By David Enna, Tipswatch.com
In his his interview last week with Time magazine, President Trump mentioned, in an off-hand way, that inflation could be the solution to the nation’s $40 trillion national debt. This is something a president should NEVER say.
You can read the full text of the interview here.
Here are excerpts of Trump’s comments during a discussion of U.S. debt, the Federal Reserve, interest rates and inflation:
Trump: How do you ever pay off the debt? Now you can do it through other means. I know I’m the best in the world. The best—I don’t want to tell you what those means are, but you can pay off the debt through other means. …
Now, when you talk about the debt, the growth is going to pay off the debt. Growth will pay it off. Now, it’s pretty bad when they (the Federal Reserve) keep raising interest rates, and they only raise them because they have Trump derangement syndrome. … they would rather see the country do badly because I’m President. …
We should be the lowest interest rate with the most prime country — we should be the lowest interest rate in the world. …
Q: Well, they’re concerned that the economy is too hot.
Trump: No, they’re concerned for inflation.
Q. Well, yeah, exactly.
Trump: Okay, and frankly, this is hurting our country more than inflation is hurting our country. More than inflation. You know, inflation. Certain levels of inflation will also pay off that debt very rapidly. Very rapidly.
At this point, White House communications adviser Steven Cheung interrupted the interview, saying: “Can I just jump in? We’re coming up for about an hour.” That put an end to the inflation discussion, but the interview continued focused on midterm-election politics.
The problem
“Certain levels of inflation will also pay off that debt very rapidly. Very rapidly.“
It’s impossible to say exactly what Trump meant by this, but it is a dangerous statement, suggesting that the United States could “inflate away” $40 trillion in debt. It set off controversy, and had Bitcoin traders celebrating.
The president’s remarks touched on a long-running fear of some bond investors: that Washington might try to inflate away its debt by letting rising prices shrink the burden of what it owes, at bondholders’ expense.
It was an outcome that droves of economists warned was coming: higher inflation being tolerated—consciously or otherwise—to bring down the value of America’s $40 trillion national debt. …
In its simplest form, above-target inflation would erode the value of existing debt, allowing the government to repurchase or refinance at relatively cheaper rates.
Trump’s comments confirm a possible scenario suggested by analysts with JPMorgan last year.
“We could see a less straightforward path to reduce the U.S. government’s debt load,” the bank’s researchers wrote. “Policymakers could erode Fed independence and effectively inflate the debt away by driving a stronger nominal growth environment characterized by higher inflation and, over the near term at least, lower real interest rates.”
Can this strategy work?
First of all, maintaining the value of the U.S. dollar and its status as the world’s reserve currency should be a sacred goal for every U.S. president, every member of Congress and every governor of the Federal Reserve. We can’t be sure what Trump meant by his comment, but using “certain levels of inflation” to help erase the nation’s debt is a horrible idea.
How about cutting spending? Or raising taxes? Or obviously … both. If you want lower interest rates, and lower inflation, that is the correct path.
I asked ChatGPT if high inflation could be a viable solution to the nation’s debt:
The basic mechanism does work. Suppose the government has $40 trillion of nominal, fixed-rate debt outstanding.
If inflation unexpectedly runs at 5% for a year, the purchasing power of that $40 trillion falls by roughly 5%. In real terms, the debt would be worth about $38 trillion in today’s dollars.
After 10 years of 5% inflation, the purchasing power of a dollar would be only about 61% of what it was initially. So if the government could keep the interest rates on its existing debt fixed, inflation would substantially erode the real value of that debt.
One key point: To make the strategy work, the government would need to keep interest rates on its existing debt stable, or lower, despite the high level of inflation. And of course, government spending on Social Security, Medicare, defense spending, construction, etc., would all rise with inflation.
At the same time, government revenues would increase if wages also increased to match the rate of inflation and tax rates remained stable.
Would the Fed join in?
The U.S. Treasury market could be shattered by any strategy to use inflation to lower future debts. Investors in nominal Treasurys would see purchasing power continuously decline in value. They would demand higher and higher interest rates (much as we are seeing today, but higher.)
To get the full effect of this strategy, the Federal Reserve would have to implement a new wave of bond-buying quantitative easing, forcing interest rates lower. ChatGPT provided a nice summary of the entire strategy:
Higher inflation → investors demand higher yields → Fed buys Treasuries → Treasury yields suppressed → government continues borrowing relatively cheaply → inflation erodes the real value of existing debt.
I think this is highly unlikely. It won’t happen.
The attraction of TIPS and I Bonds
Because Treasury Inflation-Protected Securities and Series I Savings Bonds offer a return tied to official U.S. inflation, these investments could perform very well in a scenario of high inflation tied to lower or stable real yields.
If U.S. inflation rises to 6%, TIPS and I Bonds are going to at least match that rate of inflation. This is the “Goldilocks” scenario for inflation-protected investments. The rest of the U.S. economy would suffer, however.
A caveat: In a nightmare scenario, the U.S. government could begin manipulating inflation data (in other words, lying) to suppress payments for TIPS and I Bonds, and at the same time holding down entitlement spending.
For many retired people without inflation-protected investments, a higher inflation strategy could be devastating. Fixed-rate annuity or pension payments would steadily decline in purchasing power, and nest-egg savings would get strained by higher costs.
Conclusion
No. No. No. The United States cannot simply cave in and attempt to inflate away its debt. That is an amazingly irresponsible strategy. The real solution involves a commitment to fiscal responsibility — cutting spending and raising taxes. And the Federal Reserve needs to maintain its strong commitment to holding inflation in check.
What do you think? Post your comments below, but keep the conversation civil and on topic. Political diatribes will be deleted.
Also see:
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
“To get the full effect of this strategy, the Federal Reserve would have to implement a new wave of bond-buying quantitative easing, forcing interest rates lower.” I think you mean yield curve control. Check out the Treasury and Fed YCC actions during and after WW II.
This morning, I asked Claude how will we track real inflation adjusted rates in the unlikely event if Treasury was to stop issuing TIPS. Here is what I got in response. I found it informative, so I am sharing….best
https://claude.ai/share/a45e0e2e-dc1e-45aa-8e59-b566184cd87b
Thank you David, for sharing your knowledge. Last week, after 40 years of investing, I finally took the plunge and added TIPS to my portfolio. I am starting to feel much better about the bond side of my portfolio now.
The great thing about TIPS, when held to maturity, is that you know the exact real return you will receive. Just hold and ignore the ups and downs of market fluctuations. This makes TIPS an excellent addition to future pension and Social Security income.
Hi David
Something has been puzzling me for a while now. With all of the understandable anxiety about inflation, and the past year’s run up in 10-year nominal treasury yeilds, why has the 10-year breakeven inflation rate stayed relatively constant (around 2.3%, give or take)? This has created a great time to buy TIPS, but it is as if the market for nominal Treasuries is worried about inflation while the market for TIPS is not. Am I missing something?
I have been raising this issue for many months and pointed out in this article that fear of higher inflation is not the cause of today’s higher interest rates: https://tipswatch.com/2026/09/27/tremors-are-rippling-across-the-u-s-treasury-market/
There is a global bond rout going on right now with governments and corporations trying to pile on new levels of debt. Meanwhile, the bond market is in near revolt.
Thanks! I have to admit I had only skimmed that previous post. Now I’ve given it a more thorough read. Looks like the upward pressure on both nominal Treasuries and TIPS are the other borrowers competing for the same debt–basic supply and demand. Yes?
Just for grins I looked at AA-rated 30 year corporates on Schwab to see what is trading today. 14 of the top 15 issuances (ranked from highest yeild) are Amazon and Alphabet. That’s an example of what is setting the market, and I bet there’s a bigger risk premium built into the pricing that what would be normally inferred from a AA rating!
Thanks again.
Hi Mark, I will try to answer with the intent to have David correct and improve my understanding to your question that I have been trying to answer myself. At a high level, I think of of two factors contributing to the inflation: Economic growth, as one, which impacts real yields. The second has to do with inflation that we all know means increase in prices. Our economy is growing fast with all the borrowing etc. causing ( interest rates ) real rates to go up. Relatively speaking, the price increase related expectations, Fed watches is this very seriouly, are staying subdued….best
if Biden or Obama said the same, you’d praise them as geniuses.
Don’t be ridiculous. I am for finding ways to reduce today’s ridiculous budget deficits.
Obama was relatively good on the deficit (and that was helped by a post-2011 Republican Congress that blocked just about everything):
FY2009: $1.413 trillion deficit (George Bush’s budget)
FY2016: $585 billion deficit (Obama’s final year)
Deficit fell by about 59% in nominal dollars
Deficit fell from 9.8% to 3.1% of GDP
I myself just look at the actual numbers in the books and not whether any captain of the ship has an R or D after their name.
It appears that David’s bond rates reporting is just the numbers (current and historical) and their effects on yields for us savers and does not appear particularly politically biased.
The US government numbers today across the board aren’t looking too swell, especially for the national Treasury.
Of course inflating the debt to manageable levels is the end game – there is no other feasible path.
Option 1 (the correct and wise one): Some combination of increased taxes and lower spending to produce budget surpluses and reduce the debt. Congress is completely incapable of this. We could have a PhD dissertation on why congress is so incapable of doing what everyone knows needs to be done, but for now let’s just agree this is true. Let’s give this option a 1% chance of happening.
Option 2: Because the debt grows exponentially (through the miracle of compound interest) the debt service eventually exceeds revenues. The treasury pulls every rabbit out of a hat it can for years, but eventually there are no more accounting tricks to use. The only option left is a default on US debt. There is 0% of this happening – see option 3
Option 3: With the US about to default, and a global financial crisis the size of the great depression imminent (see option 2), even the hawks on the federal reserve hold there noses and act. They start massive quantitative easing buying up all the US treasury debt and adding it to the Fed’s balance sheet. This drives down interest rates and the US is able to refinance the debt at low and favorable rates and avoid default. In the process, the US currency is debased and the government has the additional advantage of paying off debt with cheap dollars. 99% chance this happens.
The above does not mean there won’t be a private-credit collapse induced recession along the way (which seems likely), but that will be a bump in the road compared to the generational inflation we are in store for unless congress can rein in spending and raise taxes.
Also, I see the treasury ending issuance of inflation protected securities. When inflation was low for decades, they were a way to save the government a few basis points on its debt cost. In the future they will become an obvious time bomb and the treasury will wisely stop issuing them.
I am attempting to position my retirement portfolio for the above scenario (and TIPS are an important part of that). As Bill Benign says, market corrections are a temporary loss of (paper) wealth. However, Inflation erodes the value of your retirement portfolio forever.
“…cutting spending and raising taxes”. Yes
Here is some evidence for the people apprehensive about using ID.me for Treasury Direct login.
https://www.wbur.org/onpoint/2026/09/22/is-your-drivers-license-on-the-dark-web
David, you have way too much confidence in the people running the system. Of course they are going to inflate! Trump just says it out loud, that’s the difference.
I agree; I think it’s inevitable, in fact it’s already happening – inflation running above target for five years and growing worse again.
The U.S. is not likely to default because we can print our own (reserve) currency. And the Fed has already shown with QE that it’s willing to artificially suppress interest rates across the yield curve. That wasn’t even the first time: see what the government did to tame the massive debt load after WWII.
Politicians don’t win on cutting spending or raising taxes, although now there are growing calls to undo all the tax cuts for the rich and corporations. However the greedy powers-that-be may well get that scuttled.
Bottom line, we’re heading for more QE to manage the skyrocketing debt and interest burden, esp with the current people in charge. Scott Bessent has already shown he’s OK with rate manipulation. And as recently as last November, Kevin Warsh called for “lower interest rates to support households and small and medium-size businesses.”
So going forward, look for more financial repression and fiscal dominance.
Just did id.me as well and no issues, my SSN was automatically linked to both my entity account and my personal account. I redeemed a $10,000 tranche of I Bonds purchased exactly five years ago for $12,480. I think I will be going on a five year cycle as an emergency fund, and will be taking advantage of Elon’s 6% APY offer (having once been a Twitter superuser, I got an invite without direct deposit or subscription requirements which is nice) while it lasts.
I guess it is all about the money. Or maybe your politics align. Personally, I would not touch deposit accounts that use a partner to provide the FDIC insurance. I bet the folks who had to deal with Synapse Financial’s failure would agree.
If you are not politically aligned with Elon, it would actually behoove you to claim the 6% interest as it is the highest FDIC insured account available. There is a risk of Elon retroactively welching on paying a month’s interest, but I think losing the money completely is too much of a bridge for even him to cross.
One thing you left out – this is exactly what happened in the 60s and 70s and how the post-WW2 debt (also over 100% of GDP) was paid down.
The key was that the debt was much more long-term debt than short-term debt, so the government was insulated from the spike in interest rates.
WW2 also featured the Fed forcing down interest rates to a below-inflation level in order to fund the war effort. Inflation was also contained by rationing and people feeling the need to sacrifice for a greater cause.
With so much of the US debt needing to get reissued everywhere, this strategy would never work.
Cutting spending, raising taxes, and inflation / currency devaluation are the tools to manage the debt. There’s quite a bit of overlap among them and smart legislators will look for combinations that won’t get a lot of attention.
For example, during the first Trump administration there were two revenue raising measures hidden among the broader tax cuts. The first was to change the required distribution of inherited IRAs from a time table based on life expectancy of the beneficiary (about 25 years for most) to a fixed 10 years. The second was to change the annual rise in tax brackets from CPI-U to chained CPI-U, which since chained CPI-U tends to run lower, has the effect of slowly forcing tax payers into higher brackets over time.
Until and unless we start voting for benefit cuts ( these would have to be to seniors to be meaningful) and higher taxes, this type of tweaking is the most rational path forward we can hope for.
The problem at base isn’t political, it’s generational – we boomers are horribly irresponsible and we vote accordingly. (I’m 62, so tail end boomer). Hence our politics, and politicians in both parties who afraid to tell the truth about the debt lest they lose office.
With our huge demographic advantage young people really, really need to vote in high numbers to save their country! If you are older, and you love your grandchildren, do not vote for anyone over 50.
ID Me report:
I made the conversion to ID Me. I took about one hour. Plus another 90 minutes yesterday that was a failed attempt. All of the difficulty was with taking the photos and uploading. I was not able to share my cell phone camera with ID Me, that was the failed attempt, so today I used my laptop which was successful. I had trouble photographing the ID. I started with my passport card but it could not capture the information. Then I used my passport. I had a lot of trouble with lighting and glare but finally got an acceptable photo processed. Then came the selfie. It went through some kind of 1960’s psychedelic journey but ultimately couldn’t capture a usable image. Then I was transferred to the video call method which was successful. So they have whatever biometrics they were able to capture. So be it.
At least there is only the one login with ID me now. It supersedes the old login.
I tried to sign up via Medicare 6 months ago and failed. Fortunately, they allow login.gov which is easy. I was successful signing up via Treasury Direct but not without hiccups along the way, most because their instructions are poor. Before helping my wife sign up, I watched a video walking through the process from the Diamond next egg youtube channel, https://www.youtube.com/watch?v=tuFJwOsBxQU . That made my wife’s sign up much easier.
I also viewed the excellent video on Diamond Nest Egg and was able to set up ID.me in less than 20 min.
The video was good but since they didn’t have any problems they didn’t explain the alternative methods that might be encountered for setting up the account. In my case I could not give ID Me access to my cell phone camera. I had to select I do not have a cell phone, on that screen. Then it switched to the laptop/computer method. My second problem was with the facial recognition. I tried multiple attempts but finally ID Me automatically transferred me to a live online agent who was able to complete the facial recognition remotely.
Did Trump say he was going to inflate the debt away? Of course not. He was responding to and correcting a frankly stupid question from a reporter. This is a non-story.
Your last post was similar. You wrote at length about “declining inflows of foreign investments in U.S. Treasuries” without once mentioning the elephant in the room – overall foreign investment in the US is sharply higher in 2025 and again in 2026.
After two years of fear mongering that Trump doesn’t know what he’s doing, where has he led the economy? I’ll quote you: “our current reality of a healthy U.S. economy, strong job market, surging borrowing needs, depressed foreign investments, and supply-shock energy prices that could begin spreading across the U.S. economy.”
Sounds pretty good to me! As noted before, you are incorrect that foreign investments are depressed -that’s only in the treasury market. I’m not happy about higher energy prices but it’s a good tradeoff to protect our national security.
Add to that a secure border, lower crime, lower poverty rate… What’s not to like?
David, I would much prefer you drop the politics and focus on basic questions about TIPS. Here’s one statement of your I agree with “inflation expectations have been remarkably stable over the last four years. I consider this pattern highly unusual.”
So do I! Why would that be?
I appreciate this contrary opinion. Thanks for posting it.
TIPS and I Bond investors need to monitor trends in inflation, U.S. debt, and government statistical reporting. And that is what I intend to do.
I wish to say something openly. Is free speech allowed anymore if it may be perceived as something about somebody at the top who is affecting everybody in the whole wide world?
Unfortunately politics are increasingly important to economics. Deficits, interest rates, wars, immigration, energy policy, regulatory policy, and so on all impact the economy, and by extension, TIPS.
Sometimes political actions have immediate consequences, but more often they have consequences which only become apparent in time.
David has already written about the basics of TIPS in his TIPS In-Depth. The only things to write about are reporting (upcoming auctions and results), peripheral matters (ID.me, I bonds), and things which may impact whether you want to buy now or not (bond market rout, etc, including this article). I don’t see this article as political so much as reporting on a political choice (Kevin Warsh says inflation is a choice) that could impact TIPS.
Here’s a link to the transcript of the Time interview with the President.
Read TIME’s ‘What Trump Has Built’ Interview Transcript
The President had already fully addressed the inflation issue earlier in the interview, in response to a question about affordability that — stupid or not — millions of people regardless of political affiliation are asking right now.
The comment in question from the President wasn’t really responding to anything from the interviewer. It was a tangent to a question about AI. He didn’t need to say it. We can all speculate as to why. But the President knows very well that his comments move markets.
David has chosen to be a niche expert on bonds linked to inflation. When politics has a direct impact on the TIPS market, he has no choice but to discuss it. If you could have just stated your case without the personal attack on David, it would’ve been much stronger. That’s something all our leaders could learn from as well.
best, dan
Hi Dan, I did not make a “personal attack on David.” Please don’t exaggerate things. I simply pointed out issues with his post, not him.
And if the markets moved based on Trump’s words, I guess I missed it. The break even inflation is steady. To me, that indicates that market participants saw Trump’s interview the same way I did, as a non-story.
Cheers, J
When we buy bonds, especially ibonds, the government makes money hand over fist due to capital gains taxes. When inflation is higher your real return onbibonds is even less. There has rarely been a fixed rate that enabled an ibond to deliver an after tax real return.
For most people in normal tax brackets, a real yield of 0.5% will cover future taxes.
A caveat: In a nightmare scenario, the U.S. government could begin manipulating inflation data (in other words, lying) to suppress payments for TIPS and I Bonds, and at the same time holding down entitlement spending.
Keep in mind that there are many, many things tied to the consumer price index. My pension for example. The contemplated big lie would impact far beyond TIPS and I Bonds, so would get plenty of pushback…
I wouldnt worry so much about anything rates going up up up long term especially when the CPI numbers have everybody scratching their head and speculating what is the reason this is happening what hasnt happened in decades and each one saying Japan, carry trade etc. whatever that can think of in justification vs. simply saying we don’t know. Short term, some “uncomfortable for existing bondholder” rate-blips are possible especially between a tendency to file bankruptcy and a tendency to capitalize on market “dislocations”, surely buying back past low coupon debt issues for peanuts on the dollar when my boss gave a time window to deploy cash in hand is much better than the alternate tendency which is bankruptcy which many were concerned about as a way to erase debt “poof”. Thats how I see it. A window has been created as a buying opportunity for long bonds for peanuts on the dollar and capitalism allows for making profits on others losses. But heh, what do I know? I am one among many lookie loos whats going on out there and coming up with my own reasons which can change at any time as more information becomes known to me and understood for what it is by me.
I had posted an article here years ago that *governments cannot effectively inflate-away the public debt*. I searched, but I cannot find that article.
Could this be it? https://www.nber.org/system/files/working_papers/w20339/w20339.pdf
That paper’s summary states that inflation combined with the financial repression (lower interest rates than inflation) would indeed reduce the value of the public debt significantly.
The Fed has shown repeated willingness to do so through its history. I would argue it has been doing so since WWII except in short bursts like the Volcker era. As reflected in the continuous rise in hard asset prices well above official CPI-U since then.
You mentioned the Federal Reserve needs to maintain its strong commitment to holding inflation in check. They have failed to achieve their 2% inflation target for OVER 5 years. They are in their 6th year of missing their 2% mandate and inflation has been higher than 2% the entire time – at times substantially higher and over DOUBLE their target. The FOMC actions do not seem to be in sync with their rhetoric. Do you really thing they have a STRONG commitment on inflation?
It’s true. For years, the Federal Reserve was willing to accommodate reckless government spending and borrowing. The official Fed response still is, “We have no input on fiscal policy.” Annual U.S. inflation ran at 2.3% or lower (sometimes much lower) for all years between 2008 and 2020, and I speculate that the Fed did not believe that inflation could be reignited, despite years of quantitative easing. Then came COVID, with massive fiscal stimulus ($900 billion in checks mailed out in three rounds) and interest rates held to near zero, combined with supply shocks from the war in Ukraine. The Fed quickly learned that inflation could be reignited, with a vengeance. The Fed learned a lesson even if Congress and presidents didn’t. But the next financial crisis will be the true test of the Fed’s resolve.
Hopefully we have two things to look forward to. 1. At Midterms, the Democrats win the majority in the house (good chance) and possibly the Senate (low chance). If this happens they put heat on Trump and limit the damage he can do. 2. Only two years of Trump left and he will be gone forever. Did anyone watch Face the Nation? Did you hear Senator Kelly talk about Trump and Hegseth? Brutal.
Kelly and Brennan – two totally impartial talking heads.
Glad that you brought this scary strategy to our attentrion. I wonder when will the majority of this nation learn that anything seemingly outragious is most likely in the works. Leaking through comments is a way to normalize and prepare the media and our minds for such a startegy. The least we can do, without getting angry, political or frustrated, for our own good, is to identify potential risks to our portfolios. For example, I bought 20 year bonds to secure some of my fixed income. I don’t care seeing more red on the value of the bonds since my focus is on the coupon. However, I do realixe that the buying power of this fixed income will go down if the inflation is uncontrolled. Not sure how the supossedly “independent” Fed will deal with such a startegy. As they say: Time will tell, while we monitor and tune our portfolio accordingly. Thanks again for bringiing it up. I, for one, will track it more closely….best
Strangely, so many here act as if the United States is not monetarily sovereign; I read specious claims of “we must cut spending,” or “we must raise taxes,” when neither is necessary to allocate for debt reduction or elimination. At the state level, where monetary sovereignty does not exist, then yes, the household budget approach must be employed, but at the national level? No.
Yes, that is the cause of the danger. States and cities balance their budgets, along with borrowing. The United States can spend spend spend (by borrowing). But someone has to lend the money. Or the Fed can create the money and then … poof! … you have Turkey’s 30% inflation. (Turkey has a sovereign currency, too.)
David, you state ” The United States cannot simply cave in and attempt to inflate away its debt. That is an amazingly irresponsible strategy. ”
Let us not forget that the US used financial repression after WWII to deal with the national debt (see below, from Co-Pilot). And so many things have happened with this current administration that have been amazingly irresponsible (like alienating our allies, among numerous other things), why not institute financial repression once again. This administration has been very creative (and defiant) and anything is possible. I could see them instituting a cut in interest rates on existing debt — those I-bonds (T-bonds) of yours? You are now getting paid half the interest owed when they are redeemed.
Anyhow, let’s not forget how things we never though would happen have happened. Don’t rule out anything.
How the U.S. Government Executed Financial Repression After WWII (from Co-Pilot)
After World War II, U.S. national debt stood at about 106% of GDP in 1946, and by 1974 it had fallen to 23% without default, major tax hikes, or austerity riots http://www.ecconomi.com. This was achieved through a combination of inflation, modest fiscal surpluses, and deliberate financial repression.
1. Policy framework
Financial repression meant keeping real interest rates on government debt negative or near zero so that the real value of debt eroded over time Wikipedia+1. The Federal Reserve and Treasury coordinated to ensure this through:
2. Role of inflation
Postwar inflation, though not as high as in the 1970s, was higher than expected and eroded the real value of fixed-dollar debt http://www.ecconomi.com. When nominal interest rates were below inflation, bondholders lost purchasing power, and the government’s debt burden declined automatically http://www.ecconomi.com+1.
3. Fiscal backdrop
For a few years after the war, the U.S. ran small budget surpluses, which helped reduce the debt ratio http://www.ecconomi.com. But the main driver was the interest rate–inflation gap: by keeping nominal yields low, the government saved billions in interest costs, reducing the need for new borrowing BlackRock.
4. Impact
From 1945 to 1980, real interest rates on U.S. government debt were below 1% for two‑thirds of the period Wikipedia. This “financial repression tax” effectively transferred wealth from savers to the government, lowering the debt-to-GDP ratio from over 100% to about 25% by the mid‑1970s http://www.ecconomi.com+1.
5. Why it worked
The combination of monetary policy (low rates), regulatory constraints (Regulation Q, bank holding rules), and inflation created a captive market for government debt and reduced its real cost. This allowed the U.S. to deleverage without default or large tax hikes http://www.ecconomi.com+2.
In short, the post‑WWII U.S. government used coordinated Fed–Treasury policy, regulatory caps, and inflation to keep government borrowing costs low, erode the real value of debt, and shrink the debt ratio over two decades.
Sounds like a great plan….move the debt burden to 350 million Americans instead of reversing the tax cuts on the wealthy elite that created the lion’s share of the deficit. Those people will of course just keep spending and spending more and more with their fully flush budgets and prop up GDP.
Nope..we live in a different world. All the slack has been taken out of the bottom 60% – 70%’s budget. Both spouses work, so there’s no one else to send to work to prop up households budgets…unless you’re advocating child labor? YEAH, that’s the secret sauce we need, great idea!!!
You intend this plan to work while AI is removing 100s of thousands or millions of jobs from the economy over the next few years?
I don’t want to turn this into even more of a partisan debate, but I can’t allow deliberately deceptive statements like this to stand unchallenged; that’s a major reason we have these financial problems in the first place. “tax cuts on the wealthy elite”… yes and no. Yes, the wealthy elites’ tax rates have generally been reduced. Not for everyone, and anyone with an income of $1m or more is likely still paying something like 35-40% overall plus state tax, which is not exactly low. But it is certainly true that the highest rates are much lower than they were 50 years ago, which obviously helps those with the highest incomes. However… that’s because people with high incomes are just about the only ones who pay any tax at all. About half of returns in the US show a net tax liability of zero or less. Less? Less, because many handout programmes are administered through the tax code for various reasons. That erosion of the tax base has created a large voting bloc that has no incentive to elect representatives who will control spending; they are sometimes beneficiaries of it and do not have to pay for it. Under the circumstances, it is no surprise that Congress cannot raise the political will to reduce spending; incentives work! Also, no, not all tax cuts have gone to the wealthy elites. There are millions of retirees like me living on very modest incomes (think federal poverty level) who now benefit from the 0% bracket and the increased standard deduction who previously would have owed much more tax. Naturally, that is also part of the aforementioned erosion of the tax base, with the attendant perverse incentives it creates.
No one likes paying taxes. I certainly don’t. But it is better for everyone to pay a small amount of tax and control spending very strictly so as to maintain fiscal balance than to have endless screaming matches over who exactly are “the rich” who (of course) should be taxed into oblivion to cover a bloated budget full of corporate pork and handouts to the majority who pay nothing. That polarised tax structure sets the stage for a polarised politics, and while the endless and pointless fight rages, so does endless spending. The results, well, that’s what we’re talking about right now, so they’re obvious enough. Drop the class warfare rhetoric, accept that everyone including you is going to have to pay some tax, and limit spending to revenues for the next 30 years. It might even become a permanent habit!
This is a problem of behavioral economics and has to be recognised as such. It is not a matter of ideology, and allowing ideologues to frame the debate as such is a primary reason the problem exists at all.
In the spirit of Fred not wanting to allow deliberately deceptive statements to go unchallenged, I post to clarify some of Fred’s statements. He likely did not intend to deceive, but reporting rarely gets into the details. Hopefully Fred will see this post.
It is often said that the bottom 50% of filers pay no tax. People assume all 50% pay no tax, but that is not true, it is in the aggregate.
In 2023 there were 153 million returns filed. 76.5 million (half) were in the bottom 50% of income (about $53,000, fyi). 49 million returns paid no tax. So, right away, note that only 32% of returns paid no income tax. Further, only 34 million of the returns that paid no income tax were in the lower 50% by income.
So to be clear, only 45% of those in the bottom 50% paid no federal income taxes. 55% of those in the bottom 50% did indeed pay federal income taxes.
Fred also said anyone with $1 million or more is likely paying 35-40% or more in federal income taxes. In fact, the highest effective rate paid by any group was 26.2%. (The top 1%, but don’t assume all are billionaires; this is aggregated data with the same flaws as the 50% statement). Here is the source for this: https://taxfoundation.org/data/all/federal/who-pays-federal-income-taxes-tax-year-2023/ (The 34 million figure came from a different, but credible, source).
A different source disaggregated the top 1% for 2020. Returns with > $1million AGI paid a 25% tax rate. Those in the $2-10 million AGI range paid 28%, and those >$10 million paid 25%. https://www.pewresearch.org/short-reads/2023/04/18/who-pays-and-doesnt-pay-federal-income-taxes-in-the-us/
Some are surely paying 35-40%. In the aggregate though, high income earners are far from that effective rate.
Yes, some tax breaks, like the 0% capital gains/dividend rate do fall to lower income taxpayers. It is a bit like the CEO getting a 50% raise while the workers get 2% raises. And, as a practical matter, few lower income taxpayers likely benefit to any degree from this. Having done taxes for a few years as a volunteer, I do not recall anyone realizing capital gains/dividends other than the high income earners who came in because, free.
A study on the IRS website used sampled returns over a number of years to estimate a capital gains distribution. The study used sampling, is lengthy and confusing! Best I can tell, the bottom 50% had 1% of all the capital gains reported over a 5 year period.
Taxes and the underlying truth have far more complexities than are reported. We need far more granular data on taxes than is available. Some of that is likely intentional – we make tax policy without anyone having the necessary detail. It is wise to question the stats you see reported.
I see the President again yesterday announced that if his team wins the midterms and retains majority every taxpaying citizen is going to get a $5000.00 check from Uncle Sam… that’s an estimated $1.2 Trillion dollar government give away expenditure that will surely both lower inflation and the USA national debt, no?
Perhaps his plans for our government will work like magic.
We must wait and see in order to find out I suppose.
No, we just trust our divine leader like Jaylat said in an earlier comment. Nope, bribing people for votes is not bribery, nor corruption. Nor is spending US tax dollars on campaign ads.
Hyper-inflation worked so well in Weimar Germany. It allowed the government to pay off substantial domestic debts, particularly war debts, in devalued marks. This significantly reduced the real value of these debts relative to government revenues.
I mean, what could possibly go wrong?
I agree 100% with the thoughtful Dave Enna perspective and diagnosis and proposed remedy. Another prescient view of this was proposed by Richard Sylla -Alexander Hamilton Bio Author on Consuela mack’s WealthTrack show (now off air) S22- Episode 40 on 6/26/2026 on PBS. It is here: https://wealthtrack.com/americas-financial-revolution/ and on YouTube. I think R Sylla may be Dave’s Great Grandfather. His investment Tip at the end of the show was to build a TIPs ladder of bonds.
Sure, the US needs a combination of reduced spending and/or higher taxes to eliminate deficits, as the correct solution. That’s a big election issue, right (NOT)? If the deficit is less than nominal GDP you might have a chance to eventually grow your way out of the debt. In a divisive zero-sum game of US politics, the odds that the two parties together, or one (which doesn’t get reversed by a change in power), gets voters to vote for huge benefits cuts or large tax increases is somewhere around zero. Unless/until perhaps forced to in a financial crisis. Does anybody think our politics will allow fixing the deficit voluntarily? I don’t think so.
Global and US Economic history (see post WWII yield curve control (YCC) and financial repression, among other examples) shows time and again policy makers choose YCC with negative real yields. In that case it’s an open question whether TIPS and I bonds continue to be sold will be interesting to see (I might guess maybe not). https://www.chicagofed.org/publications/economic-perspectives/2021/2. Also see Japan, where households largely paid the price.
So with negative real yields (YCC/financial repression) savers and lenders pay down the debt disproportionately (vs taxpayers). Inflation is great for borrowers (US govt!). A lot of people without financial assets may not even notice, other than hating inflation (most people don’t notice the real yields of their bond funds are underwater for 15 years). You could argue this goes in the direction of evening up some wealth inequality (hurting stockholders and bond holders, and boomer retirees, too took lots of wealth transfers from younger people; people with no savings and real wage growth, not as much). Surely it will be painful for all.
BTW, in a global debt crisis (current direction, IMO), the US dollar may be the least worst currency/debt, and help retain the relative strength of the US dollar against many other currencies (but not against gold, if you want to consider that a currency, which I do).
But in the end my understanding is you still have to get rid of deficits to get out of the debt spiral. My guess is all this will be forced by the bond market first, politics after. It gets tough to finance new deficit spending while bond holders are getting debased, and the Fed as buyer of govt debt as last resort doesn’t solve the problems.
At the risk of being run out of town! Punish the speaker for saying “out loud” how does anyone think how he has been able to not pay taxes! Get more loans on higher priced (so to speak) inflated assets and then pull the money (taxfree) out through multiple entities! No false statements to financial institutions…No way in this society! No false implications/questions to/by the noted Senator from Missouri!
Do not worry, this is only transitory. The inflation reduction act from the last administration will take care of all this. Vote them again and you will see.
I see the current President again yesterday announced that if his team wins the midterms and retains majority every taxpayer is going to get a $5000.00 check from Uncle Sam… that estimated $1.2 Trillion dollar government give away expenditure will surely lower inflation (and the debt) no?
My bills are way down thanks to the heat pumps, heat pump water heater, and EV I bought during the previous administration. I have no idea how much a gallon of gas costs and I don’t really care how much a gallon of gas costs!
I think this notion of inflating the debt away will gain traction in the coming years, because neither party has the political courage to cut spending or raise taxes. In fact, they both seem to be doubling-down on the idea of giveaways with some of their latest proposals, like Trump’s $5,000 “dividend” checks, or free healthcare, college, etc. with the rise of Democratic Socialist candidates. Plus, the dollar’s reserve currency status has been steadily declining, now down to about 56% of it’s share of global foreign exchange from 65% about 20 years ago. People that assume it will forever be the world’s reserve currency may have forgot that the British pound had about a 100-130 year run as the reserve currency before Bretton Woods ended that, so nothing is forever. Plus, Trump’s policy aims are to weaken the dollar, and even though it is currently outperforming other currencies, it is still a policy goal with reshoring, etc. that may be adopted by the Dems should they regain power since they lost the “blue wall” with all the offshoring debates. There is also this notion of the government just cutting the Treasury coupons to 1%, and swapping out older, higher yielding bonds with new, lower yielding bonds, effectively defaulting on their debt (a theory discussed by Jeffrey Gundlach of DoubleLine). Even though that would destroy our international credit rating, it is not out of the realm of possibility, and definitely a fear now with the potential of a lower credit rating and central banks stocking up on gold. Whatever happens, it isn’t going to be easy, and that is the problem now – generations since the Silent one have basically not had to endure hard times for any extended period, and thus have de-risked their children’s lives, and put those types of status-quo candidates into positions of power that aren’t willing to make the necessary sacrifices any more. It’s the bailout culture now.
Thank you for bringing some much-needed attention to the manipulation of inflation numbers and interest rates.
I would not at all be surprised if the Treasury decided to stop offering any inflation adjusted bonds like Canada already did.
A caveat: In a nightmare scenario, the U.S. government could begin manipulating inflation data (in other words, lying) to suppress payments for TIPS and I Bonds, and at the same time holding down entitlement spending.
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This doesn’t need to happen, as the average person doesn’t understand there are multiple figures to discuss, and the conversation can simply point to one number without folks realizing what truly affects them. Even the newsrooms fall into this trap as they’re trying to distill a complex topic into a few talking points so the average person can attempt to digest it. Unfortunately, those details matter. Them being dropped from the conversation is actively relied on in certain cases.
* PCEcore is the preferred “inflation number” to talk about.
* PCE takes into account consumer substitution that CPI doesn’t do well.
* Yet look at PPI numbers (~2% higher) where CPI/PCE will initially lag by 1-3 months, and the full effect takes 6-7 months to play out.
This currently is the case with mortgage rates vs. housing prices. Everyone talks about the rising mortgage rates, but fewer talk about the problem of 960 ft2 starter homes in my neighborhood being $1.2M. Few talk about the price, because it’s drowned out by the conversation about rates, as there are too many folks who absolutely don’t want the price to go down.
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Direct attempts to suppress payments will be recognized by the fixed income market, and they’ll gang up rather quickly. Though again, it’s unlikely when we can just point to the squirrel when the tiger is the bigger problem.
The real example I should’ve brought up are unemployment numbers.
* Unemployment rate (U-3) is 4.2%, which is 7.1M people.
* Yet you have 5.8 million discouraged (not looked in the last 4 weeks) so they’re not actively counted. These would be counted as part of U-4, but we only focus on U-3. So we’re really at 12.9M people.
* Then you have 4.5M people (part of U-6) who are part-time or underemployed for economic reasons. They cannot find the job they want, so they take anything to pay bills. Again, U-6 numbers aren’t the metric that gets focused. So we’re at 17.4M people.
If 7.1M is 4.2% (U-3), but if you add in figures from the U-4 and U-6, you’re at 17.4M (10.3%), which isn’t an actively tracked total.
We don’t talk about unemployed + discouraged + underemployed.
We only talk about U-3.
It is indeed complex, and very much like jello. Push here, it changes over there. Even those in the industry rarely understand all the interactions.
Employment and unemployment numbers are notoriously soft. There are so many measures and none are accurate, certainly not on first release. Remember the data on unfilled jobs? It was simply online jobs posting, many of which were not for real jobs but were posted by employers since there were no incremental costs to posting and maybe a unicorn employee will respond. Then the jobs sites changed their fee models and the unfilled jobs declined a lot.
Way back I was at a party and a group was enraged that a “rich” neighbor sold their house for cheap, because they could, and it would drag down values. Me: use it to contest your property taxes and get them lowered, saving you money. They looked at me like I had horns growing out of my head. Yes, they were using their home equity as ATMs.
Rarely discussed is that govt deficit spending is very significant to nominal economic growth. Gore somebody’s ox, or increase govt spending even more, creating nominal growth but funding needs? I have not really thought that scenario through, but more spending is what we have been doing, despite DOGE. Any thoughts?
the U.S. government could begin manipulating inflation data (in other words, lying). . .
Like, bro, where have you been since 1971 ?
Isn’t this what happened after World War II. Debt to GDP was very high. The economic growth rate and inflation were high at that time. The FED suppressed interest rates through yield curve control and real interest rates were negative. By the 1970s, the federal debt was under control. Bond holders held “certificates of confiscation.” I think the public was largely unaware of this at the time. Unfortunately, there is basically only 3 ways to control this amount of debt. Default on the debt (very bad), raise taxes and cut spending (best but not likely given politics) or inflate the debt away(bad but likely). I hold a sizable amount of I bonds and TIPS but I am concerned that the government will mess with the CPI and make these securities less useful. It is probably a good idea to diversify into some foreign stocks, commodities and precious metals. I am concerned that the government’s strategy will result in the loss of our reserve currency status.
The exchange rates need to be controlled (also) by Mr. T…foreign countries have had since WW2 the favorable rate exchange to grow their economies…and after the last 2 years Mr. T thinks that has all of a sudden been wrong, but for the wrong reason! If there is economic growth (with inflation), war is less likely!
Greetings Mr. Enna:
Happily took on the “virtual editor role” and wanted to make you aware of a small typo in the third paragraph: Excepts should be excerpts.
Here are excepts (excerpts) of Trump’s comments during a discussion of U.S. debt, the Federal Reserve, interest rates and inflation:
Thank you for everything you do to keep well informed.
With gratitude + utmost respect,
-Mo
Thank you, Mo. My readers are my editors. It is fixed!
Redefining or using different measures of inflation may reduce “reported” inflation.
The latest PCE report used a revised calculation method that did just that. MUFG described this:
“The main reason for the softer PCE deflator report were bigger than expected revisions from the Bureau of Economic Analysis after they updated their methodology for three components: portfolio management and advice, software and accessories, and legal services. It was broadly expected that the revisions would lower the annual rate of change for the core PCE deflator by roughly 10-20bps but the actual revisions lowered it by 36bps. Of which portfolio management and advice account for 30bps of the downward revisions. The Fed will now wait to see the upcoming NFP report on Friday and US CPI report for September on 14th October as they continue to assess when to hike rates further.”
PCE excludes food and energy and is an “exclusion index”. Fed Chairman Warsh has suggested using “mean trimmed” PCE. The Dallas and Cleveland Fed. Res. Banks report such measures. The Dallas Fed describes its trimmed mean PCE as:
“In any given month, the rate of inflation in a price index like the Consumer Price Index or Personal Consumption Expenditures (PCE) can be thought of as a weighted average, or mean, of the rates of change in the prices of all the goods and services that make up the index. Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are—like a skater’s best and worst marks—thrown out, or “trimmed.” The inflation rate is then calculated as a weighted average of the remaining components.
For the series presented here, 24 percent of the weight from the lower tail and 31 percent of the weight in the upper tail are trimmed. Those proportions have been chosen, based on historical data, to give the best fit between the trimmed mean inflation rate and proxies for the true core PCE inflation rate. The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation.”
For example, in August 2026, the Dallas Fed reported:
“The Trimmed Mean PCE inflation rate over the 12 months ending in August was 2.2 percent. According to the BEA, the overall PCE inflation rate was 3.4 percent on a 12-month basis, and the inflation rate for PCE excluding food and energy was 3.0 percent on a 12-month basis.”
PCE and trimmed mean PCE would play into Federal Reserve decisions on policy, but have no effect on TIPS, I Bonds, and the Social Security COLA. Those are based on non-seasonally adjusted CPI-U and CPI-W. However, as you surmise, we could see “tweaks” in CPI that would also reduce reported inflation. It is something to watch.
Of course the solution is lower spending, higher taxes, and growth, The problem is no one has tried it since the late 1990s. Our debt is the responsibility of both major parties ignoring difficult and unpopular choices and then realizing there were no immediate catastrophic results in just ignoring the problem, worsening the problem, and kicking the can down the road. If you look at this deficit chart and where the up and down slopes aes, I think many people will be surprised though.
I always say, referring to both parties: “The easiest decisions in Washington are to 1) cut taxes and 2) increase spending.” The other sides of those equations take guts.
People with guts don’t get elected, or at least not reelected.
Raising taxes & cutting spending could trigger a recession, couldn’t it? How could anyone get elected advocating for that?
You just know his other way he wouldn’t mention was default and bankruptcy
I know I’m the best in the world. The best—I don’t want to tell you what those means are, but you can pay off the debt through other means. … Did he intentionally forget to mention declaring bankruptcy, too? Or is that why Steven Chueng reached for the off button so he wouldn’t have a chance to suggest that option?
I still have some faith in the Federal Reserve, but I’m struggling to find any R or D candidates to vote for who will give serious thought to deficit and debt reduction. Fortunately in my local elections, where it’s less of an issue, there are a few who want to be fiscally responsible.
I this case, at least a divided government would put brakes on both parties’ excesses.
Stiffing the lender has been a big part of Trump’s plan throughout his business career. Since many of us own government debt, we should consider our reaction to a lame duck with a bad history.
You’re probably right again David but I had to laugh when you wrote this is something “a President should NEVER SAY” because it’s something they always do anyway. At least give him credit for being honest.
This is why I called it the Pandora’s box. Once you open it, it stays open. Presidents are supposed to at least pretend they will defend the US dollar!
You said in the Would the Fed Join in section, “I think this is highly unlikely. It won’t happen.”
Could you explain your thinking on why you think this? I personally am not so quick to dismiss irrational acts these days, so I’m interested in your thoughts. Thanks for this post today, this has been on my mind all week ever since I saw that brief quip he made. I suspect the bond trading community is all over this as well and thus the drift higher all week in yields.
With its current membership, I think the Fed is committed to holding inflation in check, even if it never quite gets to the 2.0% goal. If we entered a disastrous recession, it would be a lot more accommodative. The Fed learned lessons and was humbled by the inflationary surge after COVID. The danger is that the president would stack the Fed with “yes people” if he gets a chance.
You are absolutely correct. But the electorate will never go for it.
One party says it wants to cut the budget and never does. The other says it never will but wants to spend more….except when they don’t have the house.
What I think is that thoughtful people should get out and vote. A huge fraction of voters don’t vote midterm elections. A large fraction of eligible citizens don’t register to vote. At the end of the day… we get the government we deserve, don’t we? If we ourselves are collectively careless, lazy, uninformed, easily manipulated, and apathetic, well… that’s the harvest we shall reap.
On the personal side, I have I-Bonds, TIPS out 1, 2, 3 years, a ton of T-Bills, HYSA, very few general equities (but they are globally diversified, about like a “VT” allocation), 5% energy oil & gas stocks, 3% PDBC commodity ETF, 8% physical gold stored securely offsite.
I really like your portfolio allocation. I’ve been drifting in your general direction (towards more and more TBills, iBonds/TIPS, and commodities) for months now. I was using BCI but I’ll take a look at PDBC.
PDBC has no dreaded K-1 tax form!!!
Beware that some HYSA are not *actually* FDIC insured. FDIC insurance insures bank collapse, not FinTech collapse. So, if one of the banks holding your HYSA funds collapses, yes, FDIC covers that. If the FinTech wrapper of multiple such banks collapses => no insurance.