The ongoing tense negotiation has shown no ending sign as the US debt deadline looms. The world’s economic powerhouse could lose its capability to pay bills as early as June, and the fallout could impact global assets, including cryptos.
Unresolved Issues
June 1 emerges as a pivotal date, signaling potential financial turmoil as the United States grapples with the looming threat of running out of cash and more than $31.4 trillion in debt.
The US Treasury Secretary Janet Yellen previously warned that the US would likely run out of cash by early June. The common resolution is to lift the debt ceiling; otherwise, President Biden would go down in history as the first President to default on the US.
Amidst strained discussions, significant differences persist as parties strive to bridge the gap. The US House Speaker Kevin McCarthy acknowledges the lack of substantial progress yet maintains a glimmer of hope, emphasizing the remaining time to avert a catastrophic financial breakdown.
However, the ticking clock adds urgency, as June 1 serves as a critical juncture, marking the depletion of funds needed to meet the country’s financial obligations.
The contentious issue of government spending comes at the heart of the recent debates. The House Speaker stated that raising taxes wouldn’t fix the problem raised by the government’s spending.
Republicans staunchly advocate for spending cuts aligned with 2021-approved levels, while Democrats contend that freezing spending at current levels amounts to de facto reductions, given the impact of inflation on real purchasing power.
Republican delegates express deep concern and disappointment with the negotiation process. They argue that the White House has failed to demonstrate the necessary alertness and urgency in tackling the pressing spending problem and the financial crisis.
Raising further alarms, some delegates caution that even if negotiations progress, any resulting agreement between the President and the Speaker would ultimately receive a unanimous endorsement in both the House and Senate.
How Could It Affect The Crypto Market?
A potential default will aggravate the crisis of confidence in cash-powered monetary systems, triggering a massive market selloff and harming the global economy. Will crypto boom when cash dooms? The beginning will be unlikely.
The crypto market is also subject to volatility and dynamics. Given that cryptocurrencies are high-risk, it could be a panic scenario in case of the US default. In addition, a default could negatively affect the dollar-backed stablecoins. Many of the stablecoins’ reverses are backed by the US Treasury bills, meaning they face de-pegging.
Recently, Bloomberg conducted a Markets Live Pulse survey to gauge investor sentiment regarding potential investments in the face of a US debt ceiling breach.
The survey results revealed a remarkable trend: Bitcoin emerged as a favored alternative to the US dollar. This unexpected preference for Bitcoin highlights its growing reputation as a safe haven asset, surpassing the traditional fiat currency’s perceived value and reliability.
Gold remains the leading choice for investors looking to hedge against the risk of a US default. This preference for gold stems from its historical record as a safe haven asset during economic uncertainty. Gold has long been regarded as a store of value and a hedge against inflation and currency fluctuations.
According to the survey findings, the second most popular asset in the event of a potential US default is US Treasury bonds, which ironically are the assets the US government may struggle to pay on time.
Interestingly, the survey findings also indicate that US Treasury bonds rank as the second most popular asset in the event of a potential default, despite the ironic fact that they could face payment delays from the US government.
This highlights a belief among investors that the US government will ultimately fulfill its obligations to bondholders, based on past experiences of bond recovery even amidst severe public debt crises and credit rating downgrades.
Many believe Bitcoin, along with gold and treasuries, would make a safe haven asset during financial uncertainty. This perspective suggests that there could be increased interest in cryptocurrencies as a hedge against traditional financial systems.
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