Debasement—the deliberate reduction in the value of a currency relative to real goods and services to ease the burden of debt—has been a practice as old as money itself. In 1360, Europe’s first prominent monetary theorist, Nicolas Oresme, vehemently opposed this practice in his Treatise on Money. He condemned medieval rulers for debasing currency, declaring: “Can any words be too strong to express how unjust, how detestable it is, especially in a prince, to reduce the weight without altering the mark?”
Fast forward 650 years, and modern investors, alarmed by the US government’s soaring debt, huge fiscal deficits, and the Federal Reserve’s interest rate cuts, are raising the same concerns. Like Oresme, they fear that the US administration might attempt to stabilise finances by eroding the real value of the dollar—creating a push for the perfect “debasement trade” to shield portfolios from an impending dollar devaluation.
Indeed, investors’ concerns are well-founded. A recent study by George Hall, a veteran Fed economist, and Nobel laureate Thomas Sargent highlights the growing divergence of US policy from historical norms. In the 19th and 20th centuries, large public spending spikes were typically followed by tax hikes to stabilise or pay down resulting debts. Since 2000, however, substantial debts from the dotcom crash, the Great Financial Crisis, and the Covid pandemic have been met with persistent fiscal deficits. Hall and Sargent draw a chilling parallel to pre-Revolutionary France, where excessive borrowing to fund state spending led to the collapse of the assignat currency, which lost 99.5% of its value over seven years.
For centuries, the simplest hedge against debasement has been to flee to a foreign currency with stronger backing. During the medieval period, this meant switching from local, debased coins to solid gold or silver minted by more reliable states like Venice. Today, for many, this means investing in gold or digital currencies like bitcoin—options that reject traditional, trust-based finance in favour of intrinsic value or digital integrity. But for most investors, the equivalent of medieval Venetian ducats are the currencies of nations with stronger public finances than the US.
A number of such nations exist. The Australian and New Zealand dollars are supported by sovereigns with public debt levels under half those of the US (as of 2024, according to the Bank for International Settlements). The currencies of Norway, Sweden, and Denmark are even more appealing, with government debt at 45%, 34%, and 30% of GDP respectively. Switzerland, with a mere 26% public debt-to-GDP ratio, stands out as the safest option.
However, the currency markets are already reacting to these fiscal strengths. The Australian and New Zealand dollars are up 3% and 7% respectively against the US dollar, while the Nordic currencies have appreciated by 14-18%. The Swiss franc, in particular, has surged by 14%, with government bond yields for shorter maturities turning negative as demand for the currency spikes. Investors seeking refuge in the currencies of fiscal prudence must acknowledge that much of this potential is already priced in.
Yet, there is a deeper, often overlooked issue with fleeing to fiscally stable currencies. In modern economies, most of the money supply comes not from central banks but from commercial banks and private capital markets. This means that the assets backing currencies are not just government debt but also loans to households and businesses. As such, it is not only public debt but private sector leverage that determines the true risk of debasement.
When assessed through this lens, the currencies of nations with the strongest public finances may not look as safe as they appear. Australia and New Zealand have low public debt, but their private sector debts are significant—160% and 175% of GDP respectively. In the Nordic countries, private credit ranges from 217% to 240% of GDP. Switzerland’s private sector debt is the highest of all, at nearly 270%. Thus, these countries, despite their low government debt, also face substantial risks from excessive private borrowing.
Historically, private sector debt has been a more reliable indicator of impending debasement than government borrowing. A recent study by the Bank for International Settlements (BIS) showed that the Debt Service Ratio (DSR)—a measure of a country’s private sector’s debt repayments relative to income—is a strong predictor of financial crises. In early 2025, the DSRs for Australia (19%), Sweden (22%), and Norway (26%) were already flashing red, signalling trouble ahead for their currencies.
However, one country stands apart from this trend: the United States. With private sector leverage at just 142%—a 23-year low—and a DSR of only 14.5%, the US remains in a far more stable position. This suggests that, despite all the concerns about the dollar, it may still be the safest bet against debasement.
Perhaps, then, the best “debasement trade” is to do nothing at all—hold onto the US dollar.