US President Trump: Inflation Can Quickly Pay Off Debt
US President Donald Trump stated in an interview with Time that a certain level of inflation could quickly pay off national debt. The interview was published on Thursday, and he did not specify what that inflation level would be or whether he wants the Federal Reserve to tolerate higher inflation.
Time noted that during his approximately five years in office, national debt increased by about $11 trillion. Trump initially attributed the increase to Joe Biden, then to the Federal Reserve, and mentioned other ways to pay off the debt but was unwilling to elaborate. He also stated that paying off debt relies on growth, claiming, "we have never seen growth like this," and later reiterated that the path to paying off debt is through growth.
He was more explicit about his views on interest rates: he believes that the Federal Reserve's interest rate hikes harm the US more than inflation does. In the same interview, he attributed "the largest inflation in history" to Biden, claiming he inherited the highest inflation ever, and stated that the only thing left to suppress is gasoline prices.
Data from the US Bureau of Labor Statistics shows that for the 12 months ending in August, the overall Consumer Price Index rose by 3.4%, with core inflation rising by 2.4%. The Federal Reserve's long-term target is 2%. As of June 17, the public debt balance was approximately $39.28 trillion, with reports placing the total at around $40 trillion; he did not report this total himself.
The Congressional Budget Office estimates that the deficit for fiscal year 2026 will be about $2 trillion, equivalent to 6.2% of GDP; publicly held debt is about $32.3 trillion, roughly equal to 100% of GDP; interest payments have reached a record $1.1 trillion, exceeding defense spending and nearing Medicare. Treasury Secretary Scott Bessent previously stated that if spending is controlled and annual growth reaches 3%, the country could grow out of $40 trillion in debt.
This is a statement about nominal debt being diluted by prices, not an immediate issuance of debt or buyback. The sellers are funds holding fixed-rate US Treasuries, while the buyers are risk assets betting on nominal growth and higher prices. If inflation rises and interest rates do not follow, the real burden of existing debt decreases, but the Treasury must still pay new rates when rolling over debt. Beneficiaries include floating income and physical assets, while long-term bondholders, savers relying on fixed payments, and those still anchoring expectations at 2% face pressure.
He did not address the other side: inflation raises refinancing costs. J.P. Morgan wrote about a path last year that weakens the Federal Reserve's independence, using higher nominal growth and temporarily lower real rates to inflate away debt.
Source: Public Information
ABAB AI Insight
Trump's first term focused on low inflation and low interest rates as achievements, while in his second term, he first imposed tariffs and then pushed for Federal Reserve rate cuts. Treasury Secretary Scott Bessent maintains that "there is no revenue problem, it is a spending problem," and in a speech in Dallas, he emphasized a path of 3% annual growth. This interview reframes inflation from a metric to be suppressed into a tool for debt repayment, aligning with earlier judgments from Kent Smetters of the Wharton School at the University of Pennsylvania: default does not have to mean stopping payments, but could mean inflation not returning to 2% for a long time, with the tax base elevated by nominal values.
The path is not for the Treasury to announce an inflation target. Money flows from tariffs, visa revenues, and tax cuts into nominal GDP, while the debt stock continues to roll over at fixed coupon rates. The motivation is that interest has reached $1.1 trillion, surpassing defense spending, and the growth narrative alone cannot cover refinancing. Not clarifying the level keeps the tool verbal, avoiding a direct change to the Federal Reserve's target.
In contrast, after World War II, the US used financial repression to reduce war debt relative to GDP: interest rate caps, mandatory bond allocations for banks, and inflation above coupon rates. In the 1970s, inflation rose, and interest rates followed, with the real burden not decreasing at the pace politicians desired. Currently, we are in an expansion phase with a deficit still at 6.2%, not the post-war phase of primary surpluses combined with repression.
Structurally, this represents a transfer of pricing power. The real value of nominal debt is determined by prices and refinancing rates, not by repayment declarations. The president framing "a certain level of inflation" as a means to pay off debt effectively hands over the real returns to the Treasury. The condition for this mechanism to work is that new debt rates rise slower than inflation; once the long end is priced first, the actual principal saved by the Treasury will be offset by interest payments.
ABAB News · Cognitive Law
- Inflation does not pay off principal, it only dilutes creditors.
- When the growth narrative is insufficient, prices are used as a tool.
- Old debt fears inflation, new debt fears rising interest rates.