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Financial repression

Perhaps the only positive implication of having high ifnflation is that it deflates the debt vs gdp. If the growth of debt net new issuance is lower than inflation growth, inflation helps reducing the debt. The problem of having persistent high inflation, is that it destroys purchasing power, and central banks hike rates to avoid that. And when they hike, the interest expense goes up as well, neutralizing to some extent the good effects of deflating the debt. That is what’s happening now, and higher for longer, the new #fed motto, it’s good to abate inflation but it destroys the financial repression effect against the debt. And if debt keeps growing, at some point interest expense will be so high that the US will need to issue debt to pay for rates, and the Japanization of the US will be complete. At this point the US may need inflation higher than 3% for some time to reduce debt to gdp ratio.


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