Using inflation to erode the US public debt

► The temptation to inflate away some of US debt is similar to that at the end of WW II. ► Shorter debt maturities today reduce the temptation to inflate. ► The larger share of debt held today by foreigners increases it. ► US debt overhang may induce inflation of 5% for several years. ► This inflation could significantly reduce the debt ratio. Projections indicate the US Federal debt held by the public may exceed 70–100% of GDP within 10 years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6%. Inflation reduced this ratio by more than a third within a decade. Yet there are some important differences – shorter debt maturities today reduce the temptation to inflate, while the larger share of debt held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the US debt overhang may induce an increase in inflation of about 5% for several years that could significantly reduce the debt ratio.