Original author: Lyn Alden
Original translation: AIMan, Jinse Finance
Original title: The US fiscal deficit train that no one can stop and BTC
The Current State of the US Fiscal Deficit: Nothing Stops This Train
Over the past few years, I've popularized a phrase: "Nothing Stops This Train." The phrase originally came from the TV show Breaking Bad, of course.
For those who haven't seen the show, it's about a chemistry teacher who gets diagnosed with cancer and ends up going down a dark path of making drugs in order to pay for his treatment and support his family. But of course, the moral arc of the story is that even after he's cured of his cancer, he ultimately can't stop, he can't stop what he's doing. By season five, his colleagues are telling him, "We really have to slow down, we're going too far." He's like, "No, no one can stop this train."
I have been using this term to describe the current state of the US fiscal deficit. In this rather concise talk, I will dive into what this means, why it matters, and why it is so overwhelming. We are at a Bitcoin conference, but there is a much larger dollar system around us and around the world. Therefore, the interaction between the Bitcoin world and the dollar world is critical to exchange rates, the economy, and investment in general.
Decoupling 1: Unemployment Rate Vs Federal Deficit as Percent of GDP
So here we go, I'm going to walk you through these pretty simple slides, some of them are going to be pretty simple, some of them are going to be a little bit more complex, but I'm going to walk you through the really important parts.
This chart shows two lines, one for unemployment and the other for the federal deficit as a percentage of GDP. This chart goes back several decades. And as you can see from the slide, there has always been a very good correlation between the two. During recessions, unemployment is up and the federal deficit is up, and during upturns, unemployment is low and the federal deficit is low. The one brief exception was the 1960s, if you can squint and see it on the chart, which was the Vietnam War, so there was a little bit of an exception. But other than that, the two lines pretty much coincide.
But you'll see on the right side of the chart, which I circled in green, that over the last few years, starting in about 2017, we've seen a decoupling. We had a falling unemployment rate, very low unemployment, and yet the deficit ballooned to 6% or 7%. This was happening even before and after the pandemic. Obviously, it got more severe during the pandemic, but we're in a new world right now.
I'm not the first person to talk about the deficit, but I'm trying to draw attention to something that's happening now that hasn't happened in the last few decades. We're entering a new era. This is what's happening with the deficit.
Decoupling phenomenon 2: Real interest rate Vs gold price
But the second main question is, why does this matter? Why are we talking about it at a Bitcoin conference? The short answer is, because it matters to asset prices, especially any scarce asset.
This chart shows that the gold line is the price of gold and the black line is the real interest rate. Again, we have seen historically that there is a very strong correlation between the two. For those who don't know what I mean by real interest rate, it is specifically the 10-year Treasury yield minus the CPI inflation rate.
The reason why comparing these two charts, gold and real Treasury rates, is so valuable is because they are the two most dominant reserve assets in the world, and they compete with each other in size. Gold is certainly quite scarce, and its supply is estimated to grow by 1% to 2% per year, but you don't get any income for holding it. If anything, you also have to pay a fee to store it. Whereas Treasury bonds, you know, dollars and Treasury bonds, their supply is growing much faster, but you get income for holding them.
In periods when yields are quite high relative to measured inflation, some investors who might otherwise buy gold are drawn back into the dollar and Treasury system. But when yields aren't high enough relative to inflation, many investors flock to gold. They basically say, "Why would I hold Treasurys when I'm so much richer than gold if I'm not getting anything in return for holding them?" Historically, this is a very strong correlation: high real rates mean (corrected chart interpretation) low real rates mean higher gold prices, and on this chart, real rates are inverted, so the downward line means higher real rates.
Again, as you've seen over the last few years, especially starting around 2022, gold prices and real interest rates have completely decoupled. So in this fiscal-led environment, something new is happening.
This is, of course, important for our discussion of Bitcoin. If you had said 5 years ago, if interest rates were 4% or 5%, would Bitcoin still be having packed conferences in Las Vegas? Would it be priced at over $100,000 per coin? Most people would have said no. In fact, many critics have been saying that Bitcoin is just a zero interest rate phenomenon, a bubble that will burst once the Fed does anything hawkish. But what we’ve seen over the past few years is that the Fed has taken the most hawkish steps they could, and they’ve even bankrupted some banks in the process, and yet both gold and Bitcoin have soared because something has changed.
Turning Point: Federal debt continues to grow faster than the private sector
These charts are a little bit cluttered, but I'll direct you to the important parts because that's what really shows the inflection point. The blue line in these charts is the year-over-year growth in private sector debt, which includes things like bank loans and corporate bonds. The red line is the growth in federal debt. So you have the private market and the public market. The chart on the left is 1955 to 1990, and the chart on the right is 1990 to the present. That's a 70-year history.
If you look on the left, for most of that time, the blue line, which is private sector debt growth, has been faster than public sector debt growth in any given year. The few exceptions have been in recessions, which I've highlighted in yellow on the chart, and those are fairly rare. During a recession, the deficit goes up, bank lending goes down, and then we move through that period. What you see in the chart on the right is that since the 2008 global financial crisis, and especially in the last few years, we've been in a period where federal debt growth has been consistently faster than private sector debt growth. And I've highlighted that again on the right with those little green boxes, that this has been the case even in non-recessionary times. It was happening before the pandemic, it's still happening now after the dust settles from all the money printing.
The reason why this turning point is so important is that when we look at the tools that the Fed has to control credit growth, it's primarily interest rates. If they want to slow the economy, slow credit growth, and try to slow inflation, they raise interest rates to try to make borrowing less attractive. On the other hand, if they want to speed it up, they lower interest rates.
The problem is that decades ago, when the federal debt was low and most of the money creation was coming from the private sector, whenever they raised interest rates, they were able to slow credit growth, and they slowed the private sector faster than they could expand the fiscal deficit. The problem now is that the federal debt is over 100% of GDP, and this has only happened in the last few years, and when they raise interest rates, ironically, they are increasing the federal deficit faster than they can slow private sector credit growth. What this means is that they don’t have the brakes anymore. This train is unstoppable because it doesn’t have the brakes anymore. Or to put it another way, the brakes are badly damaged. It’s as if we’ve stepped through the looking glass and are now in Wonderland, where the rules that worked most of the time are now working in reverse.
They have basically no way of slowing down the growth of total credit in the system, which is a new phenomenon.
Why the US fiscal deficit is unstoppable
So, in the next few slides of my talk, I'm going to explain why the U.S. fiscal deficit is so unstoppable. Why can't just a few people get together and fix this? Why is it so entrenched? And why am I so confident that no matter what the election results, there's no way to stop this fiscal train? I said this before the election, and I'm saying this after the election, because it really doesn't matter. Nothing is going to stop it.
1. Interest expenses
On this chart, we have a very simple graph. The blue line is the 10-year Treasury rate, and the red line is the federal debt to GDP ratio. You know, in the 1980s, debt levels were very low and interest rates were very high. We've been on a 40-50 year journey of higher and higher debt levels, but that's been offset by structurally lower interest rates. What that means is that, for example, if your debt doubles, but your interest rate halves, your interest payments are still manageable.
So for this whole 40-plus years, interest payments were actually pretty manageable. But eventually we hit zero interest rates and the math kicks in. So now we're in an environment where interest rates are not structurally going down for the first time in decades, and debt levels are still very, very high, the highest they've been since the 1940s. So interest payments are actually becoming a very significant component of federal spending for the first time in history. And there's no easy way to control it. If they get interest rates super low, then everybody wants to pile into scarce assets. But if they keep interest rates high, they're going to keep expanding the federal deficit because, like I said, we're in wonderland right now. It's a very large component.
2. Population structure and social security funds
Another very large component is Social Security. This chart shows the Social Security Trust Fund. As you can see, it's grown from zero to about $3 trillion on the chart. The reason for this change over time is demographics. The baby boomers were an unusually large generation born in the late 1940s through the 1960s, and the post-World War II generation was very large. When they entered the workforce, they paid into the Social Security system, so we saw a huge increase in the amount of money that was put in. Now unfortunately, they don't invest Social Security very well, they basically hold it in U.S. Treasuries, which are not the best long-term investments.
According to Social Security's own data, by about 2035, they're going to deplete that trust fund. What that means in practice is that they're going to spend that $3 trillion back into the economy. That's happening as the baby boomers are getting into retirement, and they're already doing it and they're going to continue to do it. It's going to continue. If you notice, this hit a peak in the late 2010s, peaked around 2017-2018, and started a very early decline. That's when the deficit decoupled from unemployment and federal debt growth started to outpace private sector credit growth. A lot of these timing coincidences are because around the same time, interest rates stopped falling and the baby boomers who financed all this growth now went into withdrawal mode. So this money is being spent back into the economy through health care, travel, housing, basically everything that people have to spend money on. It's a background expenditure that's going to come back into the system over the next 10 years.
Sometimes, that exact exhaustion date can be pushed back or forward a year, but that's mostly actuarial science and it's basically inevitable. What matters is that these people vote. Young people will protest, but they'll forget to vote. And the older demographic groups actually vote. Now, anything that touches this fund is a politically high-wire. Both major political parties in the country have vowed to basically not touch Social Security during this time. So this is basically a done deal, and even in a highly political environment, it's one of the few things that the two parties basically agree on.
3. Debt Ponzi Scheme
One of my last few slides was to highlight the Ponzi-like nature of the system. So even leaving aside the current issues with demographics and debt levels, basically the way the system is built — and by system I mean the system of central banking and the system of fractional reserve banking that’s built on top of it, the whole fiat system that we’ve had in place for over a century — it relies on constant growth. It’s like a shark that has to keep swimming or it’ll drown. The irony is that this is a system that has to keep growing.
On this chart, the top line is the total debt in the U.S. system, both public and private, and it actually went over $100 trillion for the first time. The bottom line is the monetary base. What we see is that over the entire period of this chart, which I believe is from 1966 to 2025, total debt has never gone down, with one very brief exception in 2008 when total debt in the system went down about 1%. What they did was increase the monetary base very rapidly, from $1 trillion to about $6 trillion today. They are so intolerant of even a tiny bit of deleveraging that they keep the party going.
Specifically, at that time, if we do a little math, the total debt in the system in 2008 was about $50 trillion, about half of what it is now, and their monetary base was about $1 trillion. So the system was leveraged 50 to 1. This is the kind of leverage you see in the "Degen" derivative contracts in cryptocurrencies. The entire economy was leveraged 50 to 1. Specifically, they hit zero interest rates, so they couldn't continue to support the private sector debt bubble, so they turned to the federal level. This shows the sensitivity of the system. We are now more in a phase of public sector debt growth over time.
I actually looked at data further back than this chart, going back about 110 years, and there were only four other years where total debt was down in nominal terms, and that was during the Great Depression. So 1930 to 1934 is the only time on the chart that it was down other than 2008. So over 110 years of data, there were only five years where they were tolerant of this Ponzi scheme unravelling. That's the system we're in, the math that we find ourselves operating under. And that's the big contrast with Bitcoin.
4. Long-term, uninterrupted 7% deficit growth
So for my last slide, we don't have to go into the details, but just look at the shape of these charts, and these are century-long charts. My main point with these charts is that we've actually seen this story before. We've already been through something like what we're going through now in the United States once, and that was around the 1940s. The reason debt growth has been so smooth historically is because when they finally encountered something that really challenged it, they turned the whole system around, and we're going through it a second time.
Basically, you have a private debt bubble build up, and then you hit zero interest rates, so you can't keep adding to the accelerating growth of private debt. And then what happens is you find yourself leveraged 50 to 1, and you start to unravel. How do you unravel a system that's leveraged 50 to 1? The short answer is, you don't. You just print more units of money, which is how they always deal with it. So what happens is they turn to federal debt growth, they turn to running huge federal deficits. So even though private sector debt levels eventually flatten out for a while, it continues to grow on the public sector side. That tends to be more inflationary and more persistent. Because when we get to that point that I mentioned earlier, when the Fed raises interest rates to try to slow this down, they're expanding the federal deficit faster than they can slow the growth of the banks.
So basically, we are now completely off the rails. Notice, nothing I'm saying is about the Weimar Republic, nothing about hyperinflation. This is all about the chronic, uninterrupted 7% deficit growth. We're not talking about 70% of GDP deficits, we're talking about 7%, but it's happening like clockwork every single year. What's important is the relentlessness of it.
No one can stop the US debt vs Bitcoin
So as we look forward, this is the system that Bitcoin is going to exist in. If you summarize the entire speech, all these charts, all these points, there are two main reasons why the US fiscal deficit train is unstoppable.
Number one is the math. The way they structured the Ponzi scheme system that I talked about earlier, it had to keep growing forever so that it wouldn't start to deleverage in a crazy way. That was the system that they built.
The second reason is human nature. None of us want to pay higher taxes. Those who are on the receiving end of the deficit never want to reduce it. There is hardly any politician who has enough incentive to actually reduce the deficit during their term. Basically, this represents a flexible ledger. This is the ledger that all of us use in the United States and around the world. Because it is a flexible ledger, they can always create more units, and therefore, this is the error correction mechanism that they rely on again and again.
This is in contrast to Bitcoin. You know, Bitcoin is the exact opposite of the system in many ways. It's a mirror of the system. Instead of an ever-increasing supply, and an ever-increasing supply that can't even be slowed down, Bitcoin is absolute scarcity. Instead of being opaque, it's transparent. Error corrections are not being able to simply print more supply, the error correction that happens in Bitcoin is that deleveraging can happen, but you can never shake the supply itself.
So basically, for the next 10 years, this train is going to be unstoppable. The US is going to run very large fiscal deficits, no matter what else happens. Some things can speed it up a lot, some things can probably slow it down a little bit, but nothing is going to have a meaningful impact. So one way to protect yourself from this is to own the highest quality scarce assets. And of course, the one we all love, is Bitcoin.
