Voima Weekly #54 – The Debt Will Be Repaid - But What Will the Money Be Worth?

Erosion. Waves gradually wear away the base, even while the cliff still looks solid. A metaphor for the erosion of purchasing power. Image generated with AI (which is getting so good that the results are becoming hard to distinguish from real photographs).

Government bonds are regarded as safe investments, and a few per cent in interest can look very attractive. The reasoning behind that sense of safety is understandable: governments have the power to tax. Businesses must find customers willing to pay for their products. Governments can compel people to pay. This gives them an exceptional ability to raise money even when the economy is struggling.

But this view of repayment security can be too narrow.

Getting the agreed number of euros back does not tell you how much of your work, time and future financial security those euros will preserve. A government can repay its debt exactly as agreed while the purchasing power of the money you receive has fallen substantially. There may be no default and no credit loss, yet some of the purchasing power has disappeared.

In Weekly #53, I highlighted that Italy last recorded an overall surplus, including interest payments, in 1925. I find that an extraordinary fact. France’s last surplus year was 1974. By the end of 2025, that meant one hundred consecutive deficit years for Italy and 51 for France. Finland’s last surplus year was 2008, seventeen years earlier.

Over those decades, governments, political parties, economic cycles and entire generations have come and gone. Yet spending, including interest payments, has continued to exceed revenue year after year. Italy has recorded primary surpluses in some years, covering all spending other than interest with its revenue. It would therefore be unfair to say that nothing has been attempted. But the interest bill is a real bill too.

The structure of demand for government bonds also deserves scrutiny. Central bank purchases and the favourable treatment of government bonds under banking regulations influence who buys them and at what price. Not all demand is driven by the same considerations as a person investing their own savings. At what interest rates could governments borrow without public-sector purchases and the incentives created by regulation?¹

What interests me above all is how the system works if the debt burden keeps growing and the political capacity to stabilise it cannot be found. Debt can be rolled over, with maturing loans repaid through new borrowing.² But refinancing only answers the question of how the next repayment deadline will be met. It does not answer how the ultimate cost of the debt will be shared.

One method used historically is to reduce the real value of debt through inflation. A study by Carmen Reinhart and Belén Sbrancia, published by the IMF, describes how the combination of low interest rates, regulation and inflation helped reduce the debt burdens left by the Second World War. Creditors can receive the agreed number of monetary units, but if their interest return falls below inflation, they lose purchasing power.³ The researchers describe this as a mechanism akin to taxation: governments reduce their debt burden at the expense of savers and bondholders.

This brings the discussion close to an ordinary bank account. Think of a family saving for their children, or a business building a cash buffer. Money is kept in the account because people want it to be safe and available.

The account balance can remain exactly the same. Yet the renovation, investment or retirement living costs it is supposed to cover can move further out of reach. Nobody needs to withdraw any money from your account. Purchasing power is lost whenever prices rise faster than your savings grow.

The ECB’s inflation target is two per cent. But a target is not a guarantee. Even achieving that target entails a decline in purchasing power. My own view is that the combination of growing debt and political spending pressures will push inflation clearly above target in the years ahead. Official euro area inflation averaged approximately 4.15 per cent a year between 2021 and 2025. At the same rate of price increases, the purchasing power of an interest-free €100,000 would shrink to around €81,600 in just five years. The account would still show €100,000.

Growing debt adds its own pressure.

When debt is high, rising interest rates become expensive for governments. A central bank may need higher rates to contain inflation precisely when heavily indebted governments need cheaper financing. This conflict can lead to fiscal dominance: public financing needs begin to constrain the central bank’s ability to defend the value of money.

Isabel Schnabel, a member of the ECB’s Executive Board, has also warned about the pressure that growing government debt places on monetary policy independence.⁴

I am not suggesting that France or Italy, for example, could order the ECB to weaken the euro. But when the euro area as a whole is running a deficit, the thought is difficult to avoid. The ECB is independent, and it has also raised interest rates sharply to contain inflation.⁵ Yet political pressure does not disappear simply because central bank independence is written into treaties.

Government debt and the money supply are not the same thing, and additional debt does not automatically cause a corresponding decline in the value of money. Much of our money is created through commercial bank lending, while inflation is also influenced by production and demand. The criticism centres on the incentives created by indebtedness and on who pays the bill if the return on savings falls below inflation.

Is this left-wing or Keynesian economic policy? Keynesian thinking includes using public demand to stabilise the economy: governments can support demand during a downturn and restrain it when the economy overheats. That does not amount to a blank cheque for permanent borrowing under all circumstances.

In my view, the economic problem arises when the case for stimulus is always remembered, while responsibility for strengthening public finances is continually passed on to the next government. Party affiliation does not change the consequences. Even Keynes himself wrote in 1919 that persistent inflation allows governments to take a substantial share of their citizens’ wealth without them noticing.

In trade, we take it for granted that a measure should be reliable. The Bible calls for honest weights and measures (Deuteronomy 25:13–16). It seems reasonable to me to apply the same principle to money.

A government can repay its debt exactly as agreed. But who pays the bill for irresponsible borrowing, and how high does the true tax burden rise for those who work, build businesses and already pay substantial amounts in taxes?

First come taxes and similar charges on what we earn. Then comes the loss of purchasing power in what is left.

P .S. The Kuuntelija podcast, one of Finland’s most popular, invited me to discuss the economy, taxation and gold. We also explored how the Voima companies came into being, along with my own background and story. If these topics interest you, listen to my conversation with Roni Arvonen here: https://www.youtube.com/watch? v=Lxikv7LOHBI . The episode is in Finnish.

–Marko Viinikka
Founder, CEO
Voima Gold Oy

Disclaimer: Voima Weeklies are the personal writings of the undersigned. They do not necessarily represent the official view of Voima Gold Oy or any other company, nor do they constitute investment advice or a recommendation to purchase securities.