Perhaps you could elaborate on the mechanics of this process? How does an aggregate inability to service loans (in full or in part) cause the money supply to contract, or at least contract faster than goods/service contract? Whatever that answer is, how does it prevent the Fed from printing money and buying back Treasuries (monetization of Govt debt)?
The inflation answer cannot work unless it can be accomplished in a process which increases income. Not only is that not happening now, it is difficult to come up with a hypothetical state of affairs in which increased liquidity provided through the bank fractional reserve process can result in increased income....
I contend it is happening now on a global scale. The US Federal Reserve and GSEs are inflating the USD money supply, the Japanese and Chinese are inflating their money supplies to sterilize their USD profits. Incomes are increasing in India, China, South America - the bulk of the worlds work force. They are buying food, cars, air-conditioners, cell phones, etc. Their governments and employers are buying up commodites and companies to make & power all that stuff.
As to the long term trade deficit issue, if the domestic economy continues to deteriorate, US customers will reduce offshore purchases and the offshore economies will also contract. Since US consumption is the primary market, the offshore economies will suffer more from contraction in the US than the domestic economy does.
Yes, and the 'solution' will be to do what Central Banks and governments always do - stimulate their economies with debt-based expansion and increased liquidity, except the target beneficiaries will be their own populations instead of the US.
But the pumping of the money supplies will continue. Debt being monetized in the US, and competitive currency debasement amongst the Asians & Europeans.
Otherwise it seems to me like dollars in dollars out; net wash.
Now your #54 is the global issue--inflation or deflation.
The short answer is that when the fed creates a lot of money through the bank reserve addition and lending process (which is the only way additional money supply gets into the economy, subject only to a little additional slippage as a result of the derivative process which I believe is not material), it also creates debt service requirements.
Income then gets used to pay debt service rather than to pay for new commitments so demand starts to slide; priceing power disappears; and pretty soon additional debt beings to be used to pay debt service on existing obligations. Money supply flattens out and begins to contract because the dollars that come out of income (or tax revenue) to pay debt service disappear (the money supply underlies the obligations--so whenever debt disappears, the underlying money disappears also)--pretty soon, the fed can't force enough additional money into the system through the debt process to exceed debt service on existing debt. Then we have deflation which becomes imbedded.
The only four obvious sectors where the fed can force money (in large enough quantities to make a difference) into the economy are stock margin debt; personal use real estate; consumer debt including auto loans; and capital spending with borrowed money by state and local governments. We have not yet rolled over but all four areas are under pressure (I assume last week's stock market rally is about over).
From 1924 to 1928, the fed used stock market margin debt as the primary vehicle to inject additional money supply into the economy. And it was really the only sector available (although the wealth created in the stock bubble was used as a basis for significant additional borrowing throughout the economy). So the end was a sharp cut off when it became apparent that stock values were insufficient to provide liquidity to repay the margin debt.
The debt that resulted in the period took through 1949 to eliminate through the process of inflation, repayment, and creditor realization. And throughout the 20 year period, commitment of liquidity to the debt liquidation process (coupled with poor federal fiscal policy and bad management by the fed of the monetary system, enhanced by the government's intervention--the gold price increase) eliminated most new spending for new capital commitments. Hence the economy stopped.
The current state of affairs is much more dire. The amounts are larger; the debt permeates our society in every segment of the economy--government; private industry; consumers; and investors. I read over the weekend (but have not confirmed the data) that one of the main Treasury demands behind the large borrowing this month and next is for money to pay unusually large tax refunds.
Why do we have big tax refunds? Because taxable income is down. (As is sales taxable consumption.) The single most accurate measure of the problem is tax receipts--because that number is not yet massaged.
Your point about offshore incomes is interesting. As an abstract proposition, if the US simply disappears as an economic factor, why can't China and Japan simply conduct their domestic economies by manufacturing and selling to domestic consumers? Because the domestic consumption maket doesn't support their manufacturing economy for the reason that it is not large enough. When their manufacturing economy implodes, so does the rest of their domestic economy.
Beyond that, however, you get into some esoteric areas that I can't see through to the end. The CB's of China and Japan don't just print money to support the domestic economy because that would be just a pure hyperinflation that would destroy their monetary unit--their domestic demand economy is not large enough, and can't be pumped up enough, to support the manufacturing economy they created to supply the huge US consumer economy.
But in managed economies like China and Japan, I can't tell what the end result is where their reserve base is US Treasury Debt. Nor can I speculate what will happen when there is a problem with maintainence of the Bond markets. And I don't think we can see clearly what will happen when the derivative markets become unstable as a result of counter-party credit issues.
On balance, I think the offshore economies are in worse shape that the US--and that the deflationary collapse will have a greater adverse impact there than here. But that is a speculative conclusion which may not be correct.