Published June 2022. Review of Economic Dynamics 45:22-40. I apply an asset pricing style return variance decomposition to the government debt valuation equation. Unexpected inflation comes basically all from discount rates: a higher real interest rate devalues government debt via inflation. Big deficits and lower inflation are not a puzzle: discount rates decline. Long term bonds soak up a lot of fiscal shocks, smoothing inflation forward. I also decompose recession related shocks, deficit and discount rate shocks. zip file containing programs and data.
