The Return of the ‘Debasement Trade’

Discussion of the dollar’s “debasement” is being heard anew ahead of a highly-vaunted speech on Friday at Jackson Hole by the Federal Reserve chairman, Kevin Warsh. It’s about time. The worry, CNBC reports, is that “government borrowing and money printing will erode the value of the U.S. dollar,” prompting investors to turn toward “assets like gold, crypto, stocks and real estate that can hold their value.” The strategy is designated the “debasement trade.”It’s not our intention here to give investment advice. Yet the scrutiny of our fiat dollar’s soundness is welcome and, one could well add, overdue. The talk of devaluation comes as the dollar is fetching less than a 4,600th of a gold ounce. By contrast, under the Bretton Woods system a dollar was valued at a 35th of an ounce. In other words, when it comes to the dollar’s “debasement,” the horse is not only out of the blasted barn but halfway across the county.The moniker, per Bloomberg News, is “a nod to the historical practice of rulers such as King Henry VIII of England and the Roman emperor Nero,” who “diluted, or debased, gold and silver coins with cheaper metals such as copper.” The term now “captures the idea that investors are seeking refuge from the dollar because of fear it’s being devalued,” per Bloomberg, and the trade is “gaining momentum” as America’s “debt burden keeps rising.”The talk of debasement is being fueled, too, by the national debt sailing past the $40 trillion mark. Plus, the Treasury’s interventions to prop up Japan’s fiat yen and then to calm the jitters in America’s public debt market are prompting concerns over Uncle Samuel’s fiscal health. All these developments serve to remind that today’s crisis of public indebtedness is inseparable from the fiat money system that enables governments to borrow at unprecedented levels.On that head, investor Stanley Druckenmiller is decrying Secretary Scott Bessent’s bond market buybacks, meant to lower long-term yields. Mr. Druckenmiller suggests that this is, in effect, an attempt at price control. “Markets aggregate information no committee possesses,” he asserts in a Wall Street Journal op-ed, “and prices are how that information reaches decision makers.” He calls the yield on long-term Treasuries “the most important price in the world.”The bond yield, per Mr. Druckenmiller, “is also the only fiscal disciplinarian the United States has left.” Of America’s surging debt, he laments, “neither party will run on entitlement reform,” and “both have spent the past decade expanding commitments while ignoring arithmetic.” The only pressure for democracies to “repair their finances,” he insists, is “when the cost of inaction becomes visible and immediate.”One such signal, per Mr. Druckenmiller, is when “the political price of a rising long bond finally exceeds the political price of touching spending.” Hence his concern about trying to temper the higher bond yield to paper over America’s fiscal recklessness. The “debasement trade” marks similar concerns over Uncle Sam’s economic health, with the dollar’s value in gold as the relevant price indicator. Which brings us back to Mr. Warsh. After he acceded to the Fed’s chairmanship, a Bloomberg headline reported that the “debasement trade is unraveling.” This was traced, in part, to Mr. Warsh’s stern talk about, say, getting inflation under control and upholding the Fed’s autonomy. The dollar, for a time, even strengthened in terms of gold. The revival of the debasement talk suggests that Mr. Warsh, and a sound dollar, have a tougher than expected road ahead.

The Return of the ‘Debasement Trade’

The Return of the ‘Debasement Trade’

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