It is accepted wisdom that in a fiat currency system all roads lead to inflation. I, myself, have trumpeted that view many times on other forums. If we operate on the premise that the trump card where the U.S. economic system is concerned resides in the dollar's reserve currency status, particularly with respect to the petro-dollar trade, then hyper-inflation presents a most dangerous course to take by the monetary authorities. Why?
The U.S. is able to engage in its financial profligacy, to owe the world as much as it does, because the world trades the essentials, particularly petroleum, in dollars. Remove that prop, and a hyper-inflation most assuredly would, and the U.S. economy resembles an economic banana republic almost overnight. The fact is the world is trying to get out from under the petro-dollar regime and there really is nothing that can be done other than to forestall the day of reckoning.
Clearly the dollar's demise is being managed, as in the manner of a terminal cancer patient, in a slow motion sort of way. Let me amend that, it appears as if the dollar's slow death is being managed. However, the look of an orderly decline may be just a mirage, or a temporary condition that will give way to a runaway debacle at some unspecified point in the not too distant future. I am keeping my eye on multi-decade support in the dollar that is being tested for either the fifth or sixth time, right now. In my view, all bets are off as to how ugly things will get when, there is no IF as far as I can tell, the multi-decade support fails.
The deflation argument has more going for it than one might be tempted to think from the standpoint that Peak Oil, Peak Resources, in general, are ultimately massively deflationary since they in essence create enormous and irrevocable demand destruction. As some of you may know, demand destruction and Peak Oil/Resources go hand in hand. If folks like Matt Simmons of "Twilight in The Desert" are right, we should expect unhealthy doses of inflation first, (sound familiar?) followed by deflationary collapse.
Of course sans peak everything, the advent of the prosaic phenomenon known as pushing on a string, where available credit/debt is not tapped because those who would tap it are tapped out, may wind up providing the context for the onset of a runaway deflation. The ongoing housing debacle comes to mind as a state of affairs that will have a great deal of influence on the U.S. consumer's wherewithal going forward; And that in turn will have much to say about which outcome we are faced with, inflation or deflation. Make no mistake, a defeated consumer means a defeated economy.