It's really not that complicated imo...

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.

Hey, thanks for this comment. You seem to be knowledgeable about the topic and I am a moron.

What happens to consumer spending and associated tax revenue when imported goods cost significantly more? Let's take a hypothetical German auto brand that has no factories in the US (BMW, MB, VW have factories, not sure if Audi and Porsche are grandfathered in because of VW).

If a car that cost $100K before and now is $125K, it seems that the demographic that could afford that $100K will shrug and pay the higher price. Now, that's the well-off folks, a bit immune in this economy.

What other consumer goods with imposed new tariffs will cause less spending and shrink the economy instead? It seems that tariffs are a net loss, besides I guess in cases when they are used to prevent dumping.