US Inflates Debt Away After Historic Pandemic Binge; Comes At Risk

A high debt-to-GDP level and over $30 trillion in public debt have become a massive problem and a political hot potato in Washington.

It appears the Biden administration and the Federal Reserve have chosen the route to inflate some of the debt away racked up during the virus pandemic.

High inflation rates (currently like what we see today) can reduce the real value of debt, allowing governments to, in effect, pay off debts using money worth less than when they originally borrowed it.

Bloomberg pointed out that “one of its most surprising direct offshoots” of rising inflation has “largely gone unnoticed: U.S. government debt is shrinking rapidly.”

But it’s not in dollar terms. It’s measured against the inflated size of the economy.

There’s a challenging trade-off through inflating the debt away, which is the government’s gain at the lender’s expense. This means bondholders will be repaid by the government much less than they initially put up.

So while inflation makes old debt more manageable for the government to service, it also makes new debt more expensive; and inflating the debt away comes with other consequences.

If investors, businesses, and households, expect higher inflation, it could lead to a doom loop of soaring inflation expectations.

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