The Weakening Dollar and the Private Equity Borrowing Playbook

Introduction

Chronic fiscal deficits, expansive monetary policy, and an evolving geopolitical balance are eroding the dollar’s structural advantage.

The weakening of the dollar is not a flash event—it’s a process. As that process unfolds, the calculus for institutional capital allocation changes. For Private Equity (PE) investors, the implications are profound: a depreciating currency alters the real value of leverage, reshapes valuation frameworks, and amplifies the importance of productive, cash-flowing assets.

This report examines how the ongoing revaluation of the dollar affects PE strategy—why borrowing in paper and building in substance has become not just a hedge, but a core alpha driver.

From Bretton Woods to Fiat: How the Dollar Lost Its Anchor

When the Bretton Woods system was established in 1944, it effectively crowned the U.S. dollar as the global reserve currency—redeemable in gold and backed by America’s industrial might. That discipline unraveled with the Nixon Shock of 1971, when convertibility into gold was suspended. The U.S. dollar transitioned from being as good as gold to being backed by policy discretion alone.

For decades, the dollar’s dominance persisted through inertia—oil trade settled in dollars, and U.S. Treasurys remained the deepest capital market on Earth. But that system depends on confidence. Today, with debt levels above 120% of GDP and recurring fiscal shortfalls, that confidence is quietly weakening.

The consequences are visible: fiat currencies hold purchasing power only relative to each other, not against real assets. For PE investors, that distinction matters. Portfolio returns measured in nominal dollars may appear stable, even as their real value erodes.

The chart that follows 

highlights that while the dollar indices have remained flat for nearly two decades, gold prices have multiplied severalfold. The signal is clear—real assets compound, fiat instruments dilute.

The Mechanics of Monetary Expansion: Why Liquidity Is Not Wealth

Since the early 1980s, each U.S. downturn has been met with more aggressive monetary intervention. The Federal Reserve’s balance sheet has expanded exponentially, and with every cycle, the magnitude of stimulus needed to stabilize markets has grown.

Following the 2008 Global Financial Crisis, the Fed introduced large-scale quantitative easing (QE). By 2020, in response to the COVID-19 shock, it increased the M2 money supply by over 25% in a single year—the sharpest monetary expansion in modern history.

That vertical break in M2 marks the end of “policy normalization.” Monetary aggregates that once tracked GDP now outpace it by multiples. For PE firms, this means capital is abundant in nominal terms but scarce in real purchasing power.

The volatility of post-2020 M2 growth shows that stimulus has ceased to be cyclical—it’s structural. Liquidity now expands faster than productivity, compressing real yields and inflating nominal asset values.

Private Equity’s natural advantage lies here: it invests in long-duration, productive assets funded with fixed or hedged liabilities. When money supply expands faster than real output, that liability loses real weight over time. Inflation does the work of deleveraging for you.

Real M2 and the Illusion of Growth

Once adjusted for inflation, the story changes. Real M2 growth has been flat since 2021, showing that stimulus inflated prices but not real wealth. The nominal surge in liquidity failed to translate into lasting purchasing power.

For PE investors, this underscores a critical truth: value creation must come from operational improvement, not monetary tailwinds. Public markets mark to sentiment; private markets mark to fundamentals. The differential between the two is widening—and disciplined allocators can exploit it.

Gold’s Repricing: The Market’s Judgment on Fiat

Gold’s surge past $4,000/oz in 2025 represents not a speculative mania but a repricing of trust in the monetary system.

Historically, parabolic moves in gold align with regime shifts: the inflationary 1970s, post-2008 QE, and now the era of fiscal dominance. The asset is repricing against currency dilution, not against growth.

For PE funds, this is not a call to buy bullion. It is a signal that scarcity—not liquidity—is what markets now reward. Private assets that generate hard cash flows from real activity behave like “productive gold.”

The futures curve projects an 18% cumulative gain over five years, implying markets expect sustained real rate suppression. Inflation-adjusted debt becomes the cheapest financing in history when liabilities lose value faster than enterprise cash flows accrue.

Gold’s forward structure mirrors what PE does best: use long-term illiquidity to capture value created by macro drift.

The Structural Return of Monetary Scarcity

Central banks have been quietly re-monetizing gold at record levels unseen since the 1960s.

The U.S. still holds roughly 8,000 tons—about 78% of reserves—but the closing gap from China, India, and Turkey signals a broader reallocation of monetary trust. For institutional investors, this means the reference point for “risk-free” is changing.

Gold is not just a hedge—it’s an indicator of policy credibility. When it rises alongside equities, it suggests investors are hedging against monetary instability rather than deflation. In that regime, PE becomes one of the few asset classes that can consistently transform nominal liquidity into real productive value.

The Changing World Order: What It Means for PE Allocators

Ray Dalio’s Changing World Order framework describes cyclical transitions in global reserve currencies every 75–100 years. By his metrics, the U.S. sits in the late phase: high debt, political polarization, and rising external competition.

Across Eurasia, de-dollarization is advancing. Trade between Russia, India, and China increasingly settles in rubles, rupees, and yuan, while payment systems like CIPS and SPFS bypass SWIFT entirely. The effect is structural: declining demand for dollar liquidity at the margin.

For global PE investors, this has tangible implications:

• Cross-border exits and valuations will be influenced by regional currency blocs.

• Local financing partners may prefer non-dollar debt tranches.

• The dollar’s weakening purchasing power will raise the relative value of emerging-market hard assets.

In short, the world is fragmenting into multiple monetary centers—and private capital, by design, moves more fluidly across them than public markets can.

Debt as a Tool in a Weak-Dollar Regime

For sophisticated investors, a depreciating currency turns leverage into a strategic asset. When debt is fixed in nominal dollars while the underlying assets appreciate with inflation, the borrower wins by design.

In a fiat system with persistent 3%–4% inflation, a 10-year fixed loan loses roughly a third of its real value. If that debt funds an enterprise generating 8–10% nominal growth, the spread compounds wealth automatically.

For PE, this is not theory—it’s the model.

• Leverage finances control over productive assets.

• Inflation erodes the liability while enterprise value inflates.

• Debt service remains fixed in nominal terms, while distributions rise in real ones.

In essence, inflation becomes the silent co-GP. The key discipline is ensuring debt funds yield-generating operations—not consumption or mark-to-market speculation.

Illiquidity as a Feature, Not a Flaw

Private Equity thrives on long-term horizons precisely because it is insulated from the short-term volatility that punishes public markets. Illiquidity is often portrayed as a cost; in practice, it is a protective barrier.

When the underlying currency loses value over time, the ability to not be marked to market is an advantage. Long-term capital allows assets to compound through inflationary cycles while liabilities decay in real terms.

In a weakening-dollar environment, time becomes the hedge. The patient allocator benefits twice: first through operational value creation, and second through the monetary erosion of fixed-rate obligations.

Illiquidity converts inflation from an adversary into an ally.

Geopolitics, De-Risking, and the Safe-Haven Premium

Currency systems mirror power systems. As the geopolitical order fractures—trade wars, sanctions, and regional conflicts—the notion of “risk-free” assets collapses. U.S. Treasurys, once the unquestioned benchmark, now carry implicit policy risk.

Gold’s ascent to $4,000/oz is therefore not a speculative bubble but a repricing of counterparty risk. Similarly, PE assets—particularly infrastructure, energy, and logistics—offer embedded sovereignty. They are physical, cash-generating, and locally anchored, insulating them from global liquidity swings.

For institutional allocators, the safe-haven of the 2020s is not a bond—it’s a portfolio of productive hard assets financed with depreciating fiat.

Conclusion: Borrow in Paper, Build in Substance

The U.S. dollar remains dominant but no longer unchallenged. Its slow erosion marks a transition, not a collapse. For Private Equity investors, this is not a warning—it’s an opening.

The arithmetic is simple:

• The liability is denominated in a currency that loses value each year.

• The asset is real, productive, and appreciating.

• Time compounds the gap in your favor.

This is the structural logic behind “borrowing in paper, building in substance.” Inflation becomes the invisible tailwind for disciplined, levered investors.

As the global system adjusts to a multipolar monetary order, those who understand the mechanics of fiat debasement won’t merely protect capital—they’ll compound it.

The weakening dollar is not a threat to Private Equity. It is its next great catalyst.

Sources & References

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Board of Governors of the Federal Reserve System (US), M2 [WM2NS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WM2NS, October 8, 2025.

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https://parents.simonandschuster.com/9781982160272 

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