How much longer can indebted Americans keep buying crypto?
This article was originally published on Cointelegraph.
Despite many seemingly positive reports about retail spending or the unemployment rate in the United States, the nation continues to battle several structural challenges that have only grown more severe, with a historic $34 trillion in public debt and a similar high of $1.13 trillion in consumer credit card debt. Alexander Hamilton is famous for remarking that the "national debt, if it is not excessive, will be to us a national blessing," but the scale of current debt raises questions about the sustainability of fiscal policies and their long-term economic impact.
Concerns about the public debt used to be more of a fringe topic that conservatives and libertarians argued about. However, recent remarks by leading figures in the banking sector underscore the gravity of the situation. JPMorgan Chase CEO Jamie Dimon's warning of a global market "rebellion," Bank of America CEO Brian Moynihan's call for decisive action, “The Black Swan” author Nassim Taleb's "death spiral" prognosis, and former House Speaker Paul Ryan's description of the debt crisis as "the most predictable crisis we’ve ever had" highlight the urgent need for a reassessment of the United States' fiscal trajectory.
The public's growing anxiety over government debt, with 57% of Americans surveyed by the Pew Research Center advocating for its reduction, reflects a shift in societal priorities towards fiscal responsibility. This concern gains further significance in light of its real-world implications, notably on housing affordability and the broader economic landscape. The precarious state of the housing market, exacerbated by rising interest rates, epitomizes the link between fiscal policy and individual economic prospects: as public debt grows, so too do interest rates.
The public's growing anxiety over government debt — with 57% of Americans surveyed by the Pew Research Center advocating for its reduction — reflects a shift in societal priorities towards fiscal responsibility. This concern gains further significance in light of its real-world implications, notably on housing affordability and the broader economic landscape. The precarious state of the housing market, exacerbated by rising interest rates, epitomizes the link between fiscal policy and individual economic prospects: as public debt grows, so too do interest rates.
The global standing of the U.S. dollar, serving as a "convenience yield," plays a pivotal role in the country's ability to manage its substantial debt without immediate negative consequences. However, a recent working paper released through the National Bureau of Economic Research finds that the loss of the dollar's status could amplify the debt burden by as much as 30%. This revelation underscores the imperative to critically evaluate the nation's fiscal direction.
The challenge in the nation — and many other developed countries — reflects what is going on for many consumers. Americans have increasingly turned to their credit cards without paying down the balance to cover regular expenses. A new report released through the New York Federal Reserve, for instance, shows that total credit card debt increased by $50 billion (or 4.6%) to $1.13 trillion from the previous quarter, according to the report, marking the highest level on record in Fed data dating back to 2003 and the ninth consecutive annual increase.
The New York Fed report also shows an uptick in borrowers who are struggling with credit card, student and auto loan payments. For example, 3.1% of outstanding debt was in some stage of delinquency in December — up from the 3% recorded the previous quarter, although it was still down from the average 4.7% rate seen before the Covi-19 pandemic began.
"Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels," said Wilbert van der Klaauw, economic research advisor at the New York Fed. "This signals increased financial stress, especially among younger and lower-income households."
An important strategy for retail investors during periods of uncertainty is to diversify. But how you diversify matters. Investing in the S&P 500 is good, but if all your savings are locked up in the S&P 500 and it plummets, then you’re in trouble. While it is true that, even if a plunge took place in the next year, the S&P 500 will rebound, but you still have to weather the storm.
An additional strategy is to have some exposure to crypto. Many people focus on Bitcoin, Ethereum, and other digital currencies.But at least equally important — if not more — for long-run value creation in the digital assets market is hash rate, which reflects how much activity is taking place on a blockchain. Bitcoin, for instance, has had a sustained increase in the hash rate alongside its price appreciation.
The upcoming year is an important one with substantial macroeconomic risks for both the nation and the consumer. Although some economic reports have been positive, we need to pay attention to the fundamentals and whether the data reflects transitory versus permanent shocks. The challenge for policymakers is to craft fiscal policies that foster sustainable growth and productivity, steering clear of scenarios where short-term fiscal expediencies precipitate long-term economic liabilities. The current path, however, mirrors the predicament of a borrower trapped in a cycle of debt, with interest rates surpassing their monthly income.
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