> And Canada is taxing you back This seems illogical. You can't simultaneously claim that the US is paying higher prices for Canadian goods because of US-imposed tariffs and then turn around and say only that Americans are paying a tax on buying Canadian goods on Canadian-imposed tariffs. Both countries are either paying higher prices or paying higher taxes. Canada's tariffs must also be viewed as America is taxing C…
So what do you do when your government is effectively bankrupt? You’ve accumulated more debt than you can realistically repay without imposing enormous economic pain, but you still need to keep the country functioning. One historical answer is an inflationary cycle combined with a trade war.
You impose tariffs on foreign goods, which creates government revenue while also making imported goods more expensive. You then blame the resulting price increases on foreign competitors and trading partners. But the tariffs themselves are inflationary because businesses ultimately pass much of those higher costs on to consumers.
As prices rise, nominal tax revenues also rise because governments are collecting taxes on larger dollar amounts. Meanwhile, governments have an incentive to continue borrowing, spending, and potentially expanding the money supply to deal with their fiscal problems. More money chasing higher-priced goods creates further inflation.
The critical part is what inflation does to existing debt. If you owe $1 trillion in debt today, but inflation dramatically reduces the purchasing power of the dollar over time, that $1 trillion becomes much easier to repay in real terms. The nominal debt remains the same, but its real economic burden shrinks.
So you can end up with a feedback loop: tariffs increase prices, higher prices increase nominal tax receipts, fiscal pressure encourages more borrowing and monetary expansion, monetary expansion fuels more inflation, and inflation gradually erodes the real value of the government's existing debt.
In other words, rather than explicitly defaulting on the debt, you can effectively "inflate it away." The creditors get paid back in dollars, but those dollars are worth substantially less than the dollars they originally lent.
The danger is that this isn't free money. The cost is ultimately transferred to consumers, savers, wage earners, and holders of government debt through reduced purchasing power. And once inflation expectations become entrenched, controlling the cycle can become extremely difficult without causing a recession or other severe economic disruption.