shades fills you in

soaring inflation has an interesting side effect: it helps shrink u.s. debt (compared to gdp). bloomberg says we’re on track for the biggest debt ratio decrease in decades. that’s great for the gvt and taxpayers, but is rough for the bond market

how does that happen? the st. louis fed explains that most u.s. debt is in the form of fixed-rate bonds. when inflation goes up, the bonds are worth less, bc the money the gvt pays back is worth less

but npr explains that inflation’s debt busting power is only temporary. that’s bc inflation -> higher interest rates ->more expensive borrowing for the gvt

the financial times agrees: inflation only reduces debt in the long term if it’s unexpected and doesn’t lead to higher interest rates. right now, everyone is well-aware of inflation, and interest rates are climbing

and the wsj warns that the drop in debt ratios is a one-off fluke. gvts need to commit to holding down prices. otherwise, long-term inflation will make borrowing a lot harder in the future

along those lines, the nyt reported in october that the u.s. national debt just hit $31t for the first time in history. both the white house and cbo predict the debt-to-gdp ratio will likely shrink a bit in 2023, but will start growing again in 2024

but the econ think tank bruegel has a rosier prediction. yes, rising interest rates and lower gdp will increase debt-to-gdp ratios, but only by a small amount. and that will be more than offset by high inflation

substacker noah smith argues that a period of 5-7% inflation could actually be a good thing! looking back at history, inflation was a big reason the u.s. was able to retire a bunch of its ww2 debt

but not all types of gvt debt can be inflated away, warns the financial times. there are some gvt bonds where the gvt has to pay more if there’s inflation. countries with a lot of inflation-linked bonds -- like the uk -- have had to pay out a lot more bc of inflation

so was this the fed’s plan all along? did it let inflation happen to ease the gvt’s debt? unlikely, says the american institute for economic research. the main reason the fed didn’t raise rates to tame inflation is that it didn’t want to hurt the economy. this whole debt thing was a side effect