Treasury Secretary Scott
Bessent’s recent move on U.S. Treasury bonds got me thinking about this.
According to the Tax Project Team in an October 2025 post:
“The “Debasement Trade” is a prominent investment
strategy in current finance, defined by the systematic movement of capital out
of assets denominated by sovereign promises, such as fiat currencies and
traditional fixed-income securities, and into assets characterized by
verifiable, finite supply, often referred to as “hard assets.” This strategy is
fundamentally a defensive measure, designed to preserve the real value of
wealth against the risk of the currency’s diminishing purchasing power, which
results from accelerating national debt and large/rapid monetary expansion. The
shift reflects a growing, fundamental loss of confidence in the long-term
fiscal solvency of major economies, especially the United States, whose
currency serves as the global reserve.”
That last sentence is a bit
unsettling. Is our huge national debt weakening our economy? I really don’t
know, as it is not my area of expertise.
The article notes that
currency debasement has been used as a sovereign tool at least since the Roman
Empire, when they reduced the amount of silver in silver coins, allowing them
to produce more currency with the same amount of silver.
In 1971, then-President Nixon
stopped allowing the conversion of U.S. dollars directly into gold. This
changed things.
“The erosion of a currency’s value is now primarily a
function of excessive issuance relative to underlying economic productivity.”
Below is a graph of U.S.
money supply, which continues to grow as the economy does. Population is not
growing as fast. Inflation continues to grow as it always does, but currently
and in recent years, at a rate higher than most of us would like.
The article notes that the
U.S. national debt, currently at $40 trillion, leaves us with three choices to
deal with it: cut spending, increase taxes, or devalue currency. The Trump
administration has clearly preferred the latter. In general, nobody likes the
other two choices. Currency depreciation and reserve diversification (relying
more on other currencies besides the dollar) are results of the predicament.
Quantitative Easing (QE)
happened during the 2008 financial crisis and more during COVID.
“{It} involves the central bank (the Federal Reserve)
creating new electronic money to purchase vast amounts of government and
mortgage bonds. This injects large amounts of money (hyper-liquidity) into the
financial system.
Inflation manifests as
currency debasement since it erodes the purchasing power of the dollar. It is
often seen effectively as a tax on everyone.
Some, including the Trump
administration, believe that the dollar as the world’s reserve currency is
subject to being overvalued and that:
“…managing a controlled depreciation of the dollar is a
necessary measure to correct global trade imbalances and support domestic
manufacturing.”
“Hard assets” like gold,
silver, and bitcoin are a hedge against debasement effects such as inflation,
as are other investments like real estate.
The article closes with the following summary:
“The Debasement Trade is more than a momentary market
tactic; it is a structural investment shift reflecting deep seated concerns
over fiscal integrity of the world’s leading economies. Driven by high and
persistent debt accumulation, coupled with the unconstrained power of central
banks to expand the money supply through QE, the trade represents a fundamental
shift in investor trust, from faith in government promises to reliance on the
verifiable scarcity of hard assets. As long as the structural imbalance between
monetary creation and productive capacity persists, the strategic movement
toward assets like gold and Bitcoin will continue to be a defining feature of
the global financial landscape.”
An April 2026 Charles Schwab
article notes that debasement trade has been growing in popularity as a
financial strategy. The article notes:
“…modern currency debasement is driven primarily by
excessive government debts, unconstrained "money printing," and a
loss of confidence in fiat currencies as well as the institutions that back
them. Some investors fear this modern form of currency debasement will lead to
inflation and a steady loss of purchasing power, as it has historically. Others
argue it may exacerbate wealth inequality.”
The article suggests that the
current debasement trade may result in different outcomes than the inflation it
has historically resulted in. The example given is that if low or even negative
interest rates are artificially induced, then financial assets could rise
faster than wages or savings. Others argue that new technologies like AI can
tame inflation to the point where it also leads to more wealth inequality.
Well, I could agree with that as long as those on the bottom are not going
further down and hopefully up. Others believe that debasing the dollar can lead
to seeking out other currencies (de-dollarization), but realistically the
dollar is still king. As can be seen below, the dollar has declined, but no
other currency comes near it. The prevalence of the dollar also gives the U.S.
economic system advantages over other economies, such as the ability to borrow
money at lower rates.
According to Collin Martin,
head of fixed income research and strategy at the Schwab Center for Financial
Research (SCFR):
"For better or for worse, we have a ton of debt,
and that means we have plenty of bonds for investors to buy if they want safe
and liquid assets. Our path of fiscal policy seems unsustainable, but it hasn't
mattered yet—yet being the key word. At some point, our fiscal situation could
scare away potential buyers, but that day is not today."
The independence of the
Federal Reserve has been questioned in light of Trump’s remarks about possibly
artificially (without indicators pointing to a need) lowering interest rates.
Others, including Janet Yellen, suggested that could lead to sharp inflation.
It does not seem likely to happen with Kevin Warsh heading the Fed since he has
long been an advocate of raising interest rates to counter inflation.
The article also points out
that the current interest in debasement is largely narrative-driven. Potential
effects of debasement on bond markets are explored:
“Bond markets could also provide a reality check of
sorts. The debasement trade is supported by the belief that high government
debt levels will force central banks to keep real yields low, since governments
need low rates and inflation (according to some) to reduce their debt burdens.
If "bond vigilantes" aggressively sell government bonds and force
yields higher in a form of market-based protest against unsustainable fiscal
and monetary policies, it could lead real yields to rise. This could potentially
strengthen the dollar, challenging the debasement narrative.”
It can be a bit hard to lose
sight of the fact that investment is basically betting on markets. In a way, so
too is currency manipulation. One would be betting on a certain result, but
other results are possible as well. One obvious risk is that those hard
currencies and stores like bitcoin lose value (bitcoin is notoriously
volatile). Another is that economic growth strengthens the dollar. AI may be
poised to increase demand and economic growth. That might help the deficit and reduce
inflation, but it still strengthens the dollar. The article finishes with the
following summary and warning:
“The debasement trade has become increasingly popular in
recent years, primarily due to fears that massive government debts and
inflationary monetary policies will erode the purchasing power of fiat
currencies. Investors have sought to hedge against currency devaluation by
investing in hard or uncorrelated assets like gold, bitcoin, or real estate.
However, it's important to remember that narratives can quickly shift, and even
when they don't, crowded trades can be fragile and volatile.”
According to an article in
Benzinga, commodity expert Jeffrey Currie says
markets are entering a debasement trade driven by the collision between
physical scarcity and financial intervention.
“Scarcity in the physical world. Repression in the
financial one. Scarcity pushes prices up. Repression holds yields down. The gap
between them is the debasement."
After Treasury yields briefly
reached their highest since 2007, Bessent said the Treasury would at least
double its long-term bond buybacks to $4 billion next quarter. The article says
Bessent is introducing demand into an oversupplied bond market.
“When commodity prices rise, investors demand higher
yields to compensate for the risk of losing purchasing power.”
“Higher borrowing costs then weaken demand, helping cool
the economy and eventually commodity prices.”
Currie, an expert on oil
markets, notes that it is the large diesel crack spread, the difference between
crude oil prices and diesel prices, that is the real concern. Crude oil is sold
to refineries, but diesel and gasoline are sold to consumers. They matter a lot for increasing inflation. He points out that crude prices have not changed
much, but the high cost of diesel and gasoline has risen. Refiners and those
who invest in them are making a killing currently.
“That would create an unusual inflation signal: scarcity
appearing downstream even before crude itself begins to rally.”
“And if refining capacity eventually recovers, Currie
sees another risk.”
“Refiners would return to the market to buy crude,
potentially shifting the shortage upstream and pushing crude prices higher.”
“In either case, the economy could face a similar
problem: higher energy costs.”
What is Currie’s bet?
“It is a bet that scarcity is becoming structural while
financial intervention is making the normal market response less powerful.”
“If he is right, investors may have to stop thinking of
commodities as a cyclical trade and start viewing them as protection against a
widening gap between physical prices and financial repression.”
His advice is “Get long
and buckle up.”
Bessent’s moves led to
Bitcoin gaining 23% in a week as stocks fell. His boss is big into Bitcoin, so
that is good for them. This has somewhat validated investors calling Bitcoin
“digital gold.” However, year-by-year, Bitcoin still behaves more like stocks
than gold.
References:
Understanding
the Debasement Trade: With the debasement trade's popularity growing, it's
critical for investors to understand how it works, which assets it typically
involves, and the key risks involved. Charles Schwab. April 15, 2026. Understanding
the Debasement Trade | Charles Schwab
The
'debasement' trade is here, and commodities are sending the warning. Piero
Cingari. Benzinga. August 21, 2026. The
'debasement' trade is here, and commodities are sending the warning
Scott
Bessent just kicked the bitcoin debasement trade into another gear: Chart of
the day. Jared Blikre. Yahoo Finance. August 23, 2026. Scott
Bessent just kicked the bitcoin debasement trade into another gear: Chart of
the day
Debasement
Trade Explained: What you should know. Tax Project. October 10, 2025. Debasement Trade Explained:
What you should know - Tax Project Institute
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