Federal Government

Hyper‑Inflating the Debt Away: Why U.S. Headwinds Are Pushing Capital Toward Crypto Collateral

With U.S. debt near record highs, modest growth, and banks sitting on massive unrealized losses, the path of least resistance is slow financial repression—letting inflation quietly erode the burden. In that world, scarce crypto is emerging as a parallel, post‑sovereign collateral layer.

The Ripple Effect

— 5 min read
Hyper‑Inflating the Debt Away: Why U.S. Headwinds Are Pushing Capital Toward Crypto Collateral

The emerging macro story is that the United States is drifting toward “inflating the debt away” rather than growing out of it, while a parallel market narrative positions scarce crypto-assets as the neutral collateral of a post‑sovereign era. Real U.S. data on debt, growth, and the banking system’s unrealized losses show why genuine growth‑led repair is such an uphill battle—and why financial repression plus alternative collateral are back at the center of the conversation.

The slow pivot from growth to inflation

The textbook answer to high public debt is simple: grow faster than you borrow. In practice, the U.S. is stuck with large primary deficits, rising interest costs, and only modest real growth expectations, making a clean “grow out of it” path increasingly unrealistic. The Congressional Budget Office’s report, “The Budget and Economic Outlook: 2025 to 2035” shows debt held by the public climbing from roughly 100% of GDP today toward about 118% by 2035, even under baseline assumptions that already build in steady growth and no major new shocks.

At the same time, the CBO’s economic projections show real GDP growth around 1.4% in 2025, stabilizing near 1.8% thereafter—barely above population growth and well below the rapid expansions that eased the post‑war debt overhang. With deficits near 6% of GDP and interest costs projected to total many trillions over the next decade, the arithmetic of solving the problem via productivity alone looks increasingly strained.

Banking data: pressure under the surface

The U.S. banking system is one of the pressure points quietly tying debt dynamics, interest rates, and potential inflation together. The FDIC’s Q3 2025 Quarterly Banking Profile reports that unrealized losses on securities fell but remained high at about 337.1 billion dollars, primarily in long‑duration Treasuries and agency MBS marked down during the 2022–2023 rate shock. An earlier analysis from the Office of Financial Research, “The State of Banks’ Unrealized Securities Losses,” estimates that as of late 2024 those losses were still roughly 481 billion dollars—about 19.9% of banking‑subsidiary equity.

These are not fringe assets; they are the base collateral of the dollar system, and their impairment limits how far and how fast rates can “normalize” without reigniting banking stress. In effect, the central bank faces a trade‑off: keep real rates high to crush inflation and fully mark these losses, or accept some inflation and lower real yields to protect financial stability and keep the Treasury’s funding costs manageable.

Why “grow out of it” keeps failing

Three structural forces make growth an inadequate primary tool for repairing the U.S. balance sheet:

  • Demographics and productivity. CBO’s projections indicate long‑run real growth below 2%, constrained by population aging and modest productivity gains.
  • Persistent primary deficits. Analyses from the Committee for a Responsible Federal Budget show that even under adjusted baselines, federal debt is on track to rise from about 100% of GDP in 2025 to roughly 120% by 2035, driven by structural deficits rather than one‑off shocks
  • Rising interest expense. The CBO estimates that the deficit sits around 6.2% of GDP in 2025, with interest costs a growing share of total spending as debt compounds.

Together, these mean that relying on growth alone demands an unlikely combination of faster productivity, sustained political discipline on deficits, and favorable global financing conditions. Absent that trifecta, policymakers drift toward the more politically palatable path: allow inflation to do some of the work quietly.

Hyper‑inflation or controlled repression?

Historically, advanced economies rarely choose explicit hyperinflation; instead they practice slower “financial repression.” This involves holding nominal interest rates below inflation, using regulation and captive demand from banks and pensions to absorb government debt while the real value of that debt erodes. With U.S. debt‑to‑GDP already near post‑war highs and growth modest, the temptation to lean on this mechanism increases, especially when higher rates would crystallize banking losses and drive up Treasury funding costs further.

The current U.S. setup is not hyperinflationary today—core inflation has moderated from its 2022 peak—but the combination of elevated debt, repeated large deficits, and intermittent tolerance for above‑target inflation is consistent with a long, grinding form of real‑value erosion. Investors sense this and increasingly frame their strategies around real returns rather than nominal yields, which is where crypto enters the story.

Crypto as post‑sovereign collateral

Proponents argue that assets like Bitcoin offer what sovereign collateral no longer guarantees: fixed supply, transparent monetary rules, global liquidity, and real‑time mark‑to‑market pricing beyond domestic fiscal politics. As concern grows over unrealized losses on government paper and the possibility of inflationary debt management, some institutions and funds have begun to treat Bitcoin and other large‑cap cryptoassets as portfolio hedges against currency debasement and as experimental collateral in lending and derivatives markets.

This remains small relative to the multi‑trillion‑dollar Treasury repo complex, but the direction of travel is notable. Research from the St. Louis Fed in “Banking Analytics: Unrealized Losses Decrease Again at U.S. Banks” highlights that unrealized losses, while lower than their 2023 peak, remain a non‑trivial risk factor. If inflationary debt management accelerates or confidence in long‑term fiscal sustainability deteriorates, the demand for non‑sovereign collateral could scale rapidly, even if volatility and regulation remain significant obstacles.

Headwinds, tail risks, and the crypto thesis

The core economic headwinds—high starting debt, modest growth, large structural deficits, and a banking system constrained by rate‑sensitive losses—do not guarantee runaway inflation, but they greatly narrow the policy menu. In the absence of politically painful fiscal consolidation or a productivity renaissance, allowing periods of inflation above interest rates becomes the path of least resistance, turning “hyper‑inflating the debt away” from a fringe fear into a tail risk that markets must price.

Crypto’s role in this narrative is as a parallel collateral layer that does not depend on any single sovereign’s promises, appealing to capital that wants insulation from both default and debasement risk. Whether that collateral ever scales to reserve‑asset status is an open question, but the macro backdrop makes the experiment more relevant by the year.​

DISCLAIMER: This newsletter is for informational purposes only and does not constitute investment advice, advertising, or a recommendation to buy, sell, or hold any securities. This content is not sponsored by or affiliated with any of the mentioned entities. Investments in cryptocurrencies or other financial assets carry significant risks, including the potential for total loss, extreme volatility, and regulatory uncertainty. Past performance is not indicative of future results. Always consult a qualified financial professional and conduct thorough research before making any investment decisions.

Sources


Read more