Does the Present Cooling of Inflation Mean That There is no National Debt Problem?

No.  The cooling inflation worsens the problem of the National Debt.  Financially, the federal government has been eating the marshmallow in its figurative version of the Stanford Marshmallow Experiment.

The federal government has two options to deal with the debt.  The first, is to reduce the value of its currency so that the debt in today’s dollars is worthless.  If it takes 1000 dollars to buy a pack of gum, then the trillions in debt could theoretically be paid off by selling a few billion packs of gum instead of trillions of packs of gum.  This is complicated by the fact that the U.S.’s creditors have always known about this inflation issue, so they made the government start to issue TIPS, which are inflation protected treasury notes that the government has to pay more to pay off if inflation rises. But not all of the National Debt is TIPS, so inflation still helps the government to devalue some of its debt.

The second and better option that the federal government has to address the debt is to generate a budget surplus and pay down the debt.  I’ve always been in favor of this option.

However, the federal government is selecting a third option which is to use financial controls to limit inflation while running a huge budget deficit.  This strategy might feel good, but it is the financial equivalent of throwing buckets of gasoline on your burning house and pretending that it is helping.  This third option is the one that the federal government has been choosing regularly for the past several decades, and it is why we have such a huge National Debt problem.

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