Speaking with Time last week, President Trump floated multiple ways to handle federal debt, saying, "the growth is going to pay off the debt. Growth will pay it off." He also blasted the Federal Reserve for raising rates, claiming it was because "they have Trump derangement syndrome," and argued the U.S. "should be the lowest interest rate in the world."
Pressed on whether the Fed's concern was an overheated economy, he said it was inflation. Then came the flashpoint: "Certain levels of inflation will also pay off that debt very rapidly. Very rapidly." White House communications adviser Steven Cheung then interjected, "Can I just jump in? We're coming up for about an hour." The conversation shifted to midterm election politics.
The comment set off controversy and reportedly had some Bitcoin traders cheering. The Wall Street Journal noted it taps an old bond market worry: letting faster price increases reduce the real burden of what the government owes, at bondholders' expense. Fortune framed it as a scenario many economists warned about - tolerating higher inflation, by design or by drift, would erode the value of America's $40 trillion in obligations and make old debts cheaper to refinance.
Forbes pointed to a JPMorgan analysis from last year that entertained a similar path, where policymakers could weaken 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." The piece warning on this strategy said it is highly unlikely and "won't happen," adding the Treasury market could be damaged as nominal bondholders lose purchasing power and demand ever higher yields.
Mechanically, inflation does shrink fixed debts in real terms. On a hypothetical $40 trillion pile of nominal, fixed rate debt, a surprise 5 percent inflation rate for one year would cut its real value by about 5 percent, to roughly $38 trillion in today's dollars. Keep inflation at 5 percent annually for a decade, and a dollar's buying power falls to about 61 percent of where it started, so the old debt would be much smaller in real terms.
But for this to bite, interest costs on existing debt would need to stay flat or drop even as prices rise. Meanwhile, spending on programs like Social Security, Medicare, defense, and construction would climb with inflation. Revenues would only keep pace if wages rise alongside inflation and tax rates do not change. To fully force down borrowing costs, the Fed would likely have to step in with large Treasury purchases to suppress yields even as investors demand higher rates - a chain that is possible on paper but flagged as improbable.
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If inflation runs hot while real yields stay low or steady, inflation linked Treasurys stand out. Treasury Inflation Protected Securities and Series I Savings Bonds pay based on official U.S. inflation, so at 6 percent inflation they would at least match that pace. That is a sweet spot for inflation protected assets, even as the broader economy strains.
There is a harsh caveat. In a nightmare case, the government could massage the inflation data, trimming payouts on TIPS and I Bonds while also curbing entitlement costs. Retirees without inflation protection would see fixed annuity or pension checks buy less each year, and nest eggs would have to stretch to cover higher prices.
The bottom line: the piece rejects using inflation to erode the debt. It argues the responsible route is fiscal discipline - cutting spending and raising taxes - with the Fed maintaining a firm stance against inflation.
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