There are three states that the monetary system exists in....

There are three states that the monetary system exists in. Inflation, equilibrium and deflation. The luxury of finding the right state for the economy appears to take a toll on government debt. The Japanese are notoriously the poster child for the highest debt to GDP. This carries so much shame that it would be terribly difficult to be the government that comes along and dwarfs Japan's debt to GDP. China may not be forthcoming with their debt to GDP figures because the Chinese know the world needs their economy to push through this glut. With measures restricting the sale of assets being taken, I do not have confidence in China saving the day. Yellen will not raise rates if there are any more vomiting camels from the Shanghai stock market. Regardless, the US have a reasonable debt to GDP as compared to Japan. It only sits at 102% as compared to Japan's 230% so they can take on more debt to buy more time.

Supporting fiscal measures have been taken to limit US government spending effectively. The government may not be running surpluses but their deficits have shrunk considerably which allows them to stay in this state of equilibrium longer. This is a small victory but I say small because the recovery needs inflation to offset their debt burdens. The US partakes in the global economy and prices are falling globally. Not to mention the US's seasonal Winter glut adding to deflationary forces, which pose the fundamental problem of paying yesterday's debt with tomorrow's prices. Add to this the political problem of governments applying pressure to squeeze as many exports out of their currencies as possible and no, the US will not raise rates when Europe, Japan and China are having a currency war over exports. But is this a problem?

The problem will arise when the balance of trade erodes at the American people's debt situation. Household debt is climbing with falling prices. More US dollars are leaving America's shore and US dollars can buy anything. This is not a problem now but there are trillions of US dollars that will one day mature in the form of Treasury bonds, bills and notes, which poses the next challenge to the quantitative easing program. Sure, they have time to wait for inflation to climb but do they have enough time to offset their debt burdens with that inflation. If not, the US run the risk of skipping from equilibrium past inflation to hyper inflation when the Chinese hold most of America's dollars. Remember what happened when Soros did that to Thailand's bhat. Remember how the whole world watched contagion spread to make the event the Asian debt crisis. I'm just saying.

There does appear to be time for all this to play out. However, I have decided that paper gold is too dramatic for the cavalier macro environment and I am going to get physical. I still hold my paper gold though.