Over 50% of U.S. debt is owned by foreign countries and that is going to make inflation ever more tempting, according to Morgan Stanley.When sovereign debt is owned by foreign entities, rather than domestic, inflation allows private domestic debtors to more easily pay down their debts while not impacting the sovereign government’s ability to pay their debt.
Because the U.S. has a particularly large amount of foreign owned debt, choosing to inflate would allow private consumers the ability to pay down their debts. A similar situation exists in the UK, where foreign debt ownership is 28%, but the UK also has 20% of its debts tied to inflation. This would make inflation a less likely response to the UK situation, although much of its debt is long term, so this may make it yet again more tempting as the government would not be impacted by the decision so quickly.
Europe and Japan, on the other hand, own much of their own debt, with Japan only having 7% of its debt foreign owned. This makes inflation less tempting, as it would hamper these countries ability to pay their own debts.
If the U.S. government is tempted into inflation, this could hit back against the strong dollar trend which has been developing. The UK could also make similar inflation moves, which would continue the downward trajectory of the pound.
If the Yen and Euro follow their projected course, it could lead to the currencies gaining significant value against the dollar and the pound in the medium term.
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