Hercules thats the big fallacy they dont have the choices you...

Hercules thats the big fallacy they dont have the choices you have listed . What I question is your underlying assumption. Bernanke argues strongly he can devalue the currency at will, the problem is that Bernankes ideas are simply wrong, so my argument is that (2) is based on a set of wrong headed theories and assumptions

1. pay down the debt with upwardly revalued USD (deflation); 2. pay down the debt with devalued USD (inflation); 3. default.

The stuff thats going on in Europe is instructive, governments can bail out the private system for only so long before their bond holders revolt, printed money must be lent into existence when defaults reach a critical point then bond holders refuse to buy the debt. Japan has been trying to print their way out of it for 2 decades and all that happens is that they get further and further into debt, eventually the political system revolts, forcing austerity.

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Irving Fisher set out the process in the 1930s

1)Debt liquidation leads to distress selling and to
Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

A still greater fall in the net worths of business, precipitating bankruptcies and

A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make

A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
Pessimism and loss of confidence, which in turn lead to
Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.” (1933: 342)

With deflation on top of excessive debt, “the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing” (Fisher 1933: 344).

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The option to reflate only exists while their are willing lenders and able / willing borrowers.

The whole reflation process collapses when debt levels get to a point where more reflation is impossible.

This idea that Bernanke's theories about money printing can reflate an economy at any point are 1/3 myth, 1/3 faulty economic and monetary theory and 1/3 propaganda

they certainly work when debt is low, money is printed into existence and lent by banks to willing borrowers, this credit flows right through the economy raising prices of asset and goods, this can go on for decades before the whole system break down due to excessive debt.

The governor of the Bank of Canada set it out pretty well here

http://www.bis.org/review/r111215a.pdf

Ask yourself "has Bernanke been right about anything to date"?

yes money printing and credit expansion got us where we are today, yes money printing inflated assets and prices , all commodities have risen

Now we are at the inflection point, the ability to inflate has past, now a very long period of deleveraging will occur, global austerity will take over, China faced with so much over capacity will drop prices further deflating the situation

The US will either fix their budget or default, the central banks are impotent, assuming they have choices gives them to much credit and underestimate the severity of the problem