Your post contains a crucial, yet wholly unsubstantiated, assertion:

It is true that an unanticipated inflation would succeed in bringing the real debt burden down. But as soon as creditors become concerned that this is the way the problem will be resolved, nominal rates will rise

The central bank sets interest rates net of compensation for nominal default risk. In extremis, the central bank sets interest rates for all maturities if it wants to.

And indeed, the central bank should set interest rates for all maturities: If the central bank does not do so, the long-maturity end of the yield curve depends exclusively on animal spirits and expectations about future central bank policy.

But either way, there is no connection to the government budget, let alone any economic fundamentals. At all.

- Jake

Friends come and go. Enemies accumulate.