🐻 The US debt ceiling is BS!

GM builders 👋. We hope you took some time to touch grass this past weekend because things might get real ugly, real fast. The scary US debt ceiling negotiation that everyone’s talking about is coming to a close. While the media is focused on highlighting the fight between the two parties, it fails to talk about what will actually happen once the debt ceiling is raised.

Since they’re not going to talk about it, that’s exactly what we’re going to do in this issue.

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The TL;DR

📣The big story. Why the US debt ceiling is BS. The real story behind federal debt and spending is more than just the Democratic vs. Republican drama.

🐻Other news to bear in mind. The East vs. West war heats up - Hong Kong is set to lift its ban on retail crypto trading, China releases a web3 whitepaper and Saudi Arabia could be joining the BRICs.

🐾Resources to paw into.

📣The big story
Why the US debt ceiling is BS

Debt ceiling this, debt ceiling that. It’s been the talk of the town for the past few weeks, but I reckon few truly understand what’s really going on with this gong show. Let’s dig in and explore what raising the US debt ceiling actually means for the economy and crypto market.

First off, what is the debt ceiling?

In a lot of ways, every country runs like a corporate business. It makes money by supporting the growth of its citizens and taxing them (yay). It also incurs expenses by supporting programs like Medicare, Social Security, the military, etc.

Here’s a good thread on the history of debt ceilings and how it works 👇

So what happens when you spend more than you make? The US Treasury which controls the country’s finances will print Treasury Bills (T-Bills) as an obligation to pay back the debt later.

Lucky us, those T-Bills are maturing soon, meaning that the US has two options: pay back the debt or keep borrowing, aka raise the debt ceiling, to avoid defaulting. The thing is, in the past decade, federal debt has increased from $16.7 trillion to now $32 trillion. Over that same period of time, federal spending has increased by over 80%.

So you see, the US is in a bit of a pickle 🥒 . If the nation is forced to default, it would be extremely devastating for the economy. On the high end, a default could cause an estimated loss of 8.3 million jobs and force the country into recession, as if we weren’t already in one…At the same time, raising the debt ceiling and incurring more debt fixes nothing.

The parties fight it out

It’s not an easy call to make but to determine what the next steps should be, negotiators from the Democratic and Republican parties must negotiate and come to an agreement. But of course, both parties have their own agenda and are essentially using the debt ceiling as a way to bargain how federal tax dollars should be spent.

For instance, the Republicans want to impose restrictions on future spendings, like tightening up requirements for cash aid, food stamps and Medicare. Meanwhile, the Biden administration wants to raise the debt ceiling with no strings attached.

With all this economic uncertainty, the markets dipped back down in the past few days as people speculated whether the two parties were going to come to an agreement on time. Well, of course they came to an agreement. Did you think we were actually going to default 🤷‍♀️?

So what did they settle on?

Good news, the US isn’t going to default. Bad news, the debt ceiling limit is removed until 2025, which is expected to bring in at least another $4 trillion in debt.

And many Republicans aren’t happy about it. Not only is it bad news to have an uncapped debt ceiling, but several Republican agenda items and priorities were apparently not included in the deal, driving further divide in the nation. But there’s more to the story that’s not being talked about…

Truthfully, it’s all BS

It’s easy to get caught up in all this drama between the left and right, but in reality, the negotiation between parties is just theatrics. The US was never going to default.

This is just another chapter out of their playbook. The government gets what they want (more spending money) and what happens next is the drainage of market liquidity.

Analyst Lyn Alden describes in the video below how a liquidity crisis could break 👇️ 

The ELI5 version is that the US Treasury will have to sell $1 trillion worth of bonds immediately once the debt ceiling is raised to replenish its dwindling cash reserves, known as the Treasury General Account (TGA). They usually target to have half a trillion dollars in their reserve at all times, but the current balance sits at $38 billion.

Banks, which are already suffering from a liquidity issue, will be forced to buy up the bonds. At the same time, the Feds will also continue to drain the market with their quantitative tightening (QT) tactics.

All this is going to cause a dry-up of liquidity - like Saharian desert dry 🐫. That means that in the near term, risk-on assets like crypto will likely be dumped on.

However, some crypto bulls are staying hopeful. Last week, Hong Kong announced that they will be lifting the ban on retail crypto trading on June 1st. This could open a floodgate of fresh new liquidity into the market. Will it be enough to pump our bags 🤔?

With all this said, the crypto market may have been fairly stable for the past month, but expect major volatility ahead. Stay safe 🫡.

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🐻 Other news to bear in mind

🇭🇰 Hong Kong is set to lift its ban on retail crypto trading on June 1st. Last year, the East Asian country restricted crypto trading to only professionals while the nation conducted public consultations on crypto for retail traders. That ban has now been lifted as part of their recent moves to make Hong Kong a crypto-friendly country.

🇨🇳 China releases a whitepaper on web3 innovation and development. While the US cracks down on crypto, the Eastern world is opening up and has its eyes set on making Beijing the leading innovation hub for digital assets. The web3 whitepaper highlights its intention to allocate a minimum of $100 million yuan ($14 million USD) until 2025, enhance policy support and expedite technological advancements.

🤝 Saudi Arabia could be joining the BRICs. Speaking of the war heating up between the East and West, the BRICs nation may be growing stronger as they consider Saudi Arabia’s proposal to join their bank, New Development Bank (NDB). The inclusion of Saudi Arabia would help strengthen their position in the ongoing Russia-Ukraine conflict and sanctions and reduce the BRIC’s reliance on the West. Will this drive the US de-dollarization?

🐾Resources to paw into

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That’s all for this issue. See you next week!