The Lowdown on Debasement

How seriously has investors’ confidence in America been shaken?

Not what I mean by debasement, but whatever

I’ve never considered the price of gold an important economic indicator. After all, gold isn’t money — that is, it is neither a medium of exchange, which can be used to make purchases, nor a unit of account, in which prices are quoted. It just sits there in vaults. And I mocked right-wing commentators who hyperventilated about rising gold prices during the Obama years, claiming that those rising prices were a harbinger of soaring inflation and a plunging dollar. They weren’t.

Still, gold remains an important asset. At current prices the value of the world’s above-ground gold reserves is around $36 trillion, more than a dozen times the combined value of all cryptocurrencies.

And gold prices have been on a remarkable tear since Donald Trump regained power:

Source: Haver Analytics

Do people who got all apocalyptic about the meaning of rising gold prices under Obama have anything to say about the much bigger rise under Trump? Well, if they were objective they would have a lot to say.

For the recent surge in gold prices isn’t just far bigger than the rise from 2009 to 2012. Crucially, the jump in gold prices since Trump 47 assumed the throne presidency is a reflection of fears about America’s economic future – fears that weren’t present during the Obama-era rise.

Under Obama, gold prices rose mainly as a result of ultra-low interest rates, which made speculating in gold attractive. That was a completely different dynamic from what is happening now. Interest rates aren’t low enough currently to make gold an attractive speculative trade, and long-term rates have actually risen slightly.

The skyrocketing gold prices we are seeing now are a consequence of what finance types call the “debasement trade.” While the effect of the debasement trade is shown most spectacularly in sharply rising gold and silver prices, it’s also visible in the falling value of the dollar and in rising long-term interest rates.

To understand what the term “debasement trade” means, we have to first understand what “debasement” means in this context. Debasement here means a shift away from US financial assets by investors due to fears of future erosion of the value of those assets. It could be caused by fears of an outbreak of inflation, as Trump pressures the Fed to roll the printing presses. It could be caused by fears of a fiscal crisis as he slashes taxes for the wealthy and hands out “Trump checks” in an attempt to win back voters. Or it could be caused by fears of expropriation of foreign investors in US assets. Such expropriation is not a far-fetched concern: in 2025 Trump officials floated the idea of forcibly converting holdings of short-term Treasuries into long-term loans. And the main architect of this scheme was none other than Stephen Miran, who Trump appointed to the Board of Governors of the Federal Reserve.

No one, including me, knows whether any of these destabilizing possibilities will come to pass. But in the past, when policy and policymakers were sane and rule of law prevailed, investors could and did rule out the possibility that U.S. policy would turn wildly irresponsible. Now we have an administration that casually ripped up three generations’ worth of solemn trade agreements, has threatened to seize allies’ territory, and more. Who’s to say that one of these days Trump might not declare a Liberation Day on U.S. debt? It may not be the most likely outcome, but it’s no longer in the realm of the inconceivable.

So the debasement trade – whether it’s in precious metals, the dollar or long-term Treasures -- is essentially how markets respond to the increased possibility of crazy American policy.

I want to be careful to not to overstate the case here. The explosive rise in gold prices is eye-catching but has few direct economic consequences. The value of the dollar matters much more; but while it has fallen a lot under Trump, part of that fall simply reverses an earlier rise after the 2024 election, when investors wrongly believed that Trump’s policies would boost the dollar. Still, the dollar is now significantly weaker than it was in the last two years of the Biden administration.

As for long-term long-term interest rates, they are roughly the same now as they were when Trump took office — although it’s notable that the Federal reserves rate cuts in 2025, which one would normally expect to reduce long rates, haven’t done so.

What is more telling than the absolute levels of the dollar and interest rates is the way they now react to changing conditions. Before Trump’s second coming, investors regarded U.S. investments in general and U.S. government debt in particular as safe havens. Whenever there was bad news, investors would pile into dollar assets, driving the dollar up and U.S. interest rates down — even when the bad news was coming from the United States, as it did during the 2008 financial crisis. That hasn’t happened at all under Trump. For example, the dollar fell and U.S. interest rates rose after Trump imposed his massive Liberation Day tariffs, indicating that markets didn’t consider the U.S. at all safe compared with investments elsewhere.

But aren’t stocks up under Trump? Yes, but they’re up almost everywhere, and less in the United States than in other major markets:

Source: Haver Analytics

These are stock indexes measured in local currency. Because the dollar has declined against most other currencies, in dollar terms foreign markets have strongly outperformed the U.S.

In short, the debasement trade signals that financial markets are losing faith in the United States. It’s not a full-blown panic, at least not yet, more of a gradual erosion. And it doesn’t amount to an imminent crisis. In particular, fears of debasement would have to get much worse to dethrone the dollar’s role as the world’s preeminent currency, a subject I will write about over the weekend.

But the debasement trade will hurt the United States, for example by raising the cost of refinancing U.S. debt. And it should be seen in the context of other forms of erosion, as the world signs trade agreements without America, as U.S. scientific preeminence is undermined by budget cuts and anti-science ideology, and more.

The diminishing band of Trump loyalists may believe that he is making America great again. But it’s not just liberals who realize that he’s doing the opposite. International investors are reaching the same conclusion.

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