How long can governments keep taking on more debt?

The burst of inflation during the pandemic was due to a supply shock caused by the closure of societies, while the massive government stimulus fueled demand for goods in particular. From there, inflation spread throughout the economy. Inflation remains awkwardly high, especially in services, although the trend is down, and optimistic forecasts suggest a return to the central banks' 2% target soon. 

The inflation of recent years and the sharp public stimulus are good early warnings of what is to come. For governments, the pandemic was an excellent exercise in how to stimulate the economy from a miserable level.

Public deficits can last a long time, but not forever. The level of deficits, especially in the US (over 5% of GDP), is practically at crisis levels, but we don't have a crisis, we have a roaring economy in the US and a somewhat reasonable economy in Europe and China. Unemployment is at a low level, but still deficits have widened. Keynesian counter-cyclical stimulus policy has become MMT-led stimulus at every stage of the economic cycle.

Public spending is inflated by rising social and health expenditure as the population ages. The rise in interest rates has also pushed up interest expenditure. Defense is swallowing up more money as the world fragments into competing military camps. Of course, one person's debt is another person's savings (if someone wants to save without collapsing the economy, someone must go into debt), and it also reflects to some extent the growth of inequality. Taken together, these factors are not likely to be reversed any time soon, so we can expect debt to continue to rise.  

The U.S. Federal Budget Office expects the national debt to swell to more than 150% by 2050. The debt "held by the public" is now already 99% of GDP. Deficits are forecast to remain above 5% until the very end, no matter who is in the White House. 

The independence of central banks is under threat or already gone. If you owe the bank a little, you're in trouble. If you owe the bank a million, the bank is in trouble. In line with this comment, central banks have no choice but to maintain a benign liquidity situation so that the financial system and, if necessary, the central banks themselves can finance public spending. The bond market turmoil in the UK in fall 2022 spooked central banks, and since then global liquidity has developed favorably. It is no coincidence that global equities bottomed out at the same time.

The official "QT" (quantitative tightening) is also likely to end soon. In the U.S., the Federal Budget Office itself (!) predicts that the Fed will soon turn its back on QT and begin to swell its balance sheet with bond purchases in the coming years.

 
Debt monetization is not far away. Government deficits would also be expected to fuel inflation (in addition to pure asset class/money inflation), as the US economy is already running at a reasonable capacity and downright hot. This is an important difference from the post-financial crisis period, when the economy was weak, unemployment was high and government stimulus was muted. Central banks alone can’t feed inflation with their "printers” but need the state to inject money into the economy through deficits. 

To make matters worse, the geopolitics of competition between the different camps is forcing investment. Is it an option to exercise fiscal discipline if the neighboring region is splurging big on investment and business subsidies? Europe stands in wonder at the roaring US economy. China is also taking on more debt like no tomorrow. So far, policy change seems unlikely, except in Europe that is turning into an open-air museum, where gray politicians, at least at the level of rhetoric, are trying to stick to budget limits. The current Finnish government has also done surprisingly well in the polls, despite its austerity policies. Europe's squeamishness on public spending is reflected in the continent's weaker economic performance.

Cutting back is also a difficult path, because it erodes the conditions for economic growth. When economic growth potential is low, as it is in Italy, cutting back is like getting into a bucket and trying to pull yourself up by the handle.

Why save money if the currency has no value in the future?

Particularly in the United States, there does not seem to be the political will to close the deficits. 

Thus, higher levels of inflation and interest rates seem almost inevitable in the future, unless economic policies change.

"Financial oppression", i.e. a situation in which central banks manipulate interest rates (as in Japan), is not an unlikely scenario. Negative real interest rates and inflation help countries manage their debt. With inflation, the economy and tax revenues grow, but the nominal value of the debt remains the same.

Cash is a sure loser, although it has good temporary uses in inflation shocks when asset classes are repriced (as in 2022). Companies are benefiting from the stimulus and their stocks are benefiting from the surge in liquidity, but on the other hand, only competitive companies can raise prices in line with inflation. Low capital/investment requirements and high margins are an advantage. Even investments are becoming more expensive (just look at UPM's investment in Germany). The best thing for equities would be steady strong economic growth with low inflation. Worst-case scenario of high inflation and weak economy, similar to the stagflation of the 1970s or a milder form in Europe 2022-24

Raw materials as a broad portfolio and gold have historically performed well in times of inflation, as the correlation with returns and inflation is positive. Speculative cryptocurrencies are not a hedge against inflation per se as seen in 2022, but they are sensitive to liquidity expansion as the last 1.5 years' rise shows. It is another matter whether it makes sense to use intrinsically worthless fiat money to buy an intrinsically worthless cryptocurrency whose price depends on the enthusiasm of others. 

Investors should be prepared for a continued decline in the value of the currency and an increase in government shenanigans under budgetary pressures. Central banks will soon be under the boot, as they were last in the 1930s-1970s (so this is not a new phenomenon). Investing is about postponing consumption today in order to have more purchasing power in the future. Higher inflation erodes this purchasing power, which is worth protecting.