The U.S. national debt has surpassed $40 trillion, fueling concerns about the dollar's value and prompting a surge in investments in gold and cryptocurrency, a phenomenon dubbed the 'debasement trade.' This trend reflects a market belief that the dollar's purchasing power is eroding due to government policies.
In August, Treasury Secretary Scott Bessent announced plans to double the size of buyback operations for longer-dated securities, aiming to lower yields on bonds between 10 and 30 years. The objective was to make borrowing cheaper, but the measure had a limited effect on bond yields, which returned to multi-year highs. Concurrently, the dollar weakened, falling nearly 1% on the news and declining 2.5% from its July peak as measured by the ICE dollar index.
The 'debasement trade' concept posits that the dollar's value will continue to decline, potentially driven by inflation stemming from monetary, fiscal, and trade policies. This outlook encourages traders to invest in hard assets like gold and cryptocurrencies.
Recent fiscal actions, including a deficit-increasing tax cut proposed for 2025 and a varied approach to tariffs, have been cited as contributing factors to inflation, which has risen from 3% in January 2023 to 3.5%. Former President Donald Trump has historically advocated for a weaker dollar, a stance he has expressed since the 1980s and through social media posts during his presidency.
Since reaching a post-pandemic high in October 2022, the dollar has depreciated by 12%. The national debt's ascent to a record $40 trillion has coincided with rising consumer costs, including a 72% increase in gas prices since February.
In response to these economic conditions, the prices of gold and Bitcoin have seen significant gains. After experiencing a downturn at the start of the year, gold has risen 15% since early August, and Bitcoin has increased by 25%. While these gains have not yet returned the assets to their late 2025 highs, further economic instability in the U.S. could drive more investors toward these assets as safe-haven investments.
Concerns about potential economic shocks also extend to the technology sector, particularly concerning the rapid growth in AI infrastructure. The construction of AI data centers now accounts for a substantial portion of office construction spending and a significant percentage of U.S. GDP. Major tech companies are investing heavily in AI, incurring substantial debt to finance these operations. Analysts have questioned whether these companies can generate sufficient revenue to justify these investments, raising the possibility of an AI bubble.
Experts suggest that gold and Bitcoin may offer relative safety in a weakening dollar environment. Gold has historically served as a store of value, with some analysts predicting its price could reach $4,800 per ounce. Bitcoin has shown a pattern of cyclical growth since its inception, and studies indicate that its inclusion in portfolios can improve risk-adjusted performance during periods of economic uncertainty.
Billionaire investor Ray Dalio has advised investors to maintain overweight positions in gold and Bitcoin unless the government implements significant spending cuts or revenue increases, a scenario he deems unlikely in the current political climate. The prevailing sentiment behind the 'debasement trade' is that in a climate of dollar pressure, gold and Bitcoin are viewed as stable alternatives.