The Indicator from Planet Money - The gamble of trying to inflate away debt

Episode Date: October 20, 2026

The United States national debt is running at more than $40 trillion dollars. It’s a potential crisis in the making, but President Donald Trump suggested it can all be solved just by inflating the debt away. Today, we dig into the nitty gritty on how and when inflating the national debt could work.Fact checking by Sierra Juarez.Your Next Listen –Is the federal debt REALLY that bad?–Over 2,000 episodes in our archive on the NPR AppConnect with The Indicator from Planet Money–The Indicator newsletter — a weekly roundup of news, ideas and staff picks. –Instagram, TikTok and YouTube –Find the Planet Money book –Find the Planet Money game, Sell Me A Sasquatch, and other merch at the NPR Shop!Support public media by subscribing to NPR+ and enjoy perks for over 25 podcasts like this one. This show’s perks include sponsor-free listening. Learn more at plus.npr.org.See pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

NPR. This is the indicator from Planet Money. I'm Waylon Wong. And I'm Patty Hirsch. And today we're here to talk about the national debt. A debt that right now is running at more than $40 trillion. That's more than $100,000 per person in the U.S. It's a potential crisis in the making.

But don't worry because I have a plan. A plan so cunning you could put a tail on it and call it a weasel. Whoa. Oh. My plan is to erode the national debt with inflation. You are sounding positively presidential, Patty. I'll take it. Because this is, of course, an idea espoused recently by none other than President Trump. In an interview with Time magazine, he suggested we might be able to inflate our way out of debt.

So on today's show, inflation is a tool of debt reduction, a cunning plan, or a lot of hot air. That's coming up after the break. The idea of using inflation to erode a nation's debt is not a new one. There's an old history of countries paying their debts that way, if paying is the right word to use it. This is Ricardo Rice. He's a professor of economics at the London School of Economics in the UK. He's also the co-author of a paper entitled, Inflating Away the Public Debt. So he's the guy.

He is the man. And he says that this concept is pretty simple on the face of it. When I promise to pay you $1,000, say, you're from now, those $1,000 are going to be worth a lot less if inflation turns out to be really, really high over the next 12 months. So you see how this works? If I lend Ricardo a grand today and he promises to repay it in a year, he still has to pay me $1,000. But if inflation gets really high,

if the price of everything rises sharply over the year, then that $1,000 is worth a lot less than it was when he borrowed it. Since a debt is but a promise to pay you a certain amount in dollars, the higher's inflation, the less those dollars will be worth by the time I pay you back. The dollars are worth less. The real value of the money has fallen, which means the debt has been eroded. And this can and does happen, quite recently, in fact. If you look at the recent history of the United States, we did a very big inflating of the debt in

2021 and 22. That's during COVID he's talking about in case you forgot. Inflation between 21 and 23 was approximately. 20% cumulative over this year. And just prior to then, interest rights on government debt were super low, less than 2% on 10-year treasuries. So after that two-year bout of inflation, the government's real obligation was, okay, back of the envelope math here, 16% lower. It was real. Inflation really did erode the debt. So we did inflate a lot of the debt in 2021 and 22, and that helped pay for a lot

of the extra spending of COVID. Well, a cunning plan indeed. except that it wasn't planned. Inflating away the debt, it requires unexpected inflation. So you don't just inflate that. You have to surprise inflate the debt. Aha, surprise. Yes, in that case, in fact, in almost every case when inflation has successfully eroded a government's debt,

nobody saw inflation coming. That's why treasury rates were so low in 2021. If I expect that there will be a lot of inflation, then when I lend to you the government, I ask for a higher interest rate to compensate me for that. Higher rates, meaning the government pays more to borrow, which essentially cancels out any erosion of debt that inflation might have caused. If we expect a lot of inflation, then there's no inflating away the debt because the interest rate already compensated for that inflation

and the amount in dollars that's already grown by that amount. So when the president comes out and says, and let me quote him here, inflation, certain levels of inflation, will also pay off that debt very rapidly. He's kind of applying kryptonite to inflation's debt eroding powers. Because now there's no surprise. Investors are forewarned. And guess what? If they think Mr. Trump's serious, they're going to want those higher rates and be quick about it.

Ricardo says this can have a very dangerous domino effect on the financial system. So as soon as a government admits that it wants to inflate away the debt, that is its goal, what one often sees, and this was very common the 1980s in Latin America, was that expected inflation starts rising even faster, the interest rates the government is asked for in order to sell its government bonds, escalates very quickly, and you're unable to inflate any of that way. And what are you left with only? Galloping inflation that ends up destroying your economy.

Galloping inflation? 80s Latin American economies? A destroyed economy? No, thank you. But what about if an administration decided to enact this cunning plan without telling everyone what it was going to do. Is there a way, possibly, that it could find a way to make inflation work in its favor? Can governments do that? They can sometimes. For instance, through regulating pension funds,

banks and others, enforcing them to hold a lot of government bonds in order to push up the demand for those bonds and therefore push down their interest rate. This is what economists call financial repression, forcing savers to accept a return lower than they would like, while inflation does its work on the debt. This happened in the aftermath of the Second World War. Western nations racked up big debts, and the U.S. steered investors into buying government debt and capped interest rates on those treasuries. This comes with distortions in the allocation of credit in the economy, of course.

Comes with people not wanting to save, knowing that they're going to be repressed, and also has pretty negative consequences. Yeah, people stop saving. They stop lending the government money and look elsewhere to invest, which means, yep, The government has to hike rates. Ricardo says it's really difficult to manufacture the right conditions to inflate away your debt. First, your debt has to be the right kind of debt. For example, it can't be indexed to inflation, like a lot of the treasury debt that the government has sold lately.

It also needs to be long-term debt because that's where you get the greatest erosion. And the inflation needs to be more than just a little blip. It's not enough to just have a burst of inflation. You need to have the burst of inflation to persist somewhat. It has to be unexpected, and it has to persist at the same time as we have debt that's even longer than that persistence. Good Lord. That is a lot of ducks. You've got to get all in a row there. Well, I asked Ricardo, does it look like anything like this could happen here and now? Even as the President of the States or someone else in the government might say,

wouldn't it be great if we inflated the debt, we didn't see the investor saying, oh my God, this is going to happen. And therefore, let me raise the interest rates to prevent it for being inflated away. Now, to be clear, bond yields aren't exactly low, just over 5% on the 10-year Treasury. But they aren't soaring either. In fact, they've actually settled a little as we speak, even as inflation seems to have picked up a bit. Ricardo says that's a mark of investor confidence in Fed Chair Kevin Warsh's commitment to getting inflation down to 2%. There still seems to be quite a lot of trust in the Federal Reserve, in inflation targeting, and in keeping inflation stable over the next five and seven years.

So I think there's right now the bondholders do continue to trust the Fed and that inflation will be low, even if there's a temptation to deviate from that commitment. Well, that is a relief. I don't know about you, Whalen, but I didn't fancy galloping inflation anyway. I don't know, Patty. I feel like the horse has already bolted on that one. And have you seen the price of hay? Well, I don't know about the price of hay,

but we did reach out to the White House to ask if the president's words on inflation, the debt are reflective of a planned economic strategy? They sent us a statement. It did not answer the question. Instead, it said, quote, the president's supply-side economic agenda continues to address inflation, the markets, and everyday Americans can count on more relief ahead. So here's me closing the stable door. No, too late. Too late. This episode was produced by Corey Bridges with engineering by Sina Lafredo. It was fact-checked by Sierra Hades. Kaking Cannon is our editor and the indicator is a production of NPR. Thank you.