Default by Inflation is the Real Drama in the Global Debt Market

June 13, 2023

by Brendan Brown Mises.org

The real drama of default in global markets has not been the federal debt ceiling negotiations in Washington but the write-off by inflation. The issue of whether it turns out that the US Treasury for a few weeks has been slow in servicing its debts—with all delays subsequently rectified—is a sideshow. We could regard this as camouflage for the ongoing real write-off operation. In this, countries led by the US, where a great inflation emerged during the pandemic and Ukraine war, have achieved big reductions in the real value of their debts.

The governments have also gained from a reduction in the total nominal market value of their fixed-rate debts due to the rise in interest rates. Those gains do not show up directly in national accounts. Rather, they are opportunity cost savings. Governments will not have to pay the prevailing higher level of interest rates on that part of their debts which are in fixed-rate form until far-off maturity dates.