The US is on the verge of a serious debt disaster.
The US Treasury has been quickly depleting its cash reserves ever since hitting the current public debt cap of $31.4 trillion a few months ago.
The government could be entirely out of money by June 1st, the so-called « X-date », according to Treasury Secretary Janet Yellen.
The US government wouldn’t be able to repay its debt on bonds that would mature after June 1 if it ran out of money.
So, as early as June, the US might stop making payments on part of its debt.
Instead of the US government’s inability to repay its debt, politics is what has caused the issue.
For the debt ceiling to be raised, Republicans, who now control the House, demand expenditure reductions.
The Senate’s majority party, the Democrats, favours tax increases.
It’s a traditional ideological conflict between the two sides, but if it leads to a default, the economic repercussions might be disastrous, even if an agreement was soon struck to repay the debtors who were first defaulted on and raise the debt ceiling once more.
A rating agency downgrade would undoubtedly occur, which would entail fundamentally higher borrowing rates, which in turn might have a negative knock-on effect on the economy and trigger a recession. The confidence of the US government in the eyes of investors across the world could also be irreversibly harmed.
Financial markets would suffer with a default, and equities would undoubtedly fall.
What Happens to Bitcoin and Ethereum If US Defaults?
Since both parties apparently made headway during all-night negotiations on Thursday, the market’s base case appears to be that a settlement will be struck and a default will be avoided. However, the effect of a default on BTC and ETH is currently the subject of intense discussion.
One the one hand, stock markets and both asset groups often move in lockstep.
Both asset classes would probably see a short-term drop in the event of a default since many investors who consider Bitcoin and Ether as risky investments would be panic selling.
However, Bitcoin’s impressive recovery following its March sell-off due to concerns about a US bank crisis was evidence that investors are increasingly perceiving it as a haven from problems in the conventional, fiat-based financial system.
A default by the US government, which issuing the USD, the world’s reserve currency that drives the bulk of international trade, banking, and business, is one of the biggest red flags for the old fiat system.
As it did in March, any early Bitcoin sell-off can rapidly reverse and see BTC leap to new year highs.
The future is less certain with Ether.
Given its shorter demonstrated track record as a strong alternative financial system, the much younger cryptocurrency may have a harder time benefiting from safe-haven inflows.
However, it stands to reason that Ether’s price would at least somewhat resemble Bitcoin’s price action if Bitcoin were to rise to new record highs for the year following a brief sell-off.
On the Ethereum network (and other layer-1 and layer-2 protocols that support smart contracts), a whole new financial system is now being developed from the ground up; this is not the case with Bitcoin.
In the big picture, the protracted debt limit saga simply serves to emphasize the shortcomings of the present fiat-based financial system, in which the ever-rising debt burdens holders of fiat money with a gradual but steady inflation tax.
It simply strengthens the case for decentralized digital currencies like Bitcoin and Ether.
