America’s Invisible Debt Strategy

How Inflation Quietly Erases Trillions

By late 2025, the United States government is projected to owe around 38 trillion dollars. The annual interest bill alone is approaching 1 trillion dollars – already larger than spending on Medicare and comparable with the entire defence budget. This is no longer simply a “debt problem” waiting to be solved through better policy choices. At current levels and trajectories, it is a mathematical problem with no plausible solution via the traditional tools of taxation, spending cuts or even optimistic economic growth.

Yet there is no formal plan for default, nor any credible political blueprint to pay this down honestly over time. Instead, a different, quieter strategy is already in motion – one with deep historical precedent. The United States is not preparing to repay its debt in full. It is preparing to reduce its real value, in effect erasing a large share of it through inflation and financial repression.

This article explores how that process works, why conventional solutions are no longer viable, how similar strategies were used after the Second World War, and why the current circumstances make this round both riskier and more far-reaching. It is, in essence, the story of a vast, largely invisible wealth transfer: from savers and creditors to a heavily indebted sovereign.

1. The Scale and Structure of the Problem

1.1 A debt burden that grows faster than the economy

As of December 2025, America’s gross national debt is expected to stand at around 38.4 trillion dollars. In the preceding twelve months alone, that figure increased by 2.2 trillion dollars. Over the previous five years, it rose by about 11 trillion dollars. Far from stabilising, the pace of borrowing is accelerating.

The Congressional Budget Office projects that net interest payments will climb to roughly 14 per cent of total federal spending by the late 2020s. In the final quarter of 2025, the US Treasury was paying on the order of 92 billion dollars per month in net interest, an increase of around 13 per cent on the previous year.

These are not marginal increases that can be absorbed through routine fiscal adjustments. Interest payments have already become the second largest federal expenditure, surpassing Medicare and not far behind defence. That marks a structural shift in the federal balance sheet: more and more revenue is diverted simply to service past borrowing rather than to fund current services or investments.

1.2 The vicious circle of rising interest costs

The dynamics of this environment are self-reinforcing. As interest costs rise, a larger share of tax revenue must be devoted to servicing existing debt. That leaves less for programmes, infrastructure or public investment, which in turn tends to be financed with yet more borrowing. New borrowing, at higher prevailing interest rates, generates further increases in interest expense. The cycle compounds.

The headline debt-to-GDP ratio illustrates the problem starkly. At about 120 per cent of GDP, the US is well beyond levels that historical data suggest are benign. At such levels, high debt exerts a drag on growth. Government borrowing competes with private borrowers for capital, which can push up interest rates and depress productive private investment. Rather than supporting growth, the debt burden begins to constrain it.

The result is a system in which debt grows more quickly than the economy underpinning it. That is unsustainable if the intention is to service and ultimately repay that debt in money of unchanged value.

2. Why Traditional Fixes No Longer Work

When considering paths out of a debt spiral, governments theoretically have three orthodox options: higher taxes, lower spending, or faster economic growth. In contemporary America, each of these is severely limited.

2.1 Tax rises: mathematically insufficient and politically toxic

To close the fiscal gap purely through higher taxation would require extraordinary measures. Rough calculations suggest that federal income tax rates would need to be roughly doubled across the board, or something equivalent in scale achieved through a combination of new and higher taxes. Such a shock would almost certainly push the economy into immediate recession and provoke intense political backlash.

Politicians in both major parties understand this. While there is perennial talk of “taxing the rich more” or “broadening the base”, there is no serious, detailed legislative programme anywhere in mainstream politics that would raise sufficient revenue to close the gap, let alone to run the primary surpluses required to chip away meaningfully at the existing stock of debt.

In other words, taxation as a primary route out of the current predicament is, at scale, a political fantasy.

2.2 Spending cuts: constrained by mandatory obligations

Spending cuts are no more realistic. Around two-thirds of the federal budget consists of mandatory spending: Social Security, Medicare, Medicaid and interest on the debt itself. These items are not discretionary policy choices renewed annually. They are embedded in law and driven by demographic trends and debt levels. As the population ages and as the debt stock grows, these obligations rise automatically.

The remaining third of the budget encompasses defence, infrastructure, education, federal agencies and other discretionary programmes. Even if one were to advocate closing entire departments and cutting deep into domestic programmes, the savings would be insufficient to balance the books. In an extreme thought experiment, if the United States shut down every federal function beyond the military – ceasing to fund everything from highways to schools to regulatory agencies – it would still fall short of closing the deficit.

The structural dominance of mandatory spending, particularly entitlement programmes and interest, renders the “just cut waste” narrative largely irrelevant to the real numbers.

2.3 Hoping for growth: limited by the debt itself

The third route is growth. In principle, if GDP grows faster than the debt, the debt-to-GDP ratio falls naturally over time, easing the burden even if the nominal debt stock continues to rise. This is the optimistic scenario frequently invoked by policymakers reluctant to confront more painful measures.

However, at current levels of indebtedness, the relationship between debt and growth is not so benign. A debt-to-GDP ratio around 120 per cent is associated, in the historical record, with weaker rather than stronger growth. As government borrowing absorbs a larger share of available capital, less remains for private sector investment. Higher debt also raises expectations of future taxation or inflation, which can further dampen investment and consumption.

In other words, the very scale of the US debt reduces the probability that growth alone can painlessly resolve it. The system is too heavy for that.

2.4 How we arrived here: cheap money and crisis responses

The roots of the present situation lie in the policy responses to successive crises.

After the 2008 financial crisis, interest rates fell to near zero. The Federal Reserve embarked on several rounds of quantitative easing, buying trillions of dollars of government bonds and mortgage-backed securities. This kept long-term borrowing costs abnormally low. With debt effectively “free”, politicians discovered that they could expand spending or cut taxes without triggering a visible increase in the cost of servicing the debt.

Defence budgets rose, entitlement programmes expanded, and tax reductions were enacted under the comforting assumption that low rates would persist indefinitely. There was little incentive to impose fiscal discipline when the immediate cost of profligacy appeared trivial.

Then came the COVID-19 pandemic. Faced with a sudden collapse in economic activity, the US government authorised in the region of 6 trillion dollars in emergency spending and support programmes. Much of this was financed by issuing new debt that the Federal Reserve then purchased on secondary markets, again at extremely low interest rates.

This response may well have been necessary to avert a deeper calamity. What was missing was any credible plan for how this additional debt would eventually be managed. When, inevitably, interest rates normalised, the cheap bonds issued during the era of zero rates began to mature and roll over. Refinancing them at multiples of their original coupon – bonds issued at 3 per cent in 2020 needing replacement at 7 or 8 per cent in 2025, for instance – caused the interest burden to climb far more quickly than headline debt alone might suggest.

The US entered this phase with an already heavy load of obligations. The combination of higher rates and a large existing debt stock has proved explosive.

3. The Alternative Chosen by History: Currency Devaluation

When a sovereign borrower accumulates a volume of debt that it is impractical to repay in money of stable value, there are essentially two broad paths available. One is some form of explicit default or restructuring, refusing to honour previous commitments in full. The other is to honour the commitments nominally, but in money that has been quietly degraded.

3.1 Nominal promises versus real value

Government bonds and other debt obligations are almost always defined in nominal terms. A bond might promise to pay its holder 100,000 dollars in ten years, plus a stream of fixed coupons along the way. That promise does not specify what those dollars will be able to buy when they are paid.

If inflation over the bond’s life is modest and stable, the real value received is close to what was expected. However, if over a decade the price level doubles, the purchasing power of the 100,000 dollars repaid has effectively been halved. The government has technically honoured its contractual promise, but in real economic terms it has repaid only half of what was originally lent. The other half has been erased by the silent action of inflation.

It is, in effect, a transfer of wealth from the lender to the borrower achieved without any formal announcement of default.

3.2 The “inflation tax” on creditors

The mechanism at the heart of this process can be expressed in terms of real versus nominal interest rates. If a government bond pays a nominal coupon of 4 per cent per year, but consumer prices are rising at 6 per cent, the real return is minus 2 per cent. Each year, the bond’s purchasing-power value shrinks by 2 per cent.

This negative real return functions as a kind of hidden tax on bondholders – pension funds, insurance companies, individual savers and foreign central banks. Their assets are being gradually confiscated, not by a legal levy or explicit restructuring, but by policy choices that allow inflation to run above the yield on government debt.

Economic models suggest that maintaining inflation at around 6 per cent for several years, with nominal yields held beneath that level, can cut a country’s debt-to-GDP ratio by substantial margins – on the order of 20 percentage points in four years in some scenarios. This is not hyperinflation in the sense of Weimar Germany or Zimbabwe. It is a moderate but sustained erosion of the currency’s value, directed primarily at holders of fixed-income claims on the state.

3.3 Why most people do not see it

This strategy is politically attractive precisely because it is poorly understood by the general public. When rent rises, when food becomes more expensive, when savings accounts and bond funds fail to keep up with living costs, the typical citizen blames a wide range of visible culprits: corporations, landlords, supply chain disruptions, overseas producers, even particular political parties. Few trace the root cause back to a deliberate interaction between fiscal policy and monetary policy designed to reduce the real burden of government debt.

By contrast, the large institutional holders of government bonds understand this dynamic very well. Pension funds, insurance companies and foreign central banks can read the numbers. Yet they tolerate negative real returns because the alternatives appear worse. An explicit sovereign default on US Treasury bonds would be an earthquake at the heart of the global financial system. As long as the erosion is gradual and “managed”, it is accepted as the least bad outcome.

This pattern is not hypothetical. It has a well-documented historical precedent.

4. The Post‑War Blueprint: Debt Reduction by Inflation and Repression

4.1 The United States after 1945

In 1945, the United States faced a fiscal position strikingly similar, in certain respects, to the present one. Public debt had soared to roughly 106 per cent of GDP as a result of borrowing to finance the Second World War. The government had issued bonds to citizens, banks and institutions; the war had been won, but the Treasury was left with an enormous obligation.

The political climate made orthodox solutions extremely difficult. The country had just endured the Great Depression and a global conflict. There was little appetite among voters for either sharp tax increases or severe peacetime austerity. Yet the outstanding debt had to be managed.

The chosen strategy was a combination of moderate but persistent inflation and artificially suppressed interest rates.

4.2 Capping yields and letting prices rise

In an arrangement between the US Treasury and the Federal Reserve, bond yields were effectively capped. The Fed agreed to keep long-term government bond yields around 2.5 per cent. This was not an outcome of free-market forces; it was an administratively imposed ceiling. Whenever market pressures threatened to push yields higher, the Federal Reserve stood ready to purchase bonds, thereby supporting their price and keeping yields down.

At the same time, wartime price controls were dismantled, and the economy transitioned back to peacetime production. Consumer prices rose significantly. Between 1946 and 1951, inflation averaged between roughly 6 and 12 per cent per year.

The combination meant that holders of government bonds suffered consistent negative real returns. With coupons at about 2.5 per cent and inflation running several percentage points higher, the purchasing-power value of those bonds declined year after year. This was a direct transfer of wealth from creditors to the state, achieved through monetary and fiscal coordination rather than explicit legislation.

4.3 The results: a dramatic fall in debt‑to‑GDP

The outcome of this policy mix was striking. By 1948, just three years after the war, the debt‑to‑GDP ratio had fallen from 106 per cent to around 92 per cent. Crucially, this was not the result of the government paying down 14 percentage points of GDP worth of nominal debt. Instead, a combination of real economic growth and inflation reduced the burden relative to the size of the economy.

Over the longer period from the mid‑1940s to the mid‑1970s, the effect was even more pronounced. By 1974, the US debt‑to‑GDP ratio had fallen to around 23 per cent. Detailed decompositions by economic historians attribute that reduction to three main forces:

• Fiscal primary surpluses, which contributed approximately 35 percentage points. For much of the post‑war period, tax revenues exceeded non‑interest spending.
• Real economic growth, which contributed around 32 percentage points as the economy expanded rapidly.
• Negative real interest rates, which contributed roughly 16 percentage points, representing the silent confiscation of creditor wealth through inflation running above bond yields.

Without the element of financial repression – those negative real rates enforced by policy – the debt ratio would have fallen much less dramatically, perhaps only to around 74 per cent of GDP. The inflation tax on bondholders was an essential part of the story.

4.4 Conditions that made the strategy feasible

This post‑war experience illustrates that a debt load well in excess of 100 per cent of GDP can indeed be reduced over time without overt default or hyperinflation. However, it depended on several favourable conditions.

First, demographics were extremely supportive. The US population in the late 1940s and 1950s was young, with the baby boom underway. A large and growing working‑age population meant more taxpayers relative to retirees, allowing the government to run primary surpluses without punitive tax rates.

Secondly, domestic financial markets operated under much tighter controls. Capital controls and regulatory frameworks limited the ability of large institutional investors to seek higher returns abroad. Treasury securities, even with negative real yields, were one of the few acceptable and liquid assets for pension funds and insurance companies. Financial repression was, in a sense, enforced by the structure of the system.

Thirdly, the starting point was an economy emerging from war, with enormous scope for productivity gains as factories retooled and pent‑up consumer demand was released.

Today, many of these favourable conditions are either absent or sharply reversed.

5. Financial Repression, Then and Now

5.1 What financial repression means in practice

The term “financial repression” refers to a set of policies and conditions deliberately designed to keep real interest rates below the rate of inflation, thereby transferring wealth from savers and creditors to borrowers, especially the government.

Historically, it has included:

• Caps on interest rates for government and bank deposits.
• Requirements that banks and institutional investors hold a certain proportion of their assets in government bonds.
• Capital controls that restrict investment flows abroad.
• Regulatory structures that favour government debt over other assets.

The common element is that savers and institutions are effectively coerced, directly or indirectly, into holding assets that yield less than inflation, enabling the state to reduce the real value of its obligations over time.

In the modern context, the methods are somewhat different, but the economic logic is very similar.

5.2 The pandemic response as contemporary repression

During the COVID‑19 pandemic, the Federal Reserve again purchased trillions of dollars’ worth of Treasury securities and mortgage‑backed securities. While technically these purchases were made on secondary markets, the effect was functionally equivalent to monetising a significant portion of the deficit: the government issued debt, and the central bank created new money to absorb it.

This activity helped to keep interest rates extremely low even as borrowing surged. For a time, consumer price inflation remained muted, and the Federal Reserve repeatedly described the initial uptick in prices as “transitory”, attributing it to supply chain disruptions and temporary imbalances.

By 2022, however, US inflation had risen to around 9 per cent – a level not seen in four decades. Bondholders who had previously been content with yields of 1 or 2 per cent on long‑term Treasuries suddenly found themselves earning sharply negative real returns, on the order of minus 7 or 8 per cent. Over the period from 2020 to 2023, cumulative inflation exceeded 20 per cent while much of the outstanding government debt carried coupons below 3 per cent. In rough terms, holders of that debt lost around 17 per cent of their purchasing power in just a few years.

From the standpoint of the US Treasury, this meant that a significant portion of the real debt burden had already been eroded. No bondholders were formally defaulted on. Coupons were paid, and principal was honoured. Yet what was repaid was worth materially less than what had been lent.

This was not an unfortunate side‑effect of unrelated policy. It was precisely how the system is designed to operate when debt becomes unsustainably large.

5.3 The current Federal Reserve “tightrope”

In response to the inflation surge, the Federal Reserve raised policy rates aggressively through 2022 and 2023. However, there now appears to be a reluctance to push rates much higher, despite inflation remaining above the central bank’s stated long‑term target.

Officially, this caution is framed as a balancing act between reducing inflation and maintaining employment. There is, however, an additional constraint that receives far less public emphasis: the federal government’s ability to service its debt.

Every percentage point increase in average interest rates adds hundreds of billions of dollars to annual Treasury interest costs over time. There is a level of rates at which debt service would become fiscally and politically untenable. The central bank is therefore in the delicate position of needing rates high enough to maintain some anti‑inflationary credibility, but not so high as to render the government insolvent in practice.

The result is a narrow corridor in which nominal interest rates sit only modestly above, or even slightly below, prevailing inflation expectations. Real rates hover near zero or become mildly negative, especially on longer‑dated debt. This set‑up allows for continued, if gradual, erosion of the real value of the debt stock.

While not described as such in official communications, this is essentially a modern form of financial repression. There are no explicit, publicly declared caps on yields as there were after the war, but the combination of central bank balance‑sheet policies, forward guidance and political constraints on how far rates can rise amounts to a similar outcome.

6. Why Today’s Version is More Fragile

The fact that financial repression worked in the decades after the Second World War does not guarantee its success under current conditions. Several structural differences make today’s environment more challenging.

6.1 Unfavourable demographics

Post‑war America enjoyed a demographic dividend: a swelling working‑age population and a relatively small cohort of retirees. This made it possible to run primary budget surpluses without crushing the workforce or undermining political stability.

In contrast, today’s United States is ageing rapidly. Social Security and Medicare now consume a very large share of federal outlays, and those expenditures are growing automatically as more citizens retire and live longer. These are not easy programmes to cut; they are deeply embedded in the social contract and politically sensitive.

As a result, running prolonged primary fiscal surpluses – where tax revenues exceed non‑interest spending – is vastly more difficult than in the 1950s. Without those surpluses, the burden of debt reduction falls disproportionately on inflation and negative real interest rates. The fiscal “help” that aided the post‑war process is largely absent.

6.2 Sophisticated and mobile capital

The post‑war era was characterised by strong capital controls and relatively underdeveloped international capital markets. Domestic institutions had limited ability to shift large quantities of money overseas in search of better yields or safer stores of value. This made it easier for governments to trap savings in domestic debt instruments even when real returns were negative.

Today’s financial environment is radically different. Bond investors are highly sophisticated, with access to a global menu of alternative assets. They can move capital quickly in response to perceived changes in policy or risk. If they suspect that a sovereign intends to inflate away its obligations, they demand higher nominal yields or seek assets in other currencies or in real stores of value such as property or commodities.

Indeed, yield curves often embed precisely this expectation. When long‑term bond yields trade significantly above short‑term policy rates, it reflects, in part, investors’ belief that inflation will remain elevated and that central banks will be either unable or unwilling to suppress it indefinitely.

This market awareness narrows the space in which a quiet, gradual erosion of debt can occur without more visible market pushback.

6.3 The role of foreign creditors and the dollar’s status

Another important difference lies in the composition of creditors. Roughly 30 per cent of US government debt is held by foreign investors, including other sovereigns. Major holders include Japan and China, each with exposure measured in the hundreds of billions, if not over a trillion, dollars.

These foreign holders are not compelled, in the same way as domestic institutions might be, to continue absorbing negative real returns indefinitely. They possess alternatives: they can adjust reserve portfolios towards other currencies, accumulate gold, or purchase assets denominated in euros, yen, yuan or other units. They may not be able to divest quickly or entirely without disrupting their own economies, but they can and do adjust exposures over time.

The United States benefits greatly from the dollar’s status as the world’s primary reserve and transaction currency. Global trade and finance remain heavily dollar‑centric, creating perennial demand for dollar assets, especially US Treasury securities. Foreign central banks require dollar reserves to participate in the global system, and those reserves are typically held in US government debt.

However, that dominance, while still substantial, is no longer absolute. The proportion of global reserves held in dollars has fallen over the past two decades, as some countries – notably China and Russia – have taken deliberate steps to reduce their dollar exposure and to develop alternative payment and settlement systems.

This does not portend an imminent replacement of the dollar, but it does suggest that the cushion afforded by automatic foreign demand for US debt is gradually thinning. As that happens, the room for unobserved financial repression shrinks.

6.4 The timing problem

Perhaps the most severe constraint is simply one of tempo. US federal debt is increasing by roughly 2 trillion dollars per year. Interest costs are rising exponentially as older, cheaper debt matures and is replaced with new, higher‑coupon obligations. For financial repression to materially reduce the debt‑to‑GDP ratio, the real value of the outstanding stock must be eroded faster than new debt is being added.

This implies a need for sustained inflation – perhaps 6 to 8 per cent annually – for a prolonged period, coupled with nominal interest rates that remain stubbornly lower than that, at least on a significant portion of the debt. Yet holding inflation at such levels for a decade without it becoming embedded in expectations is extremely difficult.

Once workers and businesses come to expect high inflation, they adjust their behaviour. Employees demand wage increases to match or exceed price rises; firms increase prices pre‑emptively to protect margins; contracts incorporate inflation clauses. The inflation process then shifts from a controllable policy variable to a more autonomous dynamic, harder to rein in without a sharp and painful contraction.

At the same time, bond investors witnessing this pattern will insist on higher yields to compensate for the increased inflation risk, pushing up the government’s borrowing costs and offsetting some of the “benefit” of inflationary erosion. The attempt to fine‑tune a moderate, sustained inflation that is high enough to matter but low enough to remain controllable is akin to balancing on a rapidly tightening wire.

7. If the Strategy Fails: The Unpalatable Alternatives

The current policy mix – a combination of moderate inflation, real rates near or below zero, and persistent deficits – represents what might be termed the “least bad” option from the perspective of a heavily indebted sovereign. It is the attempt to replicate, under more difficult conditions, the post‑war feat of letting inflation eat away at the debt.

If this approach is not sufficient – if inflation cannot be maintained at the necessary levels without provoking either a loss of confidence in the currency or an intolerable rise in yields – then more drastic outcomes come into view.

7.1 Explicit default or restructuring

One possibility, familiar from many episodes in emerging markets, is explicit default: the state announces that it will not, or cannot, honour its debt in full and seeks to restructure terms with its creditors. This might involve lengthening maturities, reducing principal, or lowering coupons.

For a country such as the United States, issuing debt in its own currency and sitting at the heart of the global financial system, such a step would be momentous. Treasury securities are deeply embedded in the balance sheets of banks, pension funds, insurers and central banks worldwide. An explicit default on dollar‑denominated US debt would send shockwaves through markets and could destabilise the entire structure of global finance.

For this reason, policymakers will do almost anything to avoid acknowledging such a default, even if they are effectively achieving similar results through inflation. From a political standpoint, eroding debt quietly via currency debasement is far easier to defend than telling the world’s savers that they will not be paid what they are owed.

7.2 Extreme inflation

At the other extreme of the spectrum lies uncontrolled or extreme inflation – not the 6 to 8 per cent range discussed above, but levels in the tens or even hundreds of per cent per year. Historical episodes in various countries during the twentieth century demonstrate that such inflations can wipe out domestic debt stocks relatively quickly, but at the cost of destroying savings, incomes and social stability.

In such scenarios, the national currency ceases to function effectively as a store of value. Economic life is disrupted, political systems are shaken, and the aftermath often involves new monetary regimes and painful stabilisation programmes.

The United States has no recent history of such extreme inflation, and its institutions and assets are sufficiently robust that a Weimar‑style collapse remains unlikely. However, if attempts at controlled financial repression repeatedly misjudge the balance and inflation expectations spiral, a slide into more severe territory cannot be excluded in principle.

7.3 Austerity and forced consolidation

Another, more orthodox, option is genuine austerity: large cuts to spending, significant tax increases, and a sustained effort to bring primary budgets back into surplus. This is what countries such as Greece experienced during the European debt crisis, under pressure from external creditors and supranational institutions.

The United States does not face an external overseer in this way. Its currency and debt occupy a unique position, giving it more flexibility than most. Yet it is conceivable that domestic bond markets could play a similar disciplining role. If investors were to demand yields so high that the government found itself unable to roll over debt at acceptable rates, drastic measures could be forced upon policymakers, whether they wished it or not.

All three of these alternatives – explicit default, extreme inflation and severe austerity – are politically and economically painful. Precisely for that reason, authorities have chosen, and will likely continue to choose, the comparatively subtle route of financial repression for as long as it remains feasible.

8. The Ongoing Wealth Transfer

8.1 How citizens are already paying

For ordinary citizens, the critical point is that this process is not hypothetical or far off in the future. It is already happening. Every year in which the interest rate on savings accounts and low‑risk bonds trails behind inflation, savers lose purchasing power. The nominal figures may rise modestly, but in real terms the value of those assets shrinks.

When a bond fund delivers a seemingly positive return of, say, 3 per cent, but consumer prices have risen by 6 per cent, investors have suffered a 3 per cent real loss. The difference represents, in effect, their contribution to shrinking the government’s real debt.

Because this process operates through the general price level and the structure of yields, rather than through explicit levies, it is less visible and less contested than a direct tax rise of similar magnitude would be. Yet the economic impact is much the same: resources are being redirected from the private sector to the public balance sheet.

8.2 Limited avenues of escape

Individuals living and working in the United States (or in any similar advanced economy) cannot readily opt out of the national currency system. Earnings, taxes and most transactions occur in dollars. Inflation cannot be avoided by personal choice.

However, there is some scope to mitigate exposure to the most vulnerable forms of wealth. Assets that tend to maintain or increase their value in real terms – such as productive equities, real estate and certain commodities or other “hard” assets – are less directly targeted by financial repression than are fixed‑rate bonds and cash holdings. Companies that can raise their prices in line with inflation can, in principle, protect shareholders’ real returns over time.

By contrast, bank deposits and fixed‑income claims with yields below inflation are systematically eroded. These are the primary instruments through which the state’s invisible tax on wealth is levied.

None of this means that individuals can fully escape the consequences of national policy. Wages, rents, living costs and employment all respond in complex ways to inflation and repression. But it does underscore that some asset classes bear the brunt of the adjustment more than others.

8.3 The broader picture

Framed in this way, the contemporary US debt strategy can be seen as the largest peacetime wealth transfer in the country’s history. Over the coming decades, trillions of dollars of real obligations will be, in effect, converted into devalued currency, with the shortfall borne by those whose savings and pensions are denominated in that currency.

If sustained, modestly negative real rates can, over a twenty‑year horizon, cut a high debt‑to‑GDP ratio roughly in half. Bondholders and cash savers lose perhaps 30 to 40 per cent of their purchasing power relative to a world with stable prices, while the state emerges with a cleansed balance sheet. Historically, such an outcome has been achievable under certain conditions.

Whether those conditions can be recreated today is uncertain. It would require:

• A population willing, or at least resigned, to absorbing gradual currency debasement without major political upheaval.
• Foreign creditors prepared to continue holding dollar assets despite modestly negative real returns.
• A central bank that is, in practice, sufficiently aligned with fiscal needs to tolerate inflation somewhat above target whilst maintaining nominal independence.
• Financial markets that do not fully “front‑run” the strategy by demanding much higher yields as soon as the pattern becomes clear.

Some of these elements are present, others much less so. Demographic headwinds, growing geopolitical competition, sophisticated and mobile capital, and an already elevated debt stock all complicate the picture.

What is not in doubt is the direction of travel. The United States, like several other advanced economies, has crossed a threshold beyond which the honest repayment of all outstanding obligations in money of stable value is implausible. Rather than acknowledging this directly, policymakers have chosen the path favoured throughout history: to change the value of the money in which those obligations are denominated.

In this sense, America is not preparing to “pay” its debt in the way most people intuitively understand that phrase. It is preparing to make a significant portion of that debt disappear, not through repudiation, but through the steady erosion of the purchasing power of its currency. The cost of that erasure is being borne – slowly, often unconsciously – by anyone holding dollars, savings accounts or fixed‑income securities whose returns fail to keep pace with the rising cost of living.