One way or another, all debts are settled... reckoned with... either the debtor pays, or the creditor does. Today, Americans owe more money to more people than any race ever did. Mr. Greenspan made credit exceptionally cheap and easy. This EZ money caused a boom in stocks... then a bubble in stocks. When the bubble began to lose air, the Fed chairman pumped even harder... causing new bubbles in mortgage debt, and housing. So impressed were homeowners with the 'pseudo-wealth' they had gained in their inflated houses, they rushed to spend the money - causing yet more bubbles in imports (record breaking trade deficits)... and Chinese capital spending (trying to keep up with orders from Wal-Mart.)

The debts have grown so big that the borrowers will not be able to pay them back. "Orderly deleveraging is now impossible," writes Kurt Richebächer. Most homebuyers, for example, have no intention of ever paying off their mortgages. Nor does the Federal government ever intend to pay off its debt.

Of course, as long as nothing happens, debtors will be able to continue servicing their loans forever. Nothing is fine for the lumpen. But the smart money knows that nothing won't happen forever. Even failing to borrow more would be something. Today's consumer spending requires more and more borrowing. And yet, the more they borrow, the harder it is for the debtors to keep up with the interest payments.

How, then, will all this debt be settled? Will it be inflated away? Or deflated by defaults and bankruptcies?

"The whole inflation/deflation discussion," began James Ferguson, "asks the wrong question. Will we have inflation or deflation? The answer is yes. We will have both of them. Because the real balance in an economic system is not between rising prices and falling ones... it's between stable prices and unstable ones. When an economic system is healthy, prices move up and down... but in a state of balance. When the system becomes unbalanced - which is especially the case in America now - prices can runaway in either direction and usually both. 

"What you might expect is an interest rate shock - which is what it looks like we're getting in Britain... rising rates that pop the real estate bubble. Then, consumers stop borrowing against the rising value of their property. They stop spending so much. And all of a sudden, you have not an inflationary environment, but a Japan-like deflationary one."

Look out for "savage deflation for the asset markets," writes Kurt Richebacher, "but stagflation for the economy. It is so obvious that no one can see it." 

In a stable, healthy economy debtors pay their debts. In an unstable one, it is the creditor who bears the loss. Either the debtor pays him back in inflated currency... or he goes bust and can't pay. 

Be not a long-term lender at today's rates, dear reader; it is likely to be a losing proposition.

But what about Treasuries? There, you have no risk of default or bankruptcy. The U.S. government will pay you back. Deflation would make them more valuable, not less. 

Your only risk is that the money you get back won't be worth as much as the money you lent. 

"That is still a very large risk," said fund manager Arild Eide of RAB Capital. "The U.S. can not allow millions of consumers and homeowners to go broke. It is not politically possible in a social democracy. Besides, [Fed governor Ben] Bernanke has already outlined for us the steps they will take to make sure inflation eases Americans' debt load."

Okay, let's get this straight. What to expect, we mean. Rising inflation brings rising interest rates that pop the debt bubbles. Then, the economy slumps... with falling prices for almost everything, especially financial assets. But the authorities can't stomach the sight of millions of voters trapped by their own recklessness... so they take action. What do they do?

"Whatever they need to do," came the answer from the Roundtable.

We do not doubt the logic. Or the will. What we doubt is the ability. But we will see. We will see.