The point you raise is a good one, but the deflationists are likely wrong - and even if they are right, they are right for the wrong reasons.
The key point - that most commentators are missing - is that this whole issue is fundamentally a foreign policy issue - it is only derivatively a financial issue. And the fact that so many people miss this point means that they get many things round the wrong way. And if you really want to be able to pick whether the US is going to have a monetary crisis, it doesn't matter at all how far into debt they go. What matters is the diplomatic reality that surrounds them - and that largely depends on the leadership of the major players.
So - let me explain why this is a foreign policy issue. The US is the defacto policeman of the world. It guards the western way of life. To be able to do this it has to have an enormous military. This is largely funded by all those countries that purchase its debt. They do this because essentially they support the US in this role. However bad the US is doing its job, most governments shudder to think what the alternatives might be if it couldn't play this role.
What are the alternatives?
1) 2 superpowers - cold war scenario 2) Large numbers of equal powers - systems of treaties and alliances... vying for supremacy - potential world war I type scenario. 3) Rogue states, fanatical religious states left unchecked and bring about a new dark age (pakistan is the current big worry in this respect).
These are genuine possibilities should the US suddenly lose its superpower status through a currency crisis. Not even China and Russia particularly want to confront this reality - not until perhaps maybe the two of them could team up to supplant it's military role in various regions - but only gradually and they are nowhere near strong enough yet.
So everyone buys off US debt - that's ultimately why the western world didn't mind when it floated its currency. Because they didn't mind funding its wars - and of course at that stage the western world wanted it to stay strong against the Soviet Union.
Then the cold war ended - and new enemies need to be found to justify the status of the US. But bear in mind - the terrorism issue is a bit of a sideshow - it's there to convince the general population that we need to have all these various wars. But what are these wars about really? They are about giving the policeman something to do, so that US hegemony still looks relevant and necessary. Of course, it IS relevant, and probably necessary. It's not so much that Iraq would have nuked us with their weapons of mass destruction - but that we generally need to keep the perception up that the policeman is needed so that none of those 3 scenarios come about.
This whole game worked well for quite a long time. But then something changed. China liberalised and the Asian nations had a financial crisis in the 90s which caused them also to pile in en masse into US Treasuries. Why did they choose US treasuries? After all, Asian nations don't necessarily share all of our western values... and what about the Arab bloc? Well - because the hegemony is well established, that makes the investments safe. Everyone is playing the same game, and no one wants the game to end. Because of crises like the Asian one in the 90s they wanted to park their reserves where it was absolutely the safest.
But there was too much money going into one place - and the bankers tried to load it all onto the american consumer. One the deflationists are right about - this process couldn't go on forever. Cue 2008 and the financial crisis.
Now the world accepts that the US needs to devalue. Central banks are currently helping the US to do this. They are currently selling down their reserves while letting the Fed do most of the buying in treasuries. But they are doing it gradually. So the value of the USD goes down - and the fed keeps interest rates low. If they can devalue enough - then the amount of debt that they need to issue in order to keep paying for their military as well as health care etc... will not be so onerous. What's more, their own manufacturing will improve, while export nations will worsen. More captial will move into these previous nations, the chinese will feel richer, even while their real economy is worse... same with the commodity countries like Australia - we'll be able to buy crap on the cheap even while our mines are going out of business because the australian dollar is so strong.
But this won't happen all of a sudden... because that won't give anyone time to re-tool their economies to better serve their domestic markets - build their service industries etc... something that China has a massive amount of work to do in respect to.
As such - in all likelyhood. US hegemony will be preserved. Basically the trade is - the world will pay for America's wasteful living in exchange for using its stupidest young men and women to go die in aghanistan and iraq and probably iran.
The deflationists are wrong in that America will be allowed to transfer the private debt onto the public balance sheet and then print it all away.
Now - and this is the fun bit. It might all come crashing down. But ONLY if one or more of the other countries like China or Russia make a play for power. It won't be because of the deflationary math behind all the debt the US has accrued. SO if there IS a dollar crises, the deflationists won't get what the real reason for it is. (of course, the spin on it will be that confidence just evaporated because of the math - but the real reason will be some country making a play against the dollar because they believe it will allow them to become the next power - or something like that)
Now they might do this IF some morons come to power in those countries with big ego and no brains and decide one morning that they will make their country the next superpower by nuking the USD all at once... or IF another moron like bush, or maybe a little bit worse than Bush comes to power in america. With Obama in power - then no way will it be the US that does the retard thing. So it'll have to be someone else.
China - maybe. Except that they have to believe that they can buttress their population against a sudden export collapse that would be generated. Given that they are dead scared of this happening I doubt they'll make a play. Russia no longer has the reserves to cause a dollar crash by themselves and besides, Obama has shown he is willing to play ball on eastern Europe. Saudi Arabia doesn't want Iran let off its leash because of the ages old sunni /shite distrust. Everyone who understands the current diplomatic reality has a vested interest in preserving the US hegemony.
So it will take a moron coming to power - maybe a few simultaneously.
One of these morons - btw is Ron Paul. He might actually be right on the deeper philosophical issues. Maybe the world won't descend into anarchy if US hegemony ended. But that's not historically how humans have dealt with one another. That's why conservatives can't stand libertarians. Conservatives believe that humans are essentially stupid and warlike... and they loathe in particular the happy go lucky view of the libertarians. And if your tempted to side with the optimistic libertarians, you should note that pessimists generally read the reality better than the optimists do.
