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

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.

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