← All insights

When the Debt Comes Due: Currency Cycles and the Dollar

Reserve currencies rise and fade on a debt cycle. Britain went through it in the last century, and the US is showing the early signs. What history says about how big debts end, what is different this time, and why I measure wealth in more than dollars.

Every reserve currency in modern history has eventually been debased. Not overnight, and rarely in a single dramatic event, but steadily, as the government that issued it borrowed more than it could repay in real terms. The Dutch guilder, the British pound and, at several points, the US dollar itself all went through this. The question I keep coming back to is not whether the dollar loses purchasing power over the next decade (it almost certainly will, because that is what fiat currencies do) but how fast, and what that means for anyone holding savings in it.

This piece looks at how currency cycles have played out before, where the United States sits today, and the honest case for why a sudden collapse is less likely than a slow one.

How a currency cycle works

Ray Dalio’s framework in The Changing World Order is the clearest description I know. A rising power earns its currency’s reserve status through trade, military strength and deep capital markets. Foreigners hold its money and its bonds because they are safe and liquid. That demand lets the issuer borrow cheaply, so it borrows more. Over decades, the debt grows faster than the income that services it.

At that point the government has four options: cut spending, raise taxes, default, or let inflation and low interest rates shrink the debt’s real value. The first two are politically painful, and default is unthinkable for a country that borrows in its own currency. So the fourth option, debasement, is almost always the one chosen. It is the path of least resistance because it is gradual, it is hard to see, and it spreads the cost across everyone who holds the currency.

What history shows

Britain, the closest precedent. Sterling was the world’s money in the 19th century. Research by Barry Eichengreen and Marc Flandreau found that the dollar had already overtaken the pound in central bank reserves by the mid-1920s, far earlier than most people assume. What followed was a long, stepped decline:

  • 1931: Britain left the gold standard and the pound fell by about a quarter.
  • 1949: with war debts of roughly 250% of GDP, sterling was devalued from $4.03 to $2.80, a 30% cut.
  • 1967: another devaluation, from $2.80 to $2.40. Prime Minister Harold Wilson famously told the country that “the pound in your pocket” was worth no less than before. It was.

None of these was a collapse. Each was an adjustment forced by debt and by foreign holders losing patience.

The United States has done it too. In 1934 the Gold Reserve Act raised the official price of gold from $20.67 to $35 an ounce, cutting the dollar’s gold value by about 41% at a stroke. After the Second World War, federal debt held by the public was about 106% of GDP. It was brought down to roughly a quarter of GDP by the mid-1970s, and not mainly by repayment. From 1942 to 1951 the Federal Reserve capped long-term Treasury yields at 2.5% while inflation ran higher. Carmen Reinhart and Belen Sbrancia estimate that this kind of “financial repression” quietly liquidated 3–4% of GDP of debt a year in the US and UK. Savers paid for it.

Then, on August 15, 1971, President Nixon closed the gold window. Foreign governments held more dollars than the US had gold to honor them. Gold went from $35 an ounce to about $850 by early 1980.

Japan, a modern version. Japan’s debt has been above 200% of GDP for years. The Bank of Japan held long-term yields near zero to keep the government’s interest bill manageable. The cost showed up in the currency: the yen lost roughly a third of its value against the dollar between 2021 and 2024. That is what debasement looks like in a developed economy: no default, no crisis headline, just a steady loss of purchasing power for anyone holding the currency.

Where the US is now

The numbers have moved from abstract to pressing:

  • Debt: gross federal debt is about $40.25 trillion, of which $32.4 trillion is held by the public. It grew by $2.4 trillion in the past year alone.
  • Deficit: about $1.8 trillion in fiscal 2026, close to 6% of GDP, with no recession to blame.
  • Interest: net interest is now above $1 trillion a year. The CBO projects it will reach $2.1 trillion a year by 2036, about 5% of GDP.
  • Credit rating: in May 2025 Moody’s removed the last AAA rating the US held, citing debt and interest costs well above those of similarly rated countries.

The bills are coming due

This is the part I think gets too little attention. The average interest rate on the government’s marketable debt is about 3.5%. The 10-year Treasury yield is about 5.3%, its highest since 2007, and the Fed raised rates in September rather than cutting them.

About a third of marketable debt, roughly $10 trillion, matures within the next twelve months and has to be refinanced. Every time old, cheap debt rolls into new debt at today’s rates, the interest bill steps up. As a rule of thumb, every percentage point added to the average rate costs about $300 billion a year. Higher interest means bigger deficits, which means more borrowing, which means more debt to refinance next year.

That loop is what turns a debt problem into a currency problem. The more of the budget that goes to interest, the stronger the pressure on the Fed to hold rates down, and holding rates down when inflation is above target is exactly the 1940s playbook.

Who is lending to the US

Foreign holders are still large but less committed than they were:

  • Japan holds about $1.1 trillion and the UK about $940 billion.
  • China holds about $633 billion, roughly half its 2013 peak of about $1.3 trillion.
  • The dollar’s share of global central bank reserves was 56.7% in mid-2026, down from about 70% around 2000.
  • Central banks bought a record 289 tonnes of gold in the second quarter of 2026. Gold is around $4,200 an ounce, roughly double its price at the start of 2024.

Central banks do not buy gold because they expect the dollar to collapse next quarter. They buy it because it is the one reserve asset that no other government can freeze, devalue or default on.

The case against a dollar collapse

I think the debasement thesis is right in direction. But anyone positioning for a sudden dollar crash should take the other side seriously, because it has been right for a long time.

There is still no alternative. The dollar is on one side of 89% of all foreign exchange trades. The euro’s share of reserves is about 20.6% and the Chinese renminbi’s just 2.1%. The euro has no unified bond market or fiscal union behind it; the renminbi has capital controls. A reserve currency needs deep, open markets, and the US still has the deepest.

The dollar can rise in a crisis. After falling about 10% in 2025, the dollar index is up roughly 4% this year, from about 98 to 102. When fighting broke out with Iran in the spring, investors bought dollars, not euros. In a global panic, demand for dollars to settle debts and margin calls tends to push it up, not down.

Debt in your own currency does not default. The US cannot be forced into the kind of crisis that hits countries borrowing in someone else’s money. The adjustment comes through inflation and interest rates, which is slower and less dramatic.

Everyone is debasing. Currencies are priced against each other. Europe, Japan, the UK and China all carry heavy debts. The dollar can lose purchasing power while holding its value against other currencies, which is why I think the cleaner measure is the dollar against real assets, not against the euro.

Where I come out

My base case is not a crash. It is a long, grinding loss of purchasing power, closer to Britain from 1945 to 1980 than to Weimar Germany. Interest costs keep rising, the political system keeps choosing inflation over austerity, and real interest rates on cash and bonds are held below where they would otherwise be. Over ten years that can take a large share of a saver’s real wealth without a single headline that says “devaluation.”

The risk of something faster is real, though, and it would most likely start in the bond market: a failed auction, a spike in long yields, or pressure on the Fed to cap rates. That is why I watch Treasury auctions and the Fed more closely than the dollar index.

What that means for how I think about my own portfolio:

  1. Measure wealth in real terms. A portfolio that keeps pace with the S&P 500 in dollars can still lose ground in purchasing power. I track my results against inflation and against gold, not just against the index.
  2. Own assets whose supply cannot be expanded. Gold has done this job for centuries; bitcoin is the newer, more volatile version. Both are in my portfolio for this reason.
  3. Keep bond exposure short and inflation-linked. Long-dated Treasuries are the asset most directly exposed to a debasement strategy. I hold T-bills and short-term TIPS instead.
  4. Size for a slow scenario, hedge for a fast one. A small position betting on a weaker dollar is a hedge; betting the whole portfolio on a crash is a forecast, and forecasts about timing are where most investors lose money.

The lesson of every past cycle is the same: the currency rarely fails in one day, but over a lifetime it is the holders of the currency who pay for the debts.

This article is for information only and is not investment advice or a recommendation to buy or sell any security, currency or digital asset. It summarises public data and research as of early October 2026. The author holds bitcoin, ether, Chainlink, gold (GLD), short-term Treasury and TIPS funds, and a dollar-bearish ETF (UDN). Views are the author's own and do not represent any current or former employer.

Sources