Whether you define deflation in terms of credit, in terms of purchasing power of the dollar, in terms of the CPI, or in terms of the Case-Shiller CPI, to the complete consternation of screaming hyperinflationists, those predicting deflation got it correct.

Before we can get to how I think the Endgame of the debt supercycle plays out in the US, we need to quickly survey the current environment, and revisit (at least for long-time readers) a few basic economic themes that I will call the “headwinds” of economic growth. So many leaders in so many countries think that with the right policies they can grow (export) their way out of the problem. As I have written, not everyone can grow their way out of a crisis at the same time. Someone has to buy.

Higher inflation means US debt is easier to pay back, as nominal GDP is what we pay taxes on, not inflation-adjusted. Inflation is a tried and true method of dealing with too much debt. Inflation is also just another word for default, but it sounds so much better to the ear.

Not only does this one image explain the enormity of the housing bubble, but it also debunks the myth that home prices appreciate faster than inflation over time. They don’t, and this is proof. And that makes sense – over time, the cost of homes can’t go up more than peoples’ ability to pay for them.

“Attempts by creditors to persuade nations to bail out their banks at public expense thus is ultimately an exercise in public relations. Icelanders have seen how successful Argentina has been since it imposed a crew haircut on its creditors. They also have seen the economic and political disruption in Ireland and Greece resulting from trying to pay beyond their means.