cuts promised by the DOGE initiative led by Elon Musk and Vivek Ramaswamy.

This feedback loop is difficult to break out of in a fiat system. Raising taxes will slow economic growth, spending cuts will create a backlash, and inflation—while politically expedient in the short term—will destroy voters’ purchasing power.

The result is a system teetering on the brink of collapse as confidence in the dollar erodes as global competitors such as China pump out soft power away from the United States.

The question is, how can Bitcoin become a solution to the sovereign debt problem? Put on your tin foil hat and get ready to be entertained by an entertaining, albeit speculative, scenario.

Step One: Develop a Strategic Reset

As US policymakers accept the inevitability of a monetary reset, the first step will be a strategic devaluation of the dollar. By flooding global markets with dollars, the US will create inflation in competing economies, destabilizing their currencies, although this is counterintuitive. protection the status of the dollar as the world’s main reserve currency.

Sound familiar?

The inflationary outcome of Covid-19 and the post-Covid-19 debt boom was predictable, which makes one wonder why those in power allowed this to happen.

An explanation does not necessarily require a grand conspiracy. Cantillon effect this is a sufficient reason. At the individual level, powerful politicians and financiers store their wealth in assets rather than money. Printing money doesn’t put it at risk, since more dollars chasing the same amount of scarce assets simply raises the prices of the assets they already own. And because they can use their privileged position to acquire assets with newly printed money faster than the broader market can, they can even increase their wealth by buying more assets before inflation causes their prices to rise.

Combine this with the ability to channel newly printed dollars to institutions (and stakeholders within them), and you have a strong alignment of incentives among the elite to print and spend as much money as possible as quickly as possible. If they collectively agreed that a dollar collapse was imminent, one would expect them to rush to print dollars and buy up assets while simultaneously using their power to hand out money (and the assets it can buy) to those within their trust networks to strengthen their positions. their position in the social hierarchy.

This logic is sound, if flawed, and it explains why the US government has unnecessarily spent trillions of dollars under the guise of COVID spending after the crisis was long over. If you’re in a car speeding toward a cliff and your brakes don’t work, you step on the gas pedal and hope that by speeding up you’ll be able to jump to the other side. The other side is Bitcoin – not because Bitcoin is ideal or desirable, but simply because there is no alternative.

Step Two: Launch Bitcoin Mass Adoption

For more than ten years, the US government has been fighting Bitcoin, an unfair retention approval for the sale of financial products related to it on the front attack on Bitcoin-friendly banks by the Biden-Harris administration. However, in 2024, the tune suddenly changed. Big finance’s top insider, BlackRock, has begun selling and promoting Bitcoin. Pension funds, family offices and individual investors now have easy access to Bitcoin without the need for technical knowledge.

Now that the capital markets are open to large-scale adoption of Bitcoin, the US is free to approve it as a reserve asset. Whether this happens or not is now beyond dispute. possible for the masses to use Bitcoin as a hedge against a falling dollar.

If Strategic Bitcoin Reserve comes to fruition and the US Treasury starts buying and storing Bitcoin, other countries will have to compete by doing the same. Some will sell assets, including US Treasury bonds. Others printed their own currency to buy bitcoins. The result will be a further acceleration in the flow of capital out of the fiat system and into the Bitcoin ledger.

Step Three: Monetize Debt Through Bitcoin Reserves

Let’s say the US Treasury acquires significant reserves of Bitcoin while simultaneously allowing the dollar to fade into oblivion. As Bitcoin rises in value (potentially reaching multi-million dollar territory in terms of today’s dollar purchasing power), it could offset government debt in nominal terms. Dollar hyperinflation combined with rising Bitcoin reserves will invert current debt dynamics, allowing liabilities to fall relative to assets.

Perhaps this is what President Trump was hinting at when he said proposed that the US can pay off its $35 trillion debt with Bitcoin. Many ridiculed At the time, could this have been another example of Trump’s intuition being correct, if it had not been clearly expressed?

The transition from the dollar to bitcoin will not be without pain. Hyperinflation of the dollar will create chaos and destruction throughout the global economy. But Bitcoin will be the basis for the recovery. And those who own Bitcoin—governments, financial institutions, and individuals—will retain their wealth even in the face of turmoil.

Now that Americans have clearly signaled their exit from Bitcoin, the US economy may find itself in the 21st century in a strong position to continue its dominance while late adopters of Bitcoin struggle to adapt.

Step Four: Create an Economy Based on Bitcoin

If Bitcoin became a global reserve asset, it would usher in a new era of financial discipline.

Unlike fiat money, Bitcoin’s fixed supply places natural limits on government spending, forcing policymakers to operate within sound money principles. Reckless deficit spending, perpetual wars, and currency depreciation will become relics of the paper past.

A financial system based on Bitcoin will not only curb excess, it will stimulate investment in ultra-long-term and ambitious projects. Bitcoin will be used to enable energy resource development, infrastructure revitalization, and most importantly, interplanetary expansion. Freed from the distortions of fiat monetary policy, markets could allocate capital more efficiently, fueling explosive productivity growth.

I’m looking forward to it

This scenario is not as far-fetched as it might seem at first glance. By historical standards, the dollar has expired, and the post-war “rules-based international order” is clearly under revision.

The sovereign debt crisis tests ingenuity and resolve. As countries and institutions recognize Bitcoin’s potential, competition to create reserves could intensify. The real winners will be those who take the first step, securing their position in the new economic order based on reliable digital money.