Market Overview Analysis by Michael Ashton covering: US Dollar Index Futures. Read Michael Ashton's latest article on Investing.com
There is a popular meme that the government has an incentive to inflate, because the same debt is worth less in real terms at a higher price level. Ifis high enough, then the government can make the debt go away. Inflation is, after all, a tax; doesn’t it then follow that if the government increases that tax quite a bit then it can get itself out of hock in real terms?
The average interest rate on US debt is 3.21%, about double what it was in early 2022 and the highest it has been since 2009 . Having a lot of debt mature every few years is a great way to increase the sensitivity of your interest expense, and therefore deficit, to short-term inflation and interest rate fluctuations. That’s not feature, it’s a bug!
. So, in year 0 it is $1T; in year 1 it is 1.04T, which is the same amount in real terms. Note that this implies that discretionary spending is decreasing rapidly. In year 0, the Treasury would pay interest of about $876 billion . We finally make some headway on the debt! Because so much of it is short-term, though, it takes a good 6-7 years before we see a lot of progress on the real debt because we’re just rolling it over at higher rates too quickly.
Unless you can spike inflation to, say, 100% for a year or two and then put it right back down to the prior level, you really needinflation because you need the principal amount of the outstanding debt to fall in real terms more than the interest payments are accumulating. So far, we can find no realistic way to inflate our way out of debt, other than moving toward hyperinflation . And even with these simulations, I am making a very unrealistic assumption about how the deficit evolves when the interest costs of the debt blow up.
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