The Threat Right Now is Deflation - Not Inflation!

Too many people are preaching a gloom / doom scenario where the Chinese (and others) reject U.S. bonds because of the debt, we have to raise interest rates, and suffer hyperinflation.

That is just a fantasy at this point.

Since the "downgrade", investors have been piling into treasuries - S&P's view was completely rejected. U.S. bonds are still considered the safest and most liquid investment. There are no other options. Swiss bonds are considered safe, but their market is not nearly large enough.

Right now, we are more in danger of deflation than inflation. There is currently a liquidity trap. Companies are awash in money, but not spending. So there is no demand.

Proof: Bank of New York just started charging negative interest on large cash deposits. Any return the bank can get by investing its balances in overnight / short term paper can't even cover the insurance / overhead of holding deposits!

Even though everyone wants the debt burden eased and don't want any more government stimulus, that might end up being the only course of action. The Fed can't cut interest rates any further. Companies have money, but there is not enough demand for goods/services. Cutting government spending right now will reduce demand. The time to reduce the deficit by spending cuts will be after the economy recovers out of recession.