The Federal Reserve is caught between letting the economy deflate into recession or keeping inflation high to reduce the real burden of debt. Higher inflation helps borrowers like the U.S. government pay back what they owe in cheaper dollars, but raises questions about whether the government can keep financing its deficits if inflation stays elevated.
The Fed doesn't really have a choice at this point based on mistakes made from the past. They either have to find a way to pay off all the debt or just continue to inflate. So there's deflate the economy, create recession, or continue to inflate that debt away.
100%. You're exactly right. Inflation, it benefits borrowers because the future value of that money is higher and you're paying your debt off with higher inflation dollars. And so it deflates the value of that debt over time. And you think about who's the largest borrower? It's the US government. They have an incentive to keep inflation a little higher for longer. I think that the big question mark is, can they keep financing the deficits and selling bonds to the market?
