Crypto investor and Galaxy Digital CEO Mike Novogratz told followers on Wednesday to “Buy BTC” in response to the United States government’s rapidly growing interest expense on its sovereign debt.
To some analysts, the trend suggests that the Federal Reserve will be forced to lower its benchmark interest rate again if the Federal government can no longer keep up.
The US Debt Problem
According to market analyst Joe Consorti, the U.S. government is now paying $970 billion per year in interest payments – up $41 billion from Q2. That’s the highest interest expense of all time by a wide margin, with annual payments only reaching $600 billion as recently as Q1 2022.
Consorti expects interest costs to reach $1 trillion soon. That’s over 20% of the government’s $4.7 trillion federal tax revenue, according to US Debt Clock.
“As tax receipts continue to lag sovereign debt growth, interest payments will increasingly be funded with revenue from… more debt issuance,” wrote Consorti to Twitter on Thursday. “Get it now?”
— Mike Novogratz (@novogratz) July 27, 2023
Interest costs began to surge after the Federal Reserve began its monetary tightening cycle, during which it raised its benchmark rate from 0.25% to 5.25%. It’s also continued to sell Treasury debt and agency mortgage-backed securities, driving up rates for short-term T-bills.
Such rate hikes make it more difficult for the government to roll over its previously issued debt, as new loans force it to pay out buyers at a higher interest rate.
In June, the St. Louis Fed published an essay stating that while interest payments are large in absolute terms, they’re still “relatively small” against the size of the US economy.
“However, the longer interest rates stay high, more and more of the fixed-rate marketable portion of the U.S. debt will be rolled over at higher rates, continuing to cause interest payments by the government to become a larger and larger portion of the budget,” the bank’s analysts added.
Where Does Bitcoin Come In?
Mounting interest expenses suggest that the central bank may need to inject money into the economy again to keep it upright. This would likely be bullish for risk assets, including Bitcoin – which is know for having an absolutely fixed supply irrespective of economic circumstances.
Bitcoin already rose from $19,000 to $30,000 in March when the Federal Reserve bailed out depositors to Silicon Valley Bank and Signature Bank, while also adding another $300 billion in assets back to its balance sheet.
Mike Novogratz correctly predicted the pump at the time. He also called Bitcoin a “report card on fiscal stewardship” earlier this month, in response to the fast-depreciating Turkish Lira reaching another all-time high in Bitcoin terms.
Coinbase CTO Balaji Srinivasan has repeatedly argued this year that mounting debt across all sectors of the economy could cause the government to “print trillions”, which will ultimately boost Bitcoin’s price.