On the face of it, the United States’ debt to GDP ratio doesn’t seem that bad on a global scale. In 2023, it was lower than the average for G7 nations — at 123% — and roughly half of the most indebted country in the world, Japan, where debt stood at a whopping 255% of GDP in 2023.

Looking at the numbers alone, it would be easy to brush this off as a non-issue. After all, Japan has managed to navigate its growing debt pile relatively well over the years. Its economy remains stable, while the Nikkei 225 index is up around 31% over the last year (as of May 10), outperforming the S&P 500. In reality, though, the economic situations in the two countries couldn’t be more different, which means that what works for Japan is unlikely to work for the U.S.

The glaring difference between the two is the composition of their debt ownership. In Japan, nearly 90% of debt is owned domestically by its citizens and institutions. By contrast, roughly a quarter of U.S. debt is held by international debt buyers. And so needs to ensure that its debt remains attractive to them by paying a high enough yield versus its global competitors — especially as this debt rises to higher and higher percentages of GDP, meaning that it becomes riskier to lend to the government.

Related: Jerome Powell’s pivot heralds a boring summer for Bitcoin

Indeed, last year Fitch Ratings already downgraded U.S. government debt from AAA to AA+. At the time, this news was brushed off by U.S. officials as “arbitrary and based on outdated data.” Later in the year, Moody’s downgraded its U.S. debt outlook to negative, which was also largely ignored by markets.

But investors should be paying more attention because the U.S. won’t be able to sit back and let its debt soar to the levels seen in Japan. For one thing, Japan’s net debt is much lower than its gross debt-to-GDP ratio, meaning it holds more foreign assets than it owes to other countries — the exact opposite of the US. This makes it easier for Japan to manage its growing debt pile.

Map of debt-to-GDP ratios around the world as of 2022. (Dark green signifies a higher ratio, while orange signifies a ratio of less than 25%.) Source: International Monetary Fund

Japan also hasn’t struggled with inflation nearly to the same extent as the United States. Its inflation rate sits at 2.7% after peaking at just 4.3% in January 2023. That’s a far cry from the 9.1% the U.S. reached in June 2022. The Federal Reserve is still struggling to bring sticky inflation under control, which makes the soaring debt levels particularly dangerous as this can add fuel to the fire.

The answer to inflation, as we all know, is restrictive monetary policy. But higher interest rates mean higher debt repayments, unhappy consumers, and — eventually — a slowing economy. Indeed, the Fed is already facing all of these problems. Consumer confidence is beginning to falter, debt repayments topped $1 trillion last year and first-quarter growth this year came in much lower than anyone anticipated.

So much so that we’re now hearing whispers of stagflation — a particularly undesirable economic situation, where inflation continues to rise while economic growth stagnates. Here, higher debt also creates a problem, since it limits the government’s ability to use its fiscal powers to mitigate a slowing economy. So the Federal Reserve finds itself in a bit of a catch-22 situation, especially considering that it has all but promised a rate cut next.

Related: The next ICO boom is coming — and it will be better than 2018

In an election year, keeping interest rates high for too long could also spell an unhappy electorate. However, so far, both Democrat and Republican candidates appear to be entirely ignoring the elephant in the room that is the growing U.S. debt pile. Neither side has proposed any meaningful policies to address this issue. But, with the debt-to-GDP ratio now at well over 100% and projected to keep rising quickly over the coming decades, the government will have to face the music sooner or later.

So what does this mean for crypto? Paradoxically, all this may be a net benefit for assets like Bitcoin, which could become a safe haven as worries over soaring U.S. debt intensify. Typically, rising debt levels also lead to currency devaluation. And while, like Japan, the U.S. may be able to avoid some of this due to the global reliance on the U.S. dollar, the high proportion of foreign debt ownership also makes the greenback particularly vulnerable.

Coupled with the expectations of interest rate cuts later this year, there is little chance that the dollar will maintain its current strength for too long. This, of course, will be a boon for Bitcoin (BTC), which is widely seen as a hedge against dollar weakness.

So this predicament the U.S. finds itself in isn’t necessarily bad news for cryptocurrency markets, depending on quite how badly out of hand things get. If the U.S. were to default on its debt, for example — which, of course, it won’t. This would be disastrous for all markets, including digital assets. A weaker dollar and some loss of confidence in the U.S., however, could be just what the doctor ordered for the next leg of the crypto rally.

Lucas Kiely is a guest columnist for Cointelegraph and the chief investment officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He was also the head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.