Deflation means higher risk of default

On July 18, I wrote that it was basically impossible for there to be a debt crisis so long as the dollar was stable against gold.  I've thought about it some more and I think this is incorrect.  A little bit of inflation, say 6% or less, is an escape valve against excessive debt, because it makes the debt worth a little less.  No inflation and increasing debt is a danger sign because there are increasing pressures and no escape valve.

Even though the debt is increasing a little bit less, it is still increasing more than GDP (unadjusted for inflation) is increasing.  A debt crisis can occur even if the dollar is stable against gold, and in fact is more likely to occur if it is stable against gold.  So I think we are still at risk.

My last prediction was 2029, and I will revert to that.  Here is the problem:  as long as the debt increases more than the GDP does, interest will also increase as a proportion of GDP, even at stable interest rates.  So even if the record-low interest rates can be sustained for an extended period of time, the interest as a proportion of GDP will continue to increase to the point where it is clearly unsustainable and hyperinflation/default must occur.

So the dollar strengthening against gold is dangerous. To counteract this, the Fed should engage in more QE, but purchase gold instead of more Treasury bonds or mortgage-backed securities.  This will provide a little healthy inflation (and making the debt problem less overwhelming) and make the dollar fundamentally stronger.