Inflation could be Trump's secret weapon to fight the national debt — and it's making experts worried

• Inflation has been persistently high, and it's eroding portfolio returns and purchasing power.
• Trump has vowed to bring it down, but some experts are skeptical.
• Here's how Trump might be using inflation to shrink the deficit and what you can do about it.

Inflation eats away at your portfolio gains and it makes groceries more expensive. Everybody hates it.

Or so it seems.

Despite promising to end inflation "starting on Day 1," President Donald Trump may benefit from it. And some experts think inflation could be a feature, not a bug, of Trump's presidency.

Namely, inflation could be Trump's secret weapon to sequester runaway national debt. The logic is that if the underlying currency becomes less valuable, so does the amount of money owed.

Jeff Muhlenkamp, manager of the Muhlenkamp Fund (MUHLX), certainly thinks an inflationary period is in store for the US as Trump tries to inflate away the debt.

"There's reasons to believe we will," Muhlenkamp told Business Insider. "The government's borrowed too much, and the solution governments like to use is to devalue the currency to solve the debt problem."

Rising national debt

The rising national debt is one of the economy's biggest concerns for Scott Barbee, manager of the Aegis Value Fund (AVALX).

"With the US now having $36 trillion of debt, it's an unsustainable situation," Barbee said. "A 1% increase in the debt will lead to $360 billion more of deferral spending just to support interest payments."

The national debt has steadily crept up over the past two decades. At the start of 2008, the debt-to-GDP ratio stood at 64%. Fast forward to today, and the ratio sits at over 120%.

Left unchecked, high debt levels could harm US credibility in global markets. US Treasurys are seen as a risk-free asset, but their status as the world's most trustworthy currency could be damaged if investors no longer deem the US a creditworthy borrower and US credit ratings are downgraded, Ocean Park Asset Management's CIO James St. Aubin wrote in a recent note. In a worst-case scenario, the market could see a massive Treasury bond sell-off as investors dump their holdings.

St. Aubin, Barbee, and Muhlenkamp aren't too optimistic about the government's ability to reign in the debt. While details aren't finalized, Trump has made tax cuts a big part of his campaign platform, which would only drive debt levels even higher.

Can you really inflate away the debt?

Is inflation really a cheat code to get rid of debt? Maybe you're wondering if it'll work on your student loans.

Technically, yes.

"When countries get into this kind of situation and the fiscal debt is denominated in a currency the country controls like the dollar, the way that this gets handled is through the debasement of the currency," Barbee said.

If a government adopts expansionary monetary policies such as printing money, lowering interest rates, or quantitative easing, inflation increases. As a result, the real value of the debt decreases as the US dollar's purchasing power erodes, and the US government can repay its debt with currency that's worth less than when the debt was issued. The debt-to-GDP ratio also shrinks because inflation increases nominal GDP while chipping away at the real value of outstanding debt, making debt a smaller portion of the overall economy.

Trump has been calling for the Federal Reserve to lower rates, which would stimulate the economy. Lower rates also makes it cheaper to borrow money, which would lead to less money owed in interest on the national debt as well.

Inflation isn't an airtight solution to the deficit problem, though. If inflation runs unchecked, it could end up triggering a stagflation scenario that handicaps economic growth and sends the US sliding into a recession.

While Barbee doesn't see immediate cause for concern, he suspects the US government might not be able to kick the can down the road for much longer: "I don't see a way out of it in the longer run without having this debasement occur," he said.

How to prepare

If this is indeed Trump's plan to tackle the deficit, it could result in elevated inflation levels and more stock market volatility ahead.

"Investors have to really modify the way that they're thinking about investing to take this risk into account," said Barbee.

Gold has emerged as a key winner of the last few months of market volatility. The asset has skyrocketed in popularity as investors seek a safe haven.

For Barbee and Muhlenkamp, who have dedicated portfolio allocations to gold, their bets have paid off. Twenty-five percent of Barbee's portfolio is allocated to precious metals and mining stocks.

Muhlenkamp has 10% of his portfolio in gold-related holdings.

"One of the things we've done is really focused ourselves much, much more into the hard asset category because these are the areas that historically have done well during periods of of debasement," Barbee told BI.

Muhlenkamp expressed similar sentiments regarding higher inflation levels in the future.

"If that happens, I think energy and pretty much anything you can't print will do pretty well," Muhlenkamp said.

He pointed out that energy was the best performing sector in the 1970s era of stagflation as well as 2022's high-inflation environment. Muhlenkamp is a fan of the natural gas company EQT Corporation (EQT).

Investors can get broad exposure to gold and energy through funds such as the SPDR Gold Shares ETF (GLD) and the iShares Global Energy ETF (IXC).