The Node Ahead: The Bitcoin Thesis Is Stronger Than Ever

Issue 118

When new Federal Reserve Chair Kevin Warsh held his first press conference on June 16, investors were looking for clarity. Would the Fed begin cutting interest rates to support economic growth? Would it keep policy restrictive until inflation was firmly under control?

Instead, the press conference offered few definitive answers, emphasizing that future policy would remain data dependent. Some investors interpreted that as leaving the door open to rate cuts if the economy weakened. Others concluded the Fed remained focused on bringing inflation sustainably back to target before easing policy. In short, the Fed’s ambiguity left investors without a consensus view and fueled continued uncertainty about the policy outlook.

The reaction was understandable. For decades, the Federal Reserve has been the single most influential institution in global financial markets. Its decisions affect borrowing costs, asset prices, employment, inflation, and the flow of capital around the world. Entire investment strategies have been built around anticipating the Fed’s next move.

But I increasingly believe investors are asking the wrong question.

The debate should not center on whether the Federal Reserve will cut rates, raise them, or leave them unchanged. The more important question is whether monetary policy can still be understood independently of the government’s balance sheet—or whether historically high sovereign debt has fundamentally altered the tradeoffs and long-run consequences of the Federal Reserve’s decisions.

For most of the past four decades, government debt was low enough that the Federal Reserve could raise interest rates to restrain inflation or lower them to support growth without materially affecting the federal government’s fiscal position. Fiscal policy still played an important role, but it generally remained in the background, leaving the Fed as the economy’s principal stabilizing force.

I don’t believe that’s the world we live in anymore.

The Federal Reserve still controls short-term interest rates and retains the same policy tools it has always had. What has changed is the environment in which those tools operate. With government debt now much higher, the fiscal consequences of monetary policy have become increasingly significant. Economists describe this dynamic as fiscal dominance—a situation where government debt becomes large enough that it begins influencing how monetary policy decisions are made. The Federal Reserve must still focus on inflation and employment, but it also has to consider how higher or lower interest rates affect the government’s ability to finance its existing obligations.

Today, every significant policy decision has important second-order effects. Higher interest rates increase the government’s borrowing costs as debt is refinanced. Lower interest rates ease that burden but also support credit creation, financial conditions, and potentially inflation. Monetary policy still works—but it now operates within a much more complex set of tradeoffs.

In other words, every policy decision by the Fed now feeds back into the government’s fiscal position in ways that were far less significant when debt levels were lower. This shift has important implications for investors.

Bitcoin’s long-term investment case does not ultimately depend on who chairs the Federal Reserve or whether the next FOMC meeting results in a rate hike or a rate cut. It depends on something much more fundamental: whether the monetary system itself is becoming increasingly constrained by the arithmetic of sovereign debt.

If that is the world we are entering, then the critical question is no longer, “What will the Fed do next?” It is, “How does the investment landscape change when growing sovereign debt increasingly constrains the tradeoffs and long-run consequences of monetary policy?”

To answer that, we first need to understand the fiscal reality behind the U.S. monetary system.

The Fiscal Reality Behind Monetary Policy

To understand why this matters, we have to step back from the Federal Reserve and look at the government’s balance sheet. The United States is not facing a short-term budgeting problem. It is facing a long-term structural one.

The Congressional Budget Office projects that federal revenues will rise modestly as a share of the economy over the coming decades. That increase, however, is not expected to be enough to offset the growth in federal obligations. Under current law, spending on major entitlement programs and net interest costs is projected to grow faster than the government’s revenue base, causing deficits to persist and debt to continue rising.

The widening deficit is therefore not primarily a revenue problem. It is increasingly a spending problem—and, just as importantly, an interest expense problem.

Federal spending falls into three broad categories:

1. Mandatory spending, primarily Social Security, Medicare, and Medicaid.

2. Net interest on the national debt.

3. Discretionary spending, including defense, infrastructure, education, and the annual appropriations Congress debates each year.

The important trend isn’t simply that government spending has increased. It’s that the fastest-growing parts of the budget are also the least flexible.

Mandatory spending operates differently from the rest of the federal budget. Programs like Social Security and Medicare aren’t renegotiated every year. They are governed by permanent law. As long as someone meets the eligibility requirements established by Congress, the government is legally required to make those payments.

Because the population is aging, those obligations continue to grow automatically. Millions of baby boomers are retiring, Americans are living longer, and fewer workers are supporting a growing number of beneficiaries. Unless Congress changes the underlying laws—which has repeatedly proven politically difficult—these programs expand year after year regardless of the broader economic environment.

The second major driver is interest.

The federal debt has now grown to more than 100% of GDP, and the Congressional Budget Office projects it will continue rising to 156% by 2055.

Debt-to-GDP can sound abstract, but the basic idea is straightforward. GDP measures the value of everything the U.S. economy produces in a year. When debt exceeds 100% of GDP, the government owes more than the country produces annually.

One way to think about it is a credit card balance that’s larger than your annual income. You don’t have to pay off the entire balance immediately, but you do have to make the interest payments. If those interest payments keep growing faster than your income, you may need to borrow even more just to keep up with the interest on the debt you already have, causing the balance to compound over time.

The analogy isn’t perfect. Unlike a household, the U.S. government can continually refinance maturing Treasury securities by issuing new ones. The government is not at risk of suddenly running out of money or being forced to repay the entire debt tomorrow.

But the analogy is still useful because, just like a household, a larger debt balance creates larger interest payments. Unless rising interest expenses are offset by higher revenues, lower spending, or a combination of both, they increase budget deficits and require additional borrowing. That new borrowing adds to the debt balance, creating even larger interest payments in the future.

Over time, this creates a self-reinforcing cycle: annual deficits increase the debt balance, a larger debt balance increases future interest costs, and higher interest costs create additional pressure for more borrowing. That dynamic is the early mechanism behind a debt spiral. The question is not whether the government can continue operating today—it clearly can—but whether rising debt and interest costs increase pressure to manage the burden through policies that weaken the purchasing power of money.

According to the Congressional Budget Office, net interest expense is projected to reach roughly $1 trillion annually in 2026 and more than double to about $2.1 trillion by 2036. By then, interest payments are projected to consume roughly one-quarter of federal revenues.

That money doesn’t go to build roads, strengthen national defense, fund scientific research, or provide public services. It pays for yesterday’s borrowing and creates a powerful compounding effect.

Importantly, these projections do not assume a recession, another financial crisis, or a major war. They reflect the Congressional Budget Office’s baseline forecast under current conditions. In other words, today’s fiscal outlook deteriorates even if nothing goes wrong.

That distinction is important because it changes the nature of the problem.

Historically, deficits tended to expand during recessions before narrowing as the economy recovered. Today’s deficits are different. They are increasingly structural rather than cyclical. They arise not because the economy is temporarily weak, but because spending commitments and interest costs are growing faster than the government’s revenue base.

This also explains why debates over discretionary spending often miss the larger picture. Discretionary spending receives the most political attention because Congress votes on it every year. But it now represents a shrinking share of total federal spending. Even substantial reductions would do relatively little to change the government’s long-term fiscal trajectory without broader reforms to entitlement programs and the debt itself.

In theory, Congress could address these challenges. It could reform entitlement programs, raise taxes, reduce benefits, or pursue some combination of all three. Economically, those options exist. Politically, they have proven extraordinarily difficult.

Reforming programs such as Social Security and Medicare imposes immediate, tangible costs on the millions of people who depend on them, while the benefits of lower deficits and improved fiscal sustainability accrue only gradually over many years. Democratic governments, constrained by short election cycles, therefore face strong political incentives to avoid policies that require near-term sacrifices in exchange for long-term gains.

This is not a criticism of any political party or policymaker. It is simply the reality about current incentives.

The result is that today’s deficits are becoming less a matter of annual policy choices and more a consequence of the underlying fiscal structure. As deficits become increasingly structural, they begin to constrain monetary policy as well.

When Fiscal Policy Begins to Constrain Monetary Policy

This brings us back to the Federal Reserve.

As long as government debt remains modest relative to the size of the economy, monetary policy and fiscal policy can largely be analyzed separately. The Fed raises or lowers interest rates to achieve its inflation and employment objectives, while Congress determines taxes and spending through the political process. But that separation becomes harder to maintain as debt grows.

Every increase in interest rates raises the government’s borrowing costs. The effect is not limited to newly issued debt. As Treasury securities mature and are refinanced, debt that was originally issued at lower rates is gradually rolled over at higher rates, increasing the interest expense on the existing debt as well. The larger the outstanding debt burden, the more significant this refinancing effect becomes.

This is the essence of fiscal dominance. Monetary policy is no longer operating in isolation. It increasingly operates within the constraints imposed by the government’s balance sheet.

However, it is important to understand what this does—and does not—mean.

The United States is not comparable to countries that borrow primarily in foreign currencies or lack deep capital markets. The dollar remains the world’s primary reserve currency, U.S. Treasury markets remain among the deepest and most liquid in the world, and the federal government can continue issuing debt denominated in its own currency.

The concern is not that the United States will suddenly become unable to repay its obligations. The concern is that managing a larger debt burden may increasingly require policies that reduce the real value of those obligations over time.

Consider the Federal Reserve’s options.

Suppose economic growth weakens. The conventional response would be to lower interest rates. Lower borrowing costs support investment, encourage lending, strengthen asset prices, and reduce the government’s interest expense. But lower interest rates also make financial conditions more accommodative. Credit expands more easily, demand strengthens, and the forces that can gradually erode the purchasing power of fiat money become more difficult to reverse.

Now consider the opposite scenario.

Suppose inflation proves more stubborn than expected. Under a traditional monetary framework, the Federal Reserve raises interest rates until inflation returns to target. Higher rates still help reduce inflation by slowing demand. But they also increase the government’s borrowing costs over time as maturing debt is refinanced at higher rates. As interest expenses rise, deficits can widen further, requiring additional borrowing and increasing the size of future interest payments. The very policy used to restore monetary stability can therefore create additional fiscal pressure.

Lower rates ease the government’s financing burden today, but they also reinforce the long-term forces that gradually erode the purchasing power of fiat money. Higher rates help contain inflation today, but they also increase the fiscal pressures that make sustained monetary restraint progressively more difficult. The point is not that the Federal Reserve’s choices no longer matter. It’s that each path now carries second-order consequences that increasingly push the system toward the same long-run outcome: a monetary environment in which preserving purchasing power becomes progressively more difficult.

If this dynamic is becoming more important, we should expect to see it reflected not only in economic data but also in financial markets. In fact, there are growing signs that investors are already looking beyond the Federal Reserve’s next policy decision and paying closer attention to the government’s fiscal trajectory.

Historically, long-term Treasury yields often moved broadly in line with the Federal Reserve’s policy rate. But in recent years there have been periods when the Fed has begun easing policy while longer-term yields remained elevated—or even increased. That divergence suggests investors are considering more than the next FOMC meeting. They are also evaluating whether persistent deficits, expanding Treasury issuance, and rising debt levels will require higher long-term borrowing costs regardless of where short-term policy rates move. Markets are increasingly pricing fiscal risk alongside monetary policy.

Put simply, whether the Federal Reserve cuts rates, holds them steady, or raises them, it cannot fully escape the broader fiscal environment in which it operates. Over time, persistent deficits and rising debt increase pressure on the monetary system and raise questions about how governments preserve financial stability while maintaining purchasing power.

This dynamic is not unique to the United States.

Across much of the developed world, governments are confronting similar demographic pressures, expanding debt burdens, and rising interest expense. Since bitcoin was introduced in 2009, global debt has increased dramatically, rising from roughly $170 trillion in 2009 to well over $350 trillion today. While every country has its own institutions and fiscal challenges, the broader trend is consistent: sovereign debt has grown faster than the global economy for more than a decade.

That observation matters because it reframes the investment problem. If these pressures were unique to the United States, investors could simply look elsewhere. But when rising debt becomes a defining feature of the global monetary system, there is no obvious geographic escape. Whether an investor owns U.S. stocks, developed-market government bonds, commercial real estate, or private equity, those assets all exist within a financial system increasingly shaped by expanding sovereign liabilities.

The more important question is no longer simply which asset class, industry, or geography to invest in. It is which assets are best positioned to grow in value in a financial system increasingly shaped by expanding sovereign liabilities.

When governments carry historically large debt burdens, assets whose supply can be expanded in response to political or financial pressures become less attractive as long-term stores of value. By contrast, assets with a supply independent of those pressures become increasingly valuable.

This distinction matters because nearly every major asset class derives its value from the same economic and financial system that government debt and monetary policy increasingly shape. Stocks are claims on businesses whose earnings depend on economic growth, access to capital, and consumer demand. Bonds are contractual claims issued by governments and corporations whose value is directly influenced by interest rates, inflation, and credit conditions. Real estate depends heavily on financing costs, credit availability, and the broader economy. Even commodities, while they can provide inflation protection, are productive assets whose supply generally expands when higher prices create stronger incentives to produce more.

None of this makes these assets poor investments. The point is that they are investments in an economic system whose returns increasingly reflect the tradeoffs created by rising sovereign debt and monetary policy. A monetary asset serves a different role. It is not primarily held because it generates cash flow, benefits from economic growth, or compounds earnings. It is held because it seeks to preserve purchasing power independently of the fiscal and monetary decisions that increasingly shape the rest of the financial system.

The relevant comparison, then, is not between bitcoin and stocks or real estate as productive investments. It is between bitcoin and other assets that have historically served as stores of value.

Throughout history, societies have gravitated toward monetary assets that share a handful of important characteristics. They are scarce. They are durable. They are difficult to create. And, perhaps most importantly, their supply cannot be expanded simply because governments or financial markets would benefit from more of them.

For centuries, gold has been the dominant monetary asset.

Gold earned that role because its physical properties made it exceptionally well suited to preserve purchasing power over long periods of time. It is scarce, durable, difficult to counterfeit, and widely recognized around the world.

Bitcoin was not created to eliminate gold’s monetary properties. It was created to replicate many of them in a digital form while addressing several of gold’s practical limitations.

Like gold, bitcoin is durable and independent of any government. But unlike gold, it can be verified in minutes, transferred globally without physical transportation, and divided into extremely small units.

Bitcoin improves on gold in several practical ways, but one difference stands above all others: its supply schedule is predetermined and cannot be changed in response to economic conditions, political pressures, or financial incentives.

Gold is scarce, but its supply is not fixed. As prices rise, mining becomes more profitable, encouraging additional exploration and production. New gold enters circulation every year.

Bitcoin works differently.

Its issuance follows a schedule written into the protocol itself. New bitcoin are created according to predetermined rules that cannot be changed because demand increases, governments accumulate more debt, central banks expand their balance sheets, or financial markets need additional liquidity.

No government can authorize additional bitcoin. No central bank can create additional bitcoin. No company can dilute existing holders of bitcoin through new issuance.

The total supply and the rate at which new bitcoin enters circulation are known decades in advance. That is not simply a technical feature of the network. It is bitcoin’s defining monetary property.

Everything else in the modern financial system adjusts to changing economic and political circumstances. Bitcoin’s monetary policy does not.

Whether governments borrow more, central banks expand their balance sheets, or financial markets require emergency liquidity, bitcoin’s issuance schedule remains unchanged. That independence is what makes bitcoin fundamentally different.

Its investment case is not based solely on scarcity. It is based on the combination of scarcity, decentralization, portability, divisibility, verifiability, and a monetary policy that is not controlled by any government or institution.

The bitcoin thesis rests on the idea that as governments face growing fiscal constraints and increasing pressure to adapt monetary policy around those constraints, an asset with monetary rules independent of government decisions becomes increasingly valuable.

Importantly, this argument does not depend on an extreme economic outcome.

It does not require hyperinflation, the collapse of the U.S. dollar, or policymakers making catastrophic mistakes.

The thesis is considerably more modest.

Governments with historically large debt burdens face increasing pressure to make those debts easier to manage. Reducing debt through spending cuts or major tax increases is politically difficult because the costs are immediate and visible while the benefits of fiscal sustainability appear gradually over many years. History suggests governments have often found it more politically sustainable to reduce the real burden of debt over time rather than impose austerity or major reductions in promised benefits.

Those policies can take many forms: modestly higher inflation, negative real interest rates, periodic central-bank intervention, or other measures that gradually reduce the purchasing power of money over time. These approaches differ in implementation, but they share a common effect: they reduce the real burden of debt by reducing the value of the currency in which that debt is denominated.

Viewed through that lens, bitcoin is not primarily a wager on technology, nor does its investment case depend on the failure of the existing monetary system. Its appeal rests on something more fundamental.

In a world where governments increasingly adapt monetary and fiscal policy to manage larger debt burdens, bitcoin remains a monetary asset whose supply rules are transparent, predictable, and independent of government decisions. That independence becomes more valuable precisely because the rest of the financial system remains deeply connected to political and monetary institutions.

The Question Investors Should Be Asking

For decades, investors have focused on what the Federal Reserve will do next.

But historically high sovereign debt has changed the environment in which monetary policy operates—and the consequences of each policy decision. Lower interest rates can ease financial pressure in the short term but may reinforce longer-term forces that weaken purchasing power. Higher interest rates can help contain inflation but increase the fiscal burden of existing debt.

The point is not that the Federal Reserve has lost its importance. It is that monetary policy now operates within a different set of constraints—constraints that make preserving purchasing power increasingly difficult. For investors, the question is no longer simply what the Federal Reserve will do at its next meeting, but which assets are best positioned in a financial system increasingly shaped by sovereign debt.

The bitcoin thesis does not depend on a specific outcome from the Federal Reserve. It does not require interest rates to fall. It does not require hyperinflation. It does not require the U.S. dollar to fail.

Instead, the thesis rests on a more fundamental idea: the forces that make monetary independence valuable are becoming increasingly pronounced.

Government debt levels are higher. Interest costs are rising. Policymakers face increasingly difficult tradeoffs between supporting growth, controlling inflation, and maintaining fiscal sustainability.

In a financial system where governments and central banks must continually adapt to changing fiscal realities, bitcoin remains the largest monetary network whose supply rules are transparent, predictable, and independent of political decision-making.

That is why I believe the bitcoin thesis is stronger than ever.

Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own.