Last month, CoinDesk discussed in detail how bond market activity is challenging the notion that the U.S. government is good for money, raising questions on the long-held «kayfabe» or illusion of fiscal stability.

Now, billionaire tech entrepreneur Elon Musk has raised the alarm on X through his [perhaps rightful] diatribe against President Donald Trump’s big, beautiful tax bill, which is projected to boost the fiscal deficit by $2.4 trillion over ten years.

That’s happening at a time when mounting fiscal concerns are already driving investors away from U.S. assets and into alternatives, such as bitcoin and gold. As of FY 2024, the fiscal deficit stood at $1.8 trillion, and as of today, the national debt is already at $36 trillion, with annual interest payments amount to $1.13 trillion.

Someone as influential and popular as Musk taking fiscal concerns public could result in two things: First, it could accelerate the shift away from U.S. assets. Is it merely a coincidence that at a time like this, corporate treasury adoption of bitcoin and other tokens, including XRP, has picked pace?

Secondly, investors concerned about the government’s fiscal health are likely to demand a higher inflation-adjusted yield to lend money to the government. So, expect yields to remain sticky on the higher side, further complicating the fiscal situation and economic growth.

Government is bankrupt, at least in theory

Bitcoin BTC believers, have been warning of this day for a long time. To paraphrase a former CoinDesk employee, «Crypto may not have all the right answers, but it does ask correct questions.»

The popular narrative has been that the U.S. government is bankrupt, and the dollar is headed for a collapse. According to Musk, the government risks bankruptcy if fiscal prudence isn’t restored.

In theory, the government has been bankrupt for decades. That’s evident from the repeated debt ceiling lift-offs over the years.

Congress set the first federal debt limit at $45 billion in 1939, granting the Treasury wide discretion over the use of borrowing instruments as long as the total debt does not exceed the self-imposed limit.

Since then, the ceiling has been repeatedly hit and raised, a sign of fiscal crisis and, in many ways, form of hiding bankruptcy. As of 2025, the debt limit stands at $36 trillion! That’s right trillion.

This brings to my mind a joke by an Indian standup comedian about government officials artificially raising the danger mark during floods, to create the illusion of control and normalcy.

Similarly, repeatedly raising the debt ceiling has been an attempt to mask the country’s fiscal bankruptcy.

The debt-based fiat system may be broken

For at least a decade, Bitcoin believers have been saying that the monetary system is broken and we need to fix the «money» – essentially the debt-based fiat money.

And they may be right, as the government debt-to-GDP ratios across the advanced world have risen past 100%, a sign that the debt-based fiat money’s ability to generate growth has collapsed.

A blog post on Mises Institute described the debt-based fiat money (paper money with a government stamp backed by nothing) as follows:

«The government and powerful bankers established a system in 1913 that typically works like this: Every dollar of the monetary base (or “narrow money” or “high-powered money”) comes into existence with a one-to-one increase in the public debt, collectively owed by the taxpayers. Then, private banks use that base to create more dollars (in “broad money”) that come into existence with a one-to-one increase in private debt.»

«Going the other way, if people in the private sector ever paid off all of their debts, and the federal government paid off all of its bondholders, then the supply of U.S. dollars would be virtually extinguished.»

«This is the sense in which our fiat-money, fractional-reserve system uses “debt-based money.” Although market prices are flexible and can react to deflation much better than most people realize, it is still true that our system is tragically absurd.»

A debt-to-GDP ratio above 100% means that the total government debt exceeds the nation’s annual economic output. In such a situation, for every additional dollar borrowed by the government and invested in the economy, the resulting impact (multiplier effect) is less than one dollar – that is, the return on additional borrowed funds diminishes.

To explain in the context of the law of diminishing returns/utility, the marginal utility of each additional dollar spent in generating growth is negative.

It also means that extra debt no longer generates productive economic growth and may actually be harmful. Imagine gorging on your favorite ice cream without a break (just as governments gorging on borrowed money for decades); eventually, at some stage, you will throw up. That’s where we are in terms of fiscal finances and the debt-to-GDP ratios in the U.S. and other advanced nations.

What next?

Economist Russel Napier, known for his expertise on debt and fiscal policy, 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, which is what many countries, including the U.S. and the U.K., did to inflate away debt after World War II.

Allowing moderate inflation to erode the real value of the debt, thereby reducing debt servicing and lowering the ratio, could galvanize demand for assets like gold and bitcoin.

Other steps could include devaluing currencies and implementing capital controls and financial repression, all of which could bode well for alternative investments, such as cryptocurrencies.

On a lighter note, reducing fiscal spending – a strategy initially promoted by Trump – might be the only way to get the economy back on track.

Consider this medical analogy.

When your body is exposed to excessive blood sugar over an extended period, cells tend to develop insulin resistance, leading to type 2 diabetes. Doctors often recommend fasting to help restore insulin sensitivity.

Similarly, curbing fiscal spending could be the only way to meaningfully lower the debt-to-GDP ratio below 100%, thereby restoring the effectiveness of the debt-based fiat system’s ability to generate growth.

That said, what if governments fail? The debt-based fiat system may be truly over then, intensifying the search for alternatives, with blockchain and crypto as potential options.

Let’s see how things unfold.