When TIME asked President Trump about the national debt surpassing $40 trillion, he directed much of his blame toward the Federal Reserve.
Economic growth, the president insisted, would pay off the federal debt, but not with the Fed cooling the economy. The Fed’s raising interest rates, Trump argued, “is hurting our country more than inflation is hurting our country… Certain levels of inflation will also pay off that debt very rapidly.”
That hints at a coherent, if alarming, policy view: inflation is a tolerable price, maybe even a useful tool, for a government as deeply in debt as the United States. No wonder Trump said he loved the inflation in June.
There’s an economic grain of truth to what the president says, of course. Most Treasury debt promises fixed dollar payments. If prices rise faster than anyone expected when the bond was issued and its rate set, those dollars are worth less, and the burden of the debt shrinks in real terms. The government gains at its creditors’ expense. With real output unchanged, a higher price level, driven by looser monetary policy, also raises nominal GDP, making the debt-to-GDP burden more manageable.
There’s a clear historical precedent for this relief being meaningful. The US reduced its debt-to-GDP ratio by 85 percent from 1946 to 1974, and some economists have estimated that about a fifth of that decline is attributable to a couple of bouts of inflation delivering negative returns to bond-holders. The 2021–22 inflation surge likewise shrank debt-to-GDP somewhat.
If the federal government persuaded the Federal Reserve to inflate away some of our accumulated debt, then existing bondholders really could take a hit. The average remaining maturity on outstanding debt is nearly six years, so much of it would be exposed to another surprise bout of inflation.
The problem arises with new borrowing. Investors expecting higher inflation generally demand higher nominal yields. As the Treasury refinances maturing debt and borrows to cover fresh deficits, it would therefore be paying higher interest rates. Sustained inflation priced into borrowing costs offers no windfall in reducing the debt burden. Any benefit Trump was hoping for would be temporary.
If lenders believed the president could, in fact, force the Fed to pursue this policy, it would be priced into higher yields now. About a third of publicly held marketable debt is due to mature within a year, so those higher interest costs would come quickly. Treasury Inflation-Protected Securities comprise 7 percent of marketable debt and would adjust automatically too as that higher inflation actually materialized.
More fundamentally, the country’s fiscal problem extends far beyond bonds already issued. The US managed to dig its way out of record World War II debt through a combination of economic growth, primary surpluses, and inflation. This time, under the current policy, there will be no primary surpluses. Debt is projected to keep soaring, driven overwhelmingly by entitlement programs that fuel more and more borrowing.
Unfortunately for the president, these entitlement programs can’t be inflated away. Social Security benefits rise automatically through cost-of-living adjustments, so higher inflation means larger nominal benefits. Medicare pays real healthcare bills—doctors, nurses, equipment, and medicines—whose costs rise with inflation too. You can’t inflate away a promised hip replacement.
Yes, higher inflation would mean larger nominal tax revenue as well, but income tax brackets are likewise indexed to inflation, so the net benefit to the public finances would be limited, only helping to service old obligations before they’re refinanced. But with new spending continuing to rise, inflation offers no dependable escape from the underlying mismatch between public commitments and the taxes politicians are willing to collect.
Inflation is also deeply unpopular, and for good reason.
Engineering inflation would undermine confidence in the Fed, complicate investment and contracting, and risk higher premiums on future borrowing. Even if the government successfully inflated away some of the existing debt burden, it would do so by delivering lower real returns for the owners of federal debt—pension funds, retirees, and savers generally. All the while, unexpected bouts of inflation arbitrarily redistribute from wage-earners to firms during the months where workers’ wages lag behind prices, which was a major driver of voter discontent with the post-COVID inflation.
It’s therefore baffling to hear the president extol inflation in this way. He was elected in large part because President Biden presided over the highest inflation since 1981. Trump promised that a change in administration would bring prices down. Instead, inflation is up and once again outpacing wages, in large part because of the war in Iran, but also because monetary policy has remained too loose to bring inflation back to target.
To talk up inflation’s fiscal benefits while voters are this angry about prices, weeks before the midterms, is bizarre as a matter of politics and economics. Inflation can make creditors absorb part of yesterday’s borrowing, but it cannot spare politicians the decisions needed to finance promises going forward.