The real problem that we face now (IMO) isn't the debt and inflation
by itself. It's this in combination with the current geo-political settings, and the financial institutions' really bad positions in the debt markets.
I don't know how much you know about these things. Basically, there's a LOT (several times over the entire world GDP) of multiple-leveraged debt that is packaged up and turned into little bond certificates that are then sold to wall street and hedge fund investors as a way of making profits. The returns on some of these packages were
really good in the past, and the risk, while real, wasn't too bad. Basically, the investors are paid to assume the risk of a default on the underlying debts.
Unfortunately, all of this was built on a big debt bubble. Similar to the dotcom bubble of the late 90s, this debt bubble is destined to burst. It's begun to burst already, but the government and the Fed is trying desperately to stop it by injecting money into the system. Unfortunately, the market is trying desperately to continue to inflate it at the same time by selling more superfluous things to already-indebted consumers.
So what is happening is: the bubble's been getting bigger and bigger while the burst has been postponed, but it remains inevitable. Now that it's beginning in earnest---the housing defaults, auto loan defaults, "credit crunch", and massive banking and financial markdowns---it's going to be REALLY big and painful.
All those debt arrangements within wall street are mysterious. No one really understands even their
modeled values, let alone their market values---not the originators nor the investors---nor does anyone even know who owns what. The debt has been used to purchase other debt and so on and so forth until each little bit is owned to some degree by the entire market... including even your 401Ks. Imagine a giant knot or spider's web where everything is connected somehow to this bad debt. Now that they're beginning to unravel, it's setting off a chain reaction throughout the entire financial system.
And the investors don't know how to get out of the trap. The funds aren't liquid, and no one wants to touch them for a trade. What's more, when people do get their debt packages valued on the market, "marked to market", they're finding them selling at 10 cents on the dollar in some cases, which means a loss of 90%. That's bad.
The debt problem is spreading, and not slowing. It's a natural phenomena: a market correction. This one just happens to have catastrophic potential... not like previous "recessions".
This brings us to inflation. Coupled with the vast national debt financing, the Fed has two choices in a real catastrophe. They can either let the market fall into deflation (where paper cash will be valuable), or they can hyper-inflate, or print loads of money to keep things going as long as possible (where gold will be valuable). Bernanke is referred to as "Helicopter Ben" because his academic writings on the Great Depression indicate that he'd prefer to inflate in that situation.
Finally, the geo-political aspect can't be overlooked. An analogy:
Our economy operates as if we're a family with a giant credit card, and the world is our bank. For a long time, the world has paid down our balance for us, mainly because we were its biggest credit card client, and it didn't want to lose us, thinking that we'd help their business in the long run. We have helped their business, by allowing them to expand their own economic productive infrastructures based on our purchases. Now things are different. The world has many other clients, and is self-sufficient in nearly everything,
including consumption. It doesn't want to pay our bill anymore, doesn't see any continued benefit to doing so, and has given us notice that it soon no longer will (decoupling from dollar in many countries, for instance).
In the process of having the free credit, we've forgotten what it's like to work for our money. We have allowed most of our productive, manufacturing base to fall into disrepair or to go to other countries. Essentially, we've become dependent on the credit card to live, as we haven't bothered to hold onto a good job. Now that the credit is going away, we'll have a long adjustment period before we can rebuild our own productive base and "find another job".
It's all of that put together that's worrisome. On a positive note, the massive numbers of fat people in this country may be put on an EXCELLENT diet plan very soon...
