But would debt deflation occur in a vacuum?
The only thing that props up the dollar is faith in the US to pay its debts. If it perceived that we are no longer good on debt, if those debts will no longer be paid in full the dollar will become worthless.
If the world loses its faith in the US all of the dollars held abroad as Hard Currency could come flooding back to the US as foreign holders of dollars unload them on to the market.
The US could suffer hyperinflation overnight.
China as one the largest holders of dollars could dump their holdings as an act of retaliation for a perceived slight at any time.
Any large holder of dollars dumping their dollars is going to start a run on the dollar as the holders of dollars try to salvage any value stored in dollars.
Just about every major economy today has a huge debt problem. Some are in better shape than others. Surprisingly, U.S. is one of the stronger ones. When crisis hits, more money will flood into U.S. than go out. China has a serious capital flight problem. Much of it found its way to U.S., driving up real estate price in many places. The financial crisis first started in U.S. and its ripple effect hit all corners of the world. Those places are the ones which are likely to fall first before U.S. does.
> The US could suffer hyperinflation overnight.
Possible, but as long as the US dollar is the primary index for oil, it’s unlikely. However, if the Chinese were to sink a US aircraft carrier group I think hyperinflation would soon follow. Once people lose faith in a government the velocity of that currency goes way up and sea powers like the US tend to have sudden rises and sudden collapses from power.