Impact of the Inflation Reduction Act on the Market
Now that the budget has been passed by Congress, if the U.S. government continues with this policy, we can predict the fiscal situation for the next decade, with annual expenditures approaching $7 trillion and revenues around $5 trillion. This means an annual deficit of about $2 trillion, with the deficit-to-GDP ratio hovering around 6-7%.
In simpler terms, for every $5 the U.S. government earns, it has to spend $7. Consequently, the debt will continue to rise.
This also means that U.S. debt will keep climbing. The total debt is currently nearing $35 trillion, which is roughly 100% of GDP and seven times the annual revenue. Following this trend, in ten years, the debt could exceed $50 trillion, accounting for 130% of GDP, which translates to each household (approximately 130 million households) carrying a debt of $425,000.
The rise in debt not only signifies more borrowing but also higher interest expenses. Currently, interest payments alone exceed $1 trillion annually, about 20% of fiscal revenue. With the debt scale continuing to expand, interest expenses could potentially surpass $2 trillion within the next decade. Moreover, this does not include the principal that will need to be refinanced over the next ten years. Estimates suggest that the total debt service cost over the next decade will rise from $10 trillion to $18 trillion.
This will gradually compress fiscal space. The U.S. government has almost three paths to take:
- Cut spending
- Increase tax burdens
- Lower interest rates
It is precisely due to this fiscal pressure that Trump has persistently demanded the Federal Reserve to lower interest rates and even intervened in monetary policy. For future governments, every 1% increase in interest rates brings not just an impact on economic growth but also tangible fiscal pressure, which will only grow.
However, if the path of printing money to suppress interest rates is taken, it means that the real yield on U.S. debt will be artificially lowered. For global long-term funds, such as pensions, insurance, and sovereign funds, this is not just a spread issue but a credit issue. Once the credit of U.S. debt is re-priced, the global asset pricing anchor status of U.S. debt will be shaken, ultimately affecting not just the U.S. itself but the economic system of global capital markets.
This is also why Musk has repeatedly voiced his opposition. His concern is not the current deficit itself but that this path is undermining the core mechanisms of the capital market, affecting risk pricing and credit anchoring within the U.S. system. In the short term, it indeed stimulates investor sentiment and releases liquidity, benefiting risk assets. However, in the long term, unsustainable fiscal policies combined with credit overextension could lead to more severe consequences.
If this situation truly erupts, gold, which does not require government backing, will be the most profitable. For $BTC, there may be two paths: if investors focus more on its decentralized attributes, it may be as popular as gold. However, if it is highly tied to the U.S. or the U.S. government, it may also face scrutiny.
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