If we have lower federal rates, that causes an inflation right?
Currently we have massive national debt. And we pay interest on that.
Why not try to maintain inflation just slightly above the interest rate of our debt, so that eventually our debt is irrelevant (the “buying power” of the 30ish trillion dollars would be reduced faster than the interest we pay on it).
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The issue is consumers, workers and companies don’t line high inflation. And there’s always the risk of inflation running out of control if you give too much slack. It’s not that easy to reach an exact number, hence why they have target ranges for inflation.
So we let inflation and economic growth slowly erode that debt rather than doing it quickly. Occasionally, inflation alone will be higher than interest. Such as during 2016-2019. Most of the time, inflation + GDP growth will outpace the interest on the debt.
But the main issue is to not add new debt to that. USA debt burden could have fallen by almost half from 2016-2019 when considering the previous points. But look where it is instead.
Mostly because the people that purchase the debt aren’t that ignorant. There have been situations where lenders are willing to accept negative real interest rates possibly in return for security/capital preservation. But that situation probably holds only for rather developed and stable countries.
Also remember that this punishes savers and might be something that politicians won’t want to risk.
That’s sort of the plan sometimes. However, many countries also run a deficit each year, adding to their total debt. If the national debt is 30 trillion, inflation is 2.5%, and interest rate is 2%, then about 0.5% of the debt is “inflated” away each year- about 150 billion.
However- the new deficit is likely more than 150 billion each year, so the real value of the national debt likely grows.
Also, central bank planning looks at a many year period, not just one year. Right now, interest rates are about 5.5%. This is higher than inflation, but the plan may be to have a couple years at ~5% to get inflation lower, then have a long period of lower rates and lower inflation.
Finally, different countries have different options. The US has a strong economy, and people have been willing to lend the US money a 1% when inflation is 2% a lot of the last two decades. However, a struggling country like Greece or Egypt may not have that option. Investors from those countries may prefer to invest in US dollar bonds and risk the US dollar inflation, instead of their home countries options.
There are several problems here, but a primary one is that the relative value of a dollar has no bearing on the ability of the US to make payments on its debt.
The US has sovereign currency, so it can never “run out” of dollars. It can always pay any dollar amount it needs to to pay any debt which is promised in the denomination of US currency.
So you’re trying to “solve” a non-existent – or at least severely misunderstood – problem by using inflation, which is generally a painful process for everyone in the economy, as high inflation harms consumers, workers, and businesses.
Can’t believe no one here has mentioned the obvious. The interest rate on US debt is tied to inflation. If inflation goes up, so does the interest rate.
That’s a government policy that you could choose, for a while. When consumers see inflation that high, they vote you out of office in favor of your opposition who claims they will cut inflation.
You see, **paying off the national debt isn’t a good thing**, in the way that paying off your personal debt is. If the US paid off its debt and didn’t need to borrow any more, that would be very bad. Many investors balance their portfolio with very safe US bonds, and this makes it financially reasonable for them to invest in companies and grow the economy.
> If we have lower federal rates, that causes an inflation right?
Not always. 2008-2020 frankly was characterized by near 0 fed rates and extremely low inflation. They were not able to hit the 2% inflation targets during this time.
Simply put, inflation is complicated and is affected by a lot of other factors. Like for example the price of oil. Low oil prices typically means lower inflation, while high oil prices typically leads to higher inflation.
> Why not try to maintain inflation just slightly above the interest rate of our debt, so that eventually our debt is irrelevant (the “buying power” of the 30ish trillion dollars would be reduced faster than the interest we pay on it).
In some sense we already do, but not for the reason of paying off the debt via inflation. The target of 2% inflation is meant to keep the economy growing. Too little and you risk starting a depression, too high and you wreck the economy. The US is able to lend at extremely low rates, lower than anyone else in the world. Because people are willing to buy it. It’s considered as safe as holding piles of cash, which earns you 0% interest. So as long as the US pays just above 0%, there will be takers.
Lending money to anyone involves an assessment of risk. The main question is “will I get my money back?” There’s also the question of “When I get my money back how much will it be worth?”
Interest rates take account of this risk which is why the U.S. government has been able to borrow on low rates because it has always paid back its debts on time. Hence why the debt ceiling crises pushed by Republicans for the past 25 years have been so risky.
Now if inflation rises then the terms on which the government borrows money will have to change because nobody is going to lend $10 (just an easy figure to work with) to the government if when they get it + interest back the value would be lower. The most extreme example of this is Germany in the 1930s when a million marks went from being a big fortune to not enough to buy a postage stamp in just a few years.
So in a period of high inflation the amount of interest promised has to go up which, in turn, will increase the overall debt which eventually needs to be paid and so on and so forth.
Inflation makes the debt feel smaller over time. If prices go up, wages go up, taxes paid go up and the repayment of the debt gets easier… just like a mortgage or car loan may feel easier to pay over time as wages increase.
Lower fed rates don’t cause inflation — we had over a decade of minimal inflation despite Fed rate around 0%. But raising rates is a key tool to reign in inflation by reducing demand.
Debt alone isn’t the problem – inflation builds on itself (hence the worry about have an inflationary spiral), reduces the value of savings, changes investment patterns, and causes people to lose confidence in the economy. So, inflation has to be kept in check – but doing can lead to job losses and even a recession.
Debt is a problem if and only it either causes investors to lose confidence in a nation’s ability to service that debt or it crowds out investment (and leads to interest rate increases). Neither of those are the case today – but the rate of growth of our debt is concerning and should be checked.
Ideally we would increase the debt in bad times and run surpluses during good times.
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