Last month, Coindesk discussed in detail how bond market activities challenge the US government’s notion of money suited, raising questions about the long-standing illusion of “Kayfabe” or financial stability.
Now billionaire tech entrepreneur Elon Musk has raised the X alarm through his (probably legitimate) diatribe against President Donald Donald Trump’s big beautiful tax bill.
It’s happening when we’re raising financial concerns, and already reeling investors from US assets and alternatives like Bitcoin and Gold. As of 2024, the accounting shortfall was $1.8 trillion, and as of today, citizen debt is already $36 trillion and annual interest is $1.13 trillion.
Those who are as influential and popular as Musk has financial concerns could bring two things. First, it could accelerate the transition from US assets. Is it just a coincidence that at these times, the adoption of other tokens, including Bitcoin and XRP, by the Ministry of Corporate Treasury, chose the pace?
Second, investors concerned about government financial health are likely to demand higher inflation-adjusted yields to lend the government money. Therefore, we expect yields to remain sticky on the higher side, further complicating the financial situation and economic growth.
At least in theory, the government is bankrupt.
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The followers have been warning about this day for a long time. To paraphrase a former Coindesk employee: “Crypto may not have all the right answers, but I will ask the right questions.”
The general story is that the US government is bankrupt and the dollar is heading towards collapse. Musk said the government is putting bankruptcy at risk if financial prudent doesn’t recover.
In theory, the government has been bankrupt for decades. This is evident from the debt cap liftoffs that repeatedly over the years.
Congress set the first federal debt limit at $45 billion in 1939, allowing the Treasury’s extensive discretion on the use of borrowing equipment, provided that the total debt does not exceed the self-imposed limit.
Since then, the ceiling has been repeatedly struck and raised, a sign of a fiscal crisis and in many ways a form of bankruptcy. As of 2025, the debt limit is $36 trillion! That’s exactly one trillion.
This brings to my mind a joke by an Indian stand-up comedian about government officials to artificially raise risk marks during floods and create illusions of control and normalcy.
Similarly, repeatedly raising the debt cap was an attempt to hide the country’s financial bankruptcy.
Debt-based Fiat Systems Can Be Broken
For at least 10 years, Bitcoin followers have said the financial system is broken and they need to fix “money,” or essentially debt-based fiat money.
And they may be right. The debt ratio of advanced global governments has risen above 100%, which is a sign that debt-based Fiat Money has collapsed in its ability to generate growth.
In a blog post from the Mises Institute, we discussed debt-based fiat money (banknotes with government stamps backed by nothing).
“The government and powerful bankers established a system that normally functions in 1913. Every dollar of a financial foundation (or “narrow money” or “high power money”) exists, and with one increase in public debt that the taxpayers collectively paid.
“On the contrary, if private sector people pay all their debts and the federal government pays all their bondholders, the supply of US dollars would effectively vanish.”
“This is the feeling that our Fiat Money, fractional reservation system, is using ‘debt-based money’. Market prices are flexible and can respond to deflation that is far better than most people realize, but it remains true that our system is tragically ridiculous. ”
A debt-to-GDP ratio of more than 100% means that the government’s total debt exceeds the country’s annual economic output. In this situation, for every additional addition borrowed by the government and invested in the economy, the resulting effect (multiplier effect) is less than one dollar. This means that the profits of additional borrowing funds will decrease.
To illustrate in the context of the law of reducing returns/utilities, each additional utility spent to generate growth is negative.
It also means that extra debt does not result in productive economic growth and can actually be harmful. Imagine purring your favorite ice cream without a break (just as the government has been owing the money it borrowed for decades). Finally, at one stage, you throw. That’s where we are in terms of fiscal finance and debt-to-GDP ratio in the US and other developed countries.
What’s next?
Economist Russell Napier, known for his expertise in debt and fiscal policy, discussed several steps the government is likely to take to reduce its debt-GDP ratio.
These include engineering higher nominal GDP growth through structural level inflation. This is what many countries, including the US and the UK, did after World War II to inflate their debts.
Allowing moderate inflation to erode the true value of debt, thereby reducing debt maintenance and lowering the ratio could stimulate demand for assets such as gold and bitcoin.
Other steps include devaluing currency and implementing capital management and financial restraints. All of these can portend alternative investments such as cryptocurrency.
In a light note, reducing fiscal spending – a strategy initially driven by Trump – may be the only way to get the economy back on track.
Consider this medical analogy.
When your body is exposed to excessive blood sugar for a long period of time, cells tend to develop insulin resistance, leading to type 2 diabetes. Doctors often recommend fasting to restore insulin sensitivity.
Similarly, suppressing fiscal spending is the only way to significantly reduce the debt-to-GDP ratio to less than 100%, which could restore the effectiveness of the ability of a debt-based FIAT system to generate growth.
That being said, what happens if the government fails? Debt-based FIAT systems may really be over, and blockchain and crypto as potential options will bolster searching for alternatives.
Let’s see how things unfold.
