How does inflation affect national debt

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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).

In: Economics

11 Answers

Anonymous 0 Comments

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.

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