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Apr 14, 2022 - Economy & Business

Inflation is whittling down the national debt

Felix Salmon
Real debt in Jan 2021 dollars; Data: FRED; Chart: Kavya Beheraj/Axios

America has inflated away $2.7 trillion of its national debt in the 14 months since President Biden took office.

Why it matters: If you want to find a silver lining in the latest inflation data, look to that fact that despite all his new spending programs, Biden has presided over a national debt that has remained astonishingly flat in real terms.

By the numbers: When Biden took office, the national debt stood at $27.8 trillion, as measured in January 2021 dollars. The national debt today, measured in the same dollars, is $27.7 trillion — a decline of $79 billion.

Be smart: Inflation doesn't help when it comes to the deficit. The prices of the things the government pays for — pensions, medical care, cruise missiles — are going up just as fast as anything else.

  • When it comes to the stock of accumulated debt, however — the fruit of decades of deficits from prior administrations — inflation can help to bring it down quite quickly.
  • How it works: Let's say that the government issued a one-year Treasury bill for $1,000 a year ago. It can now roll over that debt by borrowing $1,000 today. The real value of the debt has fallen to $921 if you're measuring in the dollars of a year ago.

The big picture: This time last year, Treasury could borrow one-year money at 0% interest. That corresponded to a very attractive real rate of about -4%.

  • The government now has to pay interest of about 1.75% at the same maturity, but the real rate — after accounting for inflation — is an even more attractive -7%. In fact, if you take the one-year Treasury yield and subtract the rate of inflation, the result has never been this low.
  • Economic theory says nominal interest rates are likely to rise, and will eventually converge with the rate of inflation. But that hasn't happened yet, and real interest rates have been negative for most of the past 20 years.

The bottom line: Inflation is bad for savers — which means it's good for borrowers. And there's no bigger borrower than the U.S. government.

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