Elon Musk Warns of U.S. Fiscal Collapse as Debt Surpasses $36 Trillion

Elon Musk, the billionaire tech entrepreneur, has recently expressed concerns about the potential fiscal collapse of the U.S. government. This warning comes at a time when the fiscal deficit is projected to reach $2.4 trillion over the next decade, driven in part by the tax bill passed during the Trump administration. The national debt has already surpassed $36 trillion, with annual interest payments amounting to $1.13 trillion. These mounting fiscal concerns are driving investors away from U.S. assets and towards alternatives such as bitcoin and gold.

Musk's public statements on this issue could accelerate the shift away from U.S. assets. This shift is already evident in the increased adoption of bitcoin and other tokens by corporate treasuries. Additionally, investors concerned about the government's fiscal health may demand higher inflation-adjusted yields to lend money to the government, which could keep yields elevated and further complicate the fiscal situation and economic growth.

Bitcoin believers have long warned about the potential bankruptcy of the U.S. government and the collapse of the dollar. According to Musk, the government risks bankruptcy if fiscal prudence is not restored. In theory, the government has been bankrupt for decades, as evidenced by the repeated lifting of the debt ceiling. The first federal debt limit was set at $45 billion in 1939, and since then, the ceiling has been repeatedly raised, a sign of fiscal crisis and an attempt to mask the country's fiscal bankruptcy.

For at least a decade, Bitcoin believers have argued that the monetary system is broken and that the debt-based fiat money needs to be fixed. The debt-to-GDP ratios across advanced nations have risen past 100%, indicating that the debt-based fiat money's ability to generate growth has collapsed. A blog post on the Mises Institute described the debt-based fiat money system as one where every dollar of the monetary base comes into existence with a one-to-one increase in public debt, and private banks use that base to create more dollars with a one-to-one increase in private debt. If all debts were paid off, the supply of U.S. dollars would be virtually extinguished.

A debt-to-GDP ratio above 100% means that the total government debt exceeds the nation's annual economic output. In such a situation, the return on additional borrowed funds diminishes, and extra debt may actually be harmful. This is analogous to gorging on ice cream without a break, eventually leading to negative consequences. The U.S. and other advanced nations are in a similar fiscal situation, with the debt-to-GDP ratios indicating that extra debt no longer generates productive economic growth.

Economist Russel Napier has discussed several steps governments are likely to take to reduce debt-to-GDP ratios. These include engineering higher nominal GDP growth through a structural level of inflation, devaluing currencies, implementing capital controls, and financial repression. All of these steps could bode well for alternative investments such as cryptocurrencies. Reducing fiscal spending, a strategy initially promoted by Trump, might be the only way to get the economy back on track. This is analogous to fasting to restore insulin sensitivity in the body. However, if governments fail to take these steps, the debt-based fiat system may be truly over, intensifying the search for alternatives such as blockchain and crypto.