I am doing this course on Coursera. In the context of explaining what Budget Deficits are, the professor puts up the following formula:
Real Deficit = Nominal Deficit - (Inflation*Total Debt)
My confusion is, where is the Total Debt coming from? Shouldn't Real Deficit be just a function of Nominal Deficit and Inflation? i.e.,
Real Deficit = Nominal Deficit - (Inflation*Real Deficit)
My understanding is that Total Debt is just the accumulated debt over the years (including the current year's budget deficit incurred so far). Is that understanding wrong?
The professor goes on to give a numerical example to explain the concept of inflating the debt. That's when the effective burden of debt falls due to inflation.
If Nominal Deficit = \$100 billion, inflation =10% and Total Debt = $5 trillion, then
Real Deficit = 100 - (0.10*5000) = -$800 billion.
I don't get it.
Edit: This is the direct link to the 6 minute lecture where he talks about it.