Why Trump’s ‘Big Beautiful Bill’ will trigger an ugly US default — and a role for Bitcoin

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for UnHerd. Opinions are his own.

There is an old saying in journalism that a story is not true until it is formally denied. I am therefore pondering with great interest the comment from Scott Bessent, the US Treasury Secretary, that the US “is never going to default” on its debt.

Bessent, a hedge fund manager, is new to the political game. Experienced politicians know that they should never give a straight answer to a question.

They certainly should refrain from giving blunt answers to blunt questions. I don’t think that Bessent is lying.

But I do think he is wrong.

Exorbitant privilege

The US will default — because it can and because both Republicans and Democrats believe in deficit spending.

When you possess “exorbitant privilege,” the ability to issue debt in a currency that you can print without limitation, it’s not a big leap to finance deficits without limitation as well.

We have to be clear what we mean by default.

Of course, the US is very unlikely to default formally on its debt obligations. It will, of course, meet its contractual obligations.

A formal default can still happen if Congress were to refuse to raise the debt ceiling, for example. We had a few close calls in the past. But such an accident is not my main scenario.

I’m focused on the implications of Donald Trump’s budget, which he calls The One Big Beautiful Bill. It isn’t just another Trumpesque moniker — it’s the actual name of the act.

The 1,000-page bill would extend the tax cuts Trump pushed through in his first term and implement a number of new spending priorities.

This would be a new type of Ponzi scheme. Issuing crypto debt is just another way to default.

The Congressional Budget Office did calculate that Trump’s budget will increase the annual federal deficit to around $3.8 trillion from $1.6 trillion over the next decade.

Even before this bill was introduced, the US was headed towards a debt-to-GDP ratio of 172% by 2054 thanks to the irresponsible fiscal policies of President Joe Biden and Janet Yellen, the former head of the Federal Reserve and Biden’s Treasury Secretary.

Even so, the budget reveals what Trump’s economic policies are really about.

He is not interested in rebalancing global trade. He just plainly needs the money to fund the deficit.

This is not very different from the medieval kings who debased the currency because they needed the money to fight a war.

The tariffs will raise a lot of money, but not nearly enough.

The US imports some $3 trillion worth of goods per year. A 10% tariff translates to $300 billion in revenue. That’s almost 20% of the deficit.

But it doesn’t work like this. The tariffs will lower growth and reduce income and corporation tax revenues to the US government.

Big ugly bill

They will also cost money to collect. And they will be more than offset by the tax cuts. In other words, this is One Big Ugly Bill.

For me, the main question is not whether the US will default, but how? The exorbitant privilege allows you to default in more ways than one.

One traditional choice of default is inflation, the oldest trick in the book.

They could do some financial shenanigans like transforming the 10-year Treasury bond into a zero-coupon perpetual bond. This is like owning a piece of paper that says the US government owes you absolutely nothing.

They also have more subtle ways to default.

One such way is already contained in the budget itself. If you manage to get to Section 899 on page 959, you will see that the Trump administration wants to tax foreign holders of Treasury bonds if they come from countries the US says discriminate against American companies.

We are not talking about withholding taxes where the government deducts taxes at source, which are legally owed by the holder.

Haircut

This is a tax on foreigners, or what bond market people call a haircut. You could also call it the financial market version of reciprocal tariffs. Section 899 is a default scheme dressed up as a tax.

Another way to default is through cryptocurrencies.

A US Treasury bond is not fundamentally different from a stablecoin — except it is one step up the sovereign ladder.

A US dollar-pegged stablecoin is backed by Treasury bonds. A Treasury bond is backed by the United States government.

Backed by Bitcoin

Behind the government stands the Federal Reserve. The US cannot run out of dollars, because the Fed can just print them, or rather, create them out of thin air by depositing them in someone’s account.

The US could, for example, transform its Treasuries into a US-government issued stablecoin, backed not by government debt but directly by the Federal Reserve.

It could be backed by Bitcoin — and become further removed from the US dollar economy. They could pay a coupon with more stablecoins.

This would be a new type of Ponzi scheme. Issuing crypto debt is just another way to default. This is also one of the reasons why the smarter members of the Trump economics team are enthusiastic about crypto. They may need it.

Paul Volcker, the former Fed chairman, famously joked that the only financial innovation he witnessed in his long life was the introduction of the ATM.

All the other stuff that comes under the heading of “financial innovation” were just clever ways to repackage debt and hide risks from investors.

Real innovation

I think crypto has the potential to offer real innovation by cutting out financial middlemen or acting as an insurance against fiat money debasement. But tokenised government debt falls into the Volcker category of innovation.

Bessent’s story is that the US will grow out of its debt, as it always did in the past. For as long as that hope is kept alive, and as long as people believe the growth story, the whole show will stay on the road.

When doubt starts to creep in, this bubble will collapse like no bubble ever did before.

So Bessent is formally right – the US will probably not default in the formal sense.

He is just not telling us the whole story.