When Debt Remains and Money Loses Value

Many people learn early in life that debts must be repaid. Anyone who spends money they do not have today must devote part of tomorrow's income to paying it back. States must also meet their payment obligations. But they do not have to reduce their entire stock of debt to zero at a particular point in time. As long as their financing remains sustainable, they can replace maturing bonds with new ones. They also have options that an ordinary household does not: they can change taxes, refinance debt over long periods – and, under certain conditions, benefit from money losing purchasing power.

Donald Trump described that last possibility with unusual candour in an interview with TIME:

“Certain levels of inflation will also pay off that debt very rapidly. Very rapidly.”

The interview was published on 1 October 2026. In essence, Trump claims that inflation can rapidly reduce debt. Yet inflation transfers no money to creditors and removes no claim from a contract. It can change how heavily an unchanged claim weighs in economic terms. That is precisely where its political significance lies. A debt can be repaid in full – while the creditor still loses purchasing power.

When debts stay the same and prices rise

A state owes a hundred billion euros at interest rates fixed for the long term. If prices, incomes and taxable turnover rise, its nominal revenues may grow. The existing debt initially remains unchanged. Relative to a larger nominal economy, it may become easier to bear.

This effect is particularly powerful when inflation turns out higher than expected when the contracts were signed. If creditors had already priced it in, they would normally demand a corresponding interest rate. Relief therefore arises not simply from rising prices, but also because existing contracts do not fully adjust to that development.

A household mortgage makes this easy to illustrate. If the fixed monthly payment is €1,200 and monthly net income is €5,000, the mortgage absorbs 24 per cent of income. If that income later rises to €7,500 while the payment remains unchanged, the share falls to 16 per cent.

The crucial condition, however, lies in the word “rises”. Inflation does not guarantee a corresponding pay increase. If food, energy and insurance become more expensive while income stagnates, the financial burden can grow despite a fixed-rate mortgage. And when the fixed-rate period ends, more expensive refinancing can wipe out part of the previous advantage.

States are not immune to these countervailing forces either. Employees demand higher wages, public construction projects become more expensive and social benefits rise. Inflation-linked bonds generate additional costs. New borrowing may come with higher interest rates. Inflation can erode the real value of existing debt. But it does not automatically turn a persistently unbalanced budget into a sustainable one.

The bond market votes – the bill arrives later

A government can declare its debts manageable. The bond market determines the terms on which others accept that assessment. Anyone buying a government bond expects interest and the agreed repayment. If inflation expectations rise or doubts about the ability to repay increase, investors may demand higher yields. The prices of existing bonds with fixed payments then generally fall.

“Bond vigilantes” is a term for investors who put pressure on fiscal policy by selling bonds or demanding higher yields. They are not a single organised group. Nor is every rise in yields a vote of no confidence: expected central bank rates, growth and the supply of new bonds also influence financing costs.

For the state, the burden often becomes visible only gradually. Agreed payments on existing fixed-rate bonds initially remain unchanged. Higher market rates feed through when additional borrowing is undertaken or maturing debt is replaced.

A simplified model illustrates the transition. A state has a hundred billion euros in debt, initially financed entirely at one per cent. Each year, twenty billion falls due and is replaced with new bonds at four per cent. Total debt remains unchanged.

Illustrative calculation, not a forecast. No additional debt, reduction in total debt or intervening changes in interest rates. Interest costs show the annual burden after each refinancing.

The debt stock remains the same, yet annual interest costs quadruple. A government can therefore initially emerge relatively unscathed from a period of higher market rates, while the burden builds up in the budget later. Assessing its financing requires looking at maturities and upcoming refinancing as well as the amount of debt outstanding.

France: Fiscal room is narrowing

France illustrates how difficult the combination of high spending, weak growth and rising debt can become. According to the statistics agency INSEE, public debt reached approximately €3.60 trillion at the end of the second quarter of 2026, equivalent to 119 per cent of economic output.

Public expenditure amounted to around 57.3 per cent of gross domestic product in 2025. This ratio does not mean that the state owns the same share of all businesses or produces that share of output itself. It measures public spending, including transfers, relative to GDP.

In its May spring forecast, the European Commission expected France's general government deficit to reach 5.1 per cent of GDP in 2026. For 2027, it projected 5.7 per cent under unchanged policies. These figures describe the outlook at that time, not final annual results.

This is a strained starting position. Cuts affect specific services and recipients. Tax increases weigh on income, consumption or investment. New debt postpones part of the bill but creates additional obligations.

“France is bankrupt” would be the wrong diagnosis. High debt is not a default. The actual problem is serious enough: the state must finance its ongoing promises while existing obligations narrow its room to manoeuvre.

When moving abroad also becomes a tax issue

Against this backdrop, France is debating new rules for crypto assets. According to reports on deliberations over the 2027 budget, the Finance Committee approved a proposal to bring certain unrealised crypto gains into the scope of taxation when someone transfers their tax residence abroad. The reported threshold is crypto holdings exceeding €800,000, alongside further personal eligibility conditions.

Another proposal would make exchanges of cryptocurrencies into certain stablecoins taxable. It concerns assets classified as e-money tokens, with a proposed start date of January 2027. Reports also described a proposal for a ten-year loss carryforward.

On 9 October, however, the Finance Committee subsequently rejected the entire revenue section of the draft budget. The plenary debate scheduled for 13 October will therefore start again from the original government text. The crypto amendments previously approved in committee are consequently not automatically part of that starting text. Whether they will be reintroduced and ultimately become law remains open.

As of 11 October 2026, none of the new crypto taxes described here has therefore been finally enacted. Moreover, the stated asset threshold is not the same as the tax base: taxing gains is different from imposing a levy on the entire holding.

The political question is nevertheless legitimate. A state wants to prevent gains accrued during a person's residence from escaping its taxing jurisdiction. For the person concerned, an exit tax can mean that moving home triggers financial obligations even though no assets have been sold. Whether and when money actually has to be paid depends, among other things, on deferral provisions and the final design of the rules.

This is not automatically a ban on capital movements. But it can affect the mobility of people and assets in economic terms. That effect deserves a factual debate.

Germany: More room is not an unlimited credit card

Germany starts from a different position. In May, the European Commission expected a debt-to-GDP ratio of 65.8 per cent for 2026 – significantly lower than France's. At the same time, it projected a general government deficit of 3.7 per cent in 2026 and 4.1 per cent in 2027.

The special fund for infrastructure and climate neutrality has total borrowing authorisation of €500 billion. Investments can be approved over twelve years, from 2025 to 2036. This is neither an annual spending amount of that size nor a sum that has already been spent in full. The term “special fund”, however, does not alter the fact that debt-financed spending creates interest obligations.

What matters, therefore, is what the money produces. Reliable transport routes, efficient electricity grids and functioning digital infrastructure can improve productivity and future revenues. If existing expenditure is largely shifted around without creating additional economic capacity, the calculation looks different.

Germany is not simply “the next France”. Differences in debt levels and economic structures matter. But here, too, additional obligations must fit a sustainable revenue base over the long term. New borrowing capacity buys time. Whether it delivers an improvement depends on how it is used.

Europe between price stability and government financing

As members of the euro area, France and Germany cannot each pursue their own national monetary policy. They share a currency, while key budget decisions remain national. This particular conflict concerns the monetary union; not every EU country uses the euro.

The more a state must spend on interest, the less remains for other tasks if revenues and net new borrowing are held constant. Higher policy rates thus become politically uncomfortable: what may be necessary to combat inflation can also intensify budget pressure. A central bank must then be able to sustain decisions whose costs governments and voters feel directly.

The conflict becomes tangible when rising financing costs bring spending cuts or tax increases closer. For a government, demanding lower interest rates then becomes more attractive than defending additional burdens in its own budget. If the central bank yielded to that pressure at the expense of price stability, part of the problem would be shifted from the state budget to the purchasing power of money.

Fiscal dominance describes a situation in which the requirements of government financing determine the course of monetary policy and push the objective of price stability into the background. High debt alone does not prove that this situation exists. But it raises the stakes in the conflict and thus the pressure on central bank independence. That independence must prove its worth precisely when exercising it becomes politically costly.

Financial repression works through another channel: government rules can limit interest rates or direct savings into particular investments. Combined with inflation, this can lower creditors' real returns and make public debt easier to bear. Historically, this was one way of reducing debt burdens. A negative real interest rate alone, however, does not establish that such a policy is being pursued; the specific interventions matter.

A gain on paper, a loss in the shopping basket

For savers, the problem does not end with the interest rate. Even a positive nominal return can turn into a real loss after inflation and taxes.

Consider an investment of €10,000. Its value rises by ten per cent to €11,000 over an assumed period. The investor sells it at that price. Over the same period, consumer prices also rise by ten per cent. Before tax, the investor has therefore merely preserved their purchasing power.

If the nominal gain is now taxed at an assumed rate of 25 per cent, the calculation is as follows:

Purely an illustrative calculation. The tax rate is an assumption; allowances, costs and differences between national tax rules are excluded.

After tax, the account contains €750 more. Yet it buys less than it did at the start. In this example, the entire taxable gain was needed just to offset inflation.

Tax law can recognise a gain even though the investor has not become richer in real terms. It then compares monetary amounts at different points in time without fully accounting for their different purchasing power. What appears as an increase for tax purposes may merely preserve the saver's existing possibilities.

This raises a question often overlooked in discussions of “profits”: Should a state tax nominal increases when they do not represent a real increase in wealth? This extends far beyond Bitcoin. It concerns investments whose nominal returns are taxed without fully accounting for the general erosion of money's purchasing power.

Adjusting for inflation would reduce this discrepancy but raise questions of its own: Which price index should apply, over what period should the calculation be made, and how should losses be treated? Implementation is demanding. The distributional effect nevertheless remains: when even the amount needed to offset inflation is taxed, preserving purchasing power before tax can become a loss of wealth after tax.

More access to data does not automatically mean a new tax

Through DAC8, the EU has extended tax reporting obligations for covered crypto service providers since 2026. Information relating to the first reporting year, 2026, is to be exchanged between the relevant tax authorities by 30 September 2027.

This makes the covered crypto transactions more visible to tax administrations. But DAC8 does not itself introduce a uniform European crypto tax. A reported transaction is not automatically a taxable event.

Reporting obligations, taxation of gains, exit rules and restrictions on capital movements are different instruments. Their combined effects on privacy, administrative effort and economic mobility can only be assessed if those distinctions are taken seriously.

Nor do the French proposals imply their automatic adoption by Germany. They nevertheless illustrate a conflict that extends beyond France: digital assets can move internationally, while tax claims remain tied to states and tax residence.

Bitcoin changes the individual's options

Bitcoin eliminates neither public debt nor the need to finance public tasks. It initially changes the options available to individuals: people can hold part of their wealth in a system whose issuance rules no government can change on its own. With self-custody, they can also control their bitcoin without instructing a custody provider to execute a transaction.

This shifts part of the control over issuance and custody. Tax obligations, price risks and technical responsibility remain. A state does not need to control the Bitcoin network to regulate taxpayers and trading platforms. Self-custody neither changes tax residence nor automatically makes capital gains tax-free.

The additional choice is significant nonetheless. Those holding bitcoin can place part of their wealth under different issuance rules. They thereby remove that portion from direct expansion of its money supply by a central bank, but not from the economic consequences of government policy. Bitcoin, too, is traded, valued and taxed; its purchasing power can fluctuate considerably. The freedom lies in having an additional option, not in a promise that choosing it will eliminate every risk.

Stablecoins should also be distinguished from this. Exchanging euros for a dollar stablecoin changes one's currency exposure but does not leave the fiat monetary system. If its issuer holds US government bonds as reserves, the product is even connected to the financing of public debt. How much additional demand for bonds this creates also depends on where the deposited money was previously invested.

Who pays for the promises?

Trump's statement is remarkable because it makes a distributional conflict visible. What relieves a debtor can reduce a creditor's purchasing power. What finances a state can limit its citizens' economic possibilities.

Not every loan is bad, not every tax unjust, and not every monetary policy measure an attack on savers. Public investment can enable prosperity, and states must finance shared tasks. But acknowledging this does not yet answer how large the obligations should be allowed to become or who bears their costs.

The bill can take different forms: higher taxes, fewer public services, rising interest expenditure or lost purchasing power. Often, more than one arrives at the same time.

Following our look at 1971, the next question therefore arises. Then, the issue was who can change the rules of money. Today, we must also ask what options remain for people who do not want to bear the consequences of those rules.

For people who put aside part of their income, money represents work already done and consumption deferred. Those who decide on the purchasing power of that money, its taxation and the mobility of citizens also help determine how much control individuals retain over the fruits of their labour. These decisions belong in public debate – with transparent figures, clearly identified interests and a willingness to judge government promises against their financial sustainability.

This article contains economic and monetary policy analysis as well as personal opinions. It does not constitute financial, investment, tax or legal advice.