Quote Originally Posted by jp1 View Post
I only see two ways out of our current situation. One, default on the debt and start over. Two, more quantitative easing or other money printing, thus causing inflation and a significant devaluation of the dollar until the debt is once again manageable. It's pretty obvious that Bernanke will opt for the latter. I have no idea how it's going to turn out but I'm guessing that there will be much unpleasantness along the way.
I share your "I have no idea how it's going to turn out."!

I'd like to add a few things. The Fed has a dual mandate of low unemployment and low inflation. This is generally understood to be a tradeoff (The Phillip's Curve). Given what many many people think is a naturally (currently) deflationary environment and high unemployment, it makes sense for the Fed to push much harder to create employment.

Also, I don't have a link into Bernanke's head but I suspect he makes much less of a distinction between public and private debt than most people do. In other words, governemnt debt is just a subset of the total debt situation. One man's debt (liability) is another man's stash (asset). The problem is that so much of society is buried in debt that it is adversely affecting our economy. The view from 5,000 feet says that the fix is to relieve the overall debt burden, which means a big wealth transfer from lender to debtor. The path is of course inflation. It is just a bad situation, and a dangerous game.