My best guess

As the current debt ceiling battle clearly reveals, neither party is yet really serious about reducing the federal deficit or the national debt. The Democrats, and especially President Obama, are still in full denial and determined to not only preserve, but even to expand the current entitlement programs. Indeed, some liberal academic commentators, Paul Krugman in particular, are still arguing that the government ought to increase its spending even more to try to kick-start the economy (because the last stimulus program was so successful at bringing down unemployment???).

The Republicans, though driven by the true believers in the House Tea Party faction to demand some sort of real reductions, are still playing with reductions that are a drop in the bucket compared to the real problem. The most they have seriously proposed is about $4 trillion in cuts over ten years, when the problem is “officially” at least $10 trillion in size, and actually two or three times larger if one counts all the “off budget” deficits which Congress has managed to keep out of the “official” counting.

The voters, according to the polls, are really worried about the deficit and the debt in the abstract, but don’t want any of their own entitlements touched. They would probably not vote for any politician who told them the truth, or who proposed to do what is actually necessary to reduce the deficit and debt.

So my best guess is that when all the political maneuvering is over and we are past the next election, the government will still be borrowing about half of what it spends, and the national debt will still be growing at an alarming rate. In the face of this, there really is only one way left to solve the problem – devalue the dollar. I doubt that the government will “officially” devuale the dollar – that would be political suicide. But they can accomplish the same thing by allowing inflation to rise. Indeed, under this scenario, the government probably cannot even control the inflation rate – natural market forces will drive it up as holders of government bonds lose confidence in America’s financial position and there will be little the Federal Reserve can do about it.

It’s not a pretty scenario, but I see little evidence that our current political system can avoid it.