Kenneth Rogoff Is (almost) right about the importance of inflation -but entirely wrong about its management
Susan Borden
America’s debt problem is not what Foreign Affairs thinks it is.
The recent Kenneth Rogoff [1] Foreign Affairs essay will get a lot of attention and, for that reason alone, let’s take it seriously. Unlike the Democratic deficit hawks of the 1990s and the Republican deficit alarmists of the 2010s, Rogoff does not argue that the United States is on the brink of financial insolvency. He correctly acknowledges that a country issuing debt in its own free-floating currency cannot be forced into default.
Rogoff’s concern is inflation, and on that point he is right. Inflation is the real constraint on U.S. fiscal policy. But Rogoff is dead wrong in his analysis of why inflation arises, who bears responsibility for preventing it, and what institutional tools are available to manage it.
The result is an essay that warns of austerity, repression, or “partial default,” but not because the United States lacks financial capacity.
Inflation is the constraint — but not what Rogoff imagines
Rogoff describes inflation as a form of “partial default,” a stealthy way governments reduce the real value of their obligations. In doing so, he makes the problem one of creditor confidence rather than real economic capacity. (The same mistake was made more explicitly by Greg Ngarmboonanant in his recent New York times piece, “The Quiet, Fateful Shift in Who’s Buying America’s Debt“, 26 Dec 2025).
But inflation does not constitute a failure to honour legal obligations. It is a signal that nominal spending is outrunning the economy’s ability to produce real goods and services. That can happen for many reasons, including: supply shocks, energy constraints, labour bottlenecks, market power, or poorly targeted fiscal expansion. None of these are addressed by reducing the outstanding stock of Treasury securities.
The United States does not need to “save up” fiscal credibility by running surpluses in placid times. What it needs is real readiness: the ability to mobilize under-deployed labour and production capacities. It needs resilient supply chains, first-rate public infrastructure, and automatic stabilizers that expand output rather than elevate prices when shocks inevitably hit. None of these are signified or measured by debt-to-GDP ratios.
Bond markets are not the prime movers that Rogoff suggests
Rogoff insists that long-term interest rates are “set by vast global markets,” implying that the U.S. government is largely a price taker in its own currency. This is a familiar claim, but is far removed from what is really happening.
Treasury yields emerge from a jointly constructed institutional system: the Federal Reserve sets the policy rate; the Treasury chooses the maturity structure of its issuance; and the central bank can always act as a buyer or seller of last resort in secondary markets. Markets can matter — but they operate within a framework designed and maintained by the state.
This is an old, tired story. Mainstream economists pretend the U.S. government is financially constrained like a household or a eurozone member state (neither of which are currency issuers), imposing a sort of Calvinist ethic on government spending. Policymakers of both major parties then mindlessly adopt this precept, landing on their only option — belt-tightening austerity.
“Fiscal ammunition” is not stored in the bond market
One of Rogoff’s most troubling claims is that high debt reduces the government’s ability to respond to future crises.
The government does not stockpile “ammunition” by paying down its own liabilities. It prepares for crises by ensuring that real resources will be available when needed. A nation with underemployed labour, unused industrial capacity, and fragile supply chains is not fiscally strong, regardless of its debt-to-GDP ratio. Conversely, a nation with substantial liabilities but with ample food security, energy security, and public provisioning capacity has far more room to act without stimulating inflation.
The government’s fiscal response to COVID illustrated this clearly. Inflation did not arise because the U.S. “printed too much money.” It arose because demand was restored faster than production capacity, energy supply, and logistics could adjust, (after decades, it should be noted, of underinvestment).
The quiet admission
Late in the essay, Rogoff effectively concedes that the U.S. government possesses extraordinary monetary power, but then goes on to insist that it disguise or constrain that authority, no doubt to preserve a fictional narrative of market discipline. This is, of course, upside down. The problem is not that the state has too much power; the problem is that it declines to use that power transparently and democratically to manage inflation at its source.
Inflation control should focus on where spending enters the economy, what it mobilizes, and which constraints it tackles — not on reassuring the bond markets that the government knows and remembers its place in a nearly theocratic regime of market fundamentalism.
The real risk is political, not financial
Rogoff is correct about one thing: political misuse of authority, including fiscal authority, intentional or otherwise, is always a concern. But surely the management of that possibility is not prophylactic austerity. It is thoughtful institutional innovations such as automatic stabilizers, countercyclical taxes, job guarantees, buffer stocks, and investments aimed at increasing capacity that align and calibrate spending with real resources.
Treating public debt as a looming financial threat does not discipline politics. It distorts politics. It encourages underinvestment in the very capacities that would significantly dampen future inflation. And treating investor sentiment or market response as an external enforcer devolves into the dangerous practice of conflating creditor confidence with public purpose.
At bottom, Rogoff wants us to fear inflation because it erodes trust. That’s fine, important even. But trust is not built by pretending the U.S. government is financially fragile. It is built by demonstrating that effective public spending can expand real capacity on behalf of the population without jack-ng up prices. Until mainstream economic discourse abandons household analogies and creditor-centric framing, we will continue to mistake political failures for financial ones and respond to them with unproductive, self-defeating sacrifices by too many on behalf of too few.
Source: Susan Borden substack, 5 Jan 2026 https://susanborden.substack.com/p/kenneth-rogoff-is-almost-right-about
Reproduced with the author’s permission.
1. Kenneth Rogoff is an American economist and chess Grandmaster. He occupies the Maurits C. Boas Chair of International Economics at Harvard University. During the Great Recession, Rogoff was an influential proponent of austerity.
Susan Bordan is interested in the economics of sustainable prosperity, and is the U.S. Modern Money Lab Chairman.
