If they pay back their debt, there is a chance it will flow back to the FED, but if they don’t its probably because they bought a Chinese made DVD player at Wallmart. Once that happens the money is in the economy, and if they default on their debt it is “permanantly” in the economy with no hope of deflation. Meaning every defaulted loan actual causes massive inflation.
I always like the explanation of inflation that goes like this:
Lets say there is $0 in the economy total.
Now lets say you borrow $100 from the FED at an interest rate of 1%.
It is not possible to pay back at all because you owe $101 but only $100 has ever been printed.
the FED must print more money and either spend it or loan it into the economy so that you can pay back $101.
If you spend the $100 on a DVD player and then don’t pay back the loan, they money still exists, someone else just has it.
