With regard to the question of inflation/deflation/possible currency collapse, the way I sees the question is this:
Is the current system of financing our national debt sustainable and, if it isn’t, then what?
Here has been the dynamic for the past 20 years: US consumers and the US government and US institutions run up huge debts. These debts are used to finance consumption, not capital investment. The consumption is a consumption of largely foreign products. The foreigners who sell these products earn beaucoup dollars. Essentially, then, the dollars get sent overseas. The dollars are then “recycled” by foreigners investing them in US government bonds, which allows the US to continue running up huge debts, allowing us to continue to buy products, etc. etc. etc. That has been the pattern.
We might be on the cusp of seeing that dynamic break down: US consumers and the US government and US institutions are stuck with huge debts accumulated over the past 20 years. Only now, the credit bubble has burst so new credit is not being created. Jobs are being lost, home prices are declining, and everyone feels poor. Consumption of foreign products will fall dramatically due to lack of money. China, Japan and other producer nations will suffer, having lost their #1 market. They will no longer be getting dollars in nearly the same quantity. They will therefore be unable to continue to buy US government bonds in anything close to the same quantity.
The problem is this: The US government has dug itself into a $10.5 trillion debt. That debt is not going anywhere. At the same time, the US government has and will continue to have unprecedented financing needs due to the cost of the bailouts, the dramatic decrease in tax revenue, interest on the debt, retiring baby boomers, everything Obama wants to do, etc. Thus, just when the US’s financing needs are incredibly high and getting higher, our traditional source of financing just might dry up. Then what?
Answer: The US “monetizes the debt” by, essentially, printing money? This creates a vicious cycle in the form of higher interest rates, decreasing purchases of US bonds, higher debt, etc. If this cycle gets going, it is the most inflationary of all outcomes. In other words, if we have very high inflation or hyperinflation, it could come, ironically, not from an increase in domestic lending and higher economic activity, but from the recession itself leading to a breakdown in the traditional means by which US government debt has been financed.
Right now we have deflation (at least as it is commonly understood – a decrease in the price of commodities and assets). But deflation may very well be the condition precedent to hyperinflation.
The fundamental problem—the endgame, if you will—is the gigantic US government debt and how the country can sustain itself when its external sources of financing dry up.
Everything you say is true; your projections should be unquestionable. However, we now have the Paulson Gang in the day trading and market manipulation business; look what he did while at Goldman Sachs…
The U.S. is now just another player at the poker table. If Paulson, via his Incredible Market Manipulation Fund (IMMF), manages to stabilize and rally the market (aka, fool everyone), he may be able to continue to "Sach" (as in Goldman Sachs) the rest of the world–as the U.S. has for the last 100 years or so. Same game, less discrete.
I don’t think the world is as ignorant as he thinks it is. We’ll see…