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To pay off the national debt, the Federal Reserve (U.S. Central Bank) could, in theory, use inflation to reduce the real value of the debt. This would happen because, with rising inflation, the dollar would lose purchasing power, making the debt less burdensome. To generate this inflation, the Fed could:
- Lower interest rates, which would make credit cheaper, encouraging spending and investments and, consequently, increasing the amount of money in circulation.
- Buy government bonds, thereby injecting more money into the economy, expanding the money supply.
Although it seems like a solution, this strategy is extremely risky and could lead to hyperinflation, loss of savings (the saved money would quickly lose value), loss of confidence in the dollar (affecting international trade and the global economy), and increased costs of future loans. It is important to emphasize that this measure does not solve the government's ongoing budget deficits.
Most economists consider this approach a very dangerous last resort. They prefer more sustainable fiscal solutions, such as: tax increases and spending cuts.
The main objective of the Federal Reserve is to maintain price stability, not to reduce the national debt through inflation.
