Why America’s debt is out of control – and Japan’s debt is not

In light of this, the United States' debt-to-GDP ratio doesn't look so bad on a global scale. In the year In 2023, the debt was 255% larger than the average of the G7 countries – by 123% – and the most indebted country in the world, Japan.

Just looking at the numbers, it would be easy to dismiss this as a problem. After all, Japan has managed to navigate its growing debt pile relatively well over the years. The economy is stable, and the Nikkei 225 index is up about 31% over the past year (as of May 10), outperforming the S&P 500. This means that what works for Japan does not work for America.

The clear difference between the two is the composition of debt ownership. About 90% of Japan's debt is held domestically by its citizens and institutions. In contrast, approximately one-quarter of US debt is held by international debt buyers. And it has to pay high enough yields to its global competitors to ensure its debt remains attractive to them — especially as that debt rises to higher and higher percentages of GDP, which means lending to the government becomes more risky.

Related: Jerome Powell's column heralds a dull summer for Bitcoin

In fact, last year Fitch Ratings downgraded US government debt from AA to AA+. At the time, this news was dismissed as “arbitrary and based on outdated information” by US officials. At the end of the year, Moody's downgraded the US debt outlook to negative, which was ignored by the markets.

But investors should pay more attention because the US cannot afford to sit back and let its debt rise to the levels seen in Japan. For one thing, Japan's net debt is much lower than its total debt-to-GDP ratio, meaning it holds more foreign assets than any other country—a stark contrast to the US. This would make it easier for Japan to manage its growing debt pile.

Japan has not struggled with inflation to the same extent as the United States. Inflation stood at 2.7% in January 2023 after rising just 4.3%. That's a far cry from the 9.1% the United States reached in June 2022. The Federal Reserve is still struggling to control sticky inflation, which is driving up rising debt. At particularly dangerous levels, this can add fuel to the fire.

As we all know, the answer to inflation is restrictive monetary policy. But higher interest rates mean higher debt payments, unhappy consumers and — ultimately — a slowdown. Of course, the federation is facing all these problems. Consumer confidence has begun to decline, debt payments increased by $1 trillion last year and growth in the first quarter of this year has been much slower than anyone expected.

Until now, we have been hearing about inflation – a particularly undesirable economic situation, where economic growth slows as inflation rises. Here, high debt levels also pose a problem, as they limit the government's fiscal powers to address a declining economy. So the Federal Reserve finds itself in a bit of a catch-22 situation, especially as it all but promises to taper at the next level.

Related: The next ICO boom is coming — and it's going to be even better than 2018.

In an election year, keeping interest rates low for too long will also result in an unhappy electorate. So far, however, both the Democratic and Republican candidates seem to have completely ignored the elephant in the room: America's growing debt pile. Neither side has proposed any meaningful policy to address this issue. However, with the debt-to-GDP ratio now over 100% and predicted to grow rapidly over the next decade, the government will have to face the music sooner or later.

So what does this mean for crypto? Paradoxically, all of this could be a net benefit to assets like Bitcoin, which can be a refuge from worries about rising US debt. Typically, an increase in debt levels leads to a currency crash. And, like Japan, the US may be able to avoid some of this because of its global dependence on the US dollar, while its high share of foreign debt ownership makes the greenback particularly vulnerable.

Coupled with interest rate cuts expected later this year, there is little chance that the dollar will maintain its current strength for long. This will certainly benefit Bitcoin (BTC), which is widely used as a hedge against dollar weakness.

So this predicament in the United States is not bad news for cryptocurrency markets, depending on how out of control things get. If the US were to cancel its debt, for example – that wouldn't happen either. This is dangerous for all markets, including digital assets. A weak dollar and some lack of confidence in the US, however, may be what the doctor ordered for the next leg of the crypto rally.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.