It will end with a whimper, not a bang.
I like all the recent blather from the Fed (reference: the Dec FOMC minutes) about how we may have reached the limit of monetary policy's ability to deal with the crises we face.
Baloney I say. The Fed is bluffing.
After all, we reached that same monetary policy limit in Sept of 2008, and yet the TARP still went through, and the Fed still ballooned its balance sheet, all just to save Hank Paulson's Alama Mater, Goldman Sachs.
But enough of what's in the past- bygones, water under the bridge, etc.
Let's talk about 80x leverage in the global dollar marketplace, and weigh that against the only source of ALL US dollar credit for a moment.
Yup, sure as hell, that leverage factor says that the debt is completely unpayable (aka odious), and that the process of deleveraging means catastrophic deflation... No argument from me.
But wait! what about interest rates?
When primary dealer banks can create whatever capital reserve level they need to be at by borrowing from the Fed for 0.25%, and they then can use this credit to purchase US Treasuries that yield ANYTHING better than 0.25%, then there is still plenty of room for this game to continue...
BUT, of course, there is the threat of rising Treasury yields due to a global Treasury demand collapse. Ignoring such a scenario, (or dismissing it out of some misplaced patriotic duty) firmly places one in the same camp that was reading (and believing) Dow 36000 in March of 2000.
Global US Treasury demand COULD collapse this afternoon, or it MIGHT NOT ever collapse (or at least not until all of us are dead).
If Treasury demand in the open market does collapse, forcing upwrd pressure on yields, and making it harder for the Treasury to issue successful auctions; then the best bet on that day (if/when it comes to pass) will be to simply stand back and watch as the Primary dealer banks buy the rising yield Treasuries, still using newly issued Fed credit that might drift as low as 0.0000125% (or even 0.000000000000000000000125%) ... creating a dollar carry trade that makes Japan's look bush league.
Meanwhile, the Treasury will need to make sure that all this new issuance can keep the US balance sheet from tipping over, so Congress will raise the debt ceiling (either in continuously increasing increments that rise exponentially; or maybe they will get really smart and just throw a nuclear number at it like 250 Quadrillion dollars) and we will all witness a bout of odious debt creation that will make every tsunami that Mother Nature has ever concocted look tame by comparison.
You may one day see the guys on Myth Busters sailing a boat around the world made out of US Dollars and Duct Tape, just to prove that the dollar still floats globally.
Why is this the most logical outcome, you ask? Simple- hyper inflation NEVER occurs in militarily significant economies. The only way you topple military giants is via internal political upheaval.
You can repudiate our currency, but you can not collect on the debt we owe you, unless you can kick our ass. This is the final lesson the Romans HAD to be taught the hard way by the Huns and the Visigoths, and so too, I fear, it will be for the USA.
Sad, but true, if history is a reputable guide.
The US has a very long (decades as I see it) episode of internal and political degradation to endure before the cyclical lessons of history once again assert their mastery over human hubris and arrogance.
Ergo, global US dollar supply will not be shrinking over any horizon measured in years, or even in decades.
The US dollar is not cooked. The US dollar is merely cooking, but the heat under the pot will never rise above a simmer. The water will boil, but not until we get bored of watching it.
In the meantime, there will be all kinds of crazy currency gyrations, and all kinds of new International Reserve Credit currency ideas that will (again) attempt to willfully ignore what is a basic, fundamental, unavoidable, and inescapable truth:
ALL money is a claim on future production. All of it- credit based money, or hard commodity money- it is all nothing more than a representation of the stored value of work that was done yesterday, but is intended to be exchanged for the results of some other work that will not be done until tomorrow.
Therefore, the ability to borrow work from the future will never go to zero, unless the aggregate value of ALL work ever done prior to today also goes to zero.
The fallacy that deflation destroys value is a myth. Deflation negatively impacts the desire to work (since it creates the perception that work is valueless, and therefore meaningless)- this is the persistent nag that inspired Ben Bernanke to crank out his famous Helicopter Manifesto in 2002.
If you understand the value of work as it pertains to your own psyche (pride, accomplishment, achievement, etc) then you will successfully endure EVERY possible future that this diseased system of political and financial corruption might lay out in front of you...