President Donald Trump says inflation could help America deal with its $40 trillion national debt. The more surprising part may be who is helping finance it.
In a TIME interview published Thursday, Trump argued that stronger growth would help reduce the debt burden. Then he went further:
“Certain levels of inflation will also pay off that debt very rapidly. Very rapidly.”
Trump also argued that higher interest rates were hurting the country more than inflation.
How Can Inflation Shrink the US National Debt?
There is some economics behind the inflation argument. Inflation makes existing fixed-rate debt worth less in real terms because the government repays it with dollars that have lost purchasing power.
But there is a catch. Higher inflation can push Treasury yields higher, making new borrowing and refinancing more expensive.
The Congressional Budget Office estimates that higher inflation and interest rates can significantly increase federal interest costs.
Who is Lending America the $40 Trillion?
Foreign countries help finance US debt by buying US Treasury securities, which are basically loans to the US government. America gets the cash now and promises to repay those investors later with interest.
So, which country is the leading buyer? Japan. They hold $1.1 trillion in US securities, latest data show.
A small British Overseas Territory, the Cayman Islands, officially ranks fifth, with $460.1 billion.
However, a Federal Reserve study found Cayman hedge funds held about $1.85 trillion at the end of 2024. Bonds pledged for loans often vanish from the official tally.
Count them, and Cayman tops every country. Most of that money belongs to US hedge funds using the island as a legal base.
The buying is speeding up. Cayman’s holdings of Treasury bills, short-term government debt, jumped 22% in one month to a record $211.2 billion in July, FRED data show.
Some traders on X claim China is secretly buying back in through Cayman. The Fed study names no Chinese buyers.
America’s biggest apparent foreign Treasury buyer may increasingly be a Caribbean financial hub acting as the legal home for leveraged hedge funds.
And those funds are buying the same debt Trump says inflation could help shrink.