TL;DR
Higher budget deficits push up inflation faster than most people think, because markets price in the effect in real time — a kind of backdoor default.
Bond investors and economists have long nursed a fear: a government that borrows too much will eventually resort to higher inflation as a backdoor default. Through much of 2026, long-term bond markets have brought that fear into the open.
A recent study wanted to see how quickly that link shows up in the real world. The researchers zeroed in on the 2020 U.S. election — once Democrats took the White House and the Senate, they could push through a huge stimulus package.
Everything hung on the Georgia Senate runoff. Polls showed a knife's edge, and Wall Street had already calculated: if Democrats won, stimulus would add $900 billion (later about $1 trillion) on top of what had been agreed in bipartisan bills.
On runoff day, bond markets, inflation swaps and dividend futures all adjusted in real time. The researchers estimate that each one-percentage-point rise in the deficit lifted two-year-ahead price expectations by about 0.19 percentage points.
About a third of the 2021-2022 inflation surge came from the deficit shock — and that's before supply-chain snarls and the energy crisis piled on.
Today, with the U.S., Japan and much of Europe running hefty deficits, markets will keep delivering the same real-time message: borrow too much, and price expectations rise.
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