The following is an excerpt from a commentary made available to MurkyMarkets.com subscribers on November 6, 2009.

The next issue I wanted to write about in this post is this whole notion of ballooning reserves at the Fed, and how we get to hyperinflation if this money were to ever be lent out and multiplied across the economy. Reserves might have gone from 10 Billion in August 2008, to about 1 Trillion today, but in fact, this money is not being lent out - it is simply sitting there at the Fed, earning interest.

Many economists, as well as government officials, have been pounding the tables demanding that banks lend this money out in efforts to support the economy and get it jump-started. This is the side that smells the deflationary threat, and understands that deflation could be delayed so long as a new credit bubble is inflated.

But that is not happening, as anyone who has attempted to obtain a loan lately would attest to the difficulty they are encountering, whether it be for business or a home mortgage/refinance.

Those arguing the other side say that if this money were to be lent out, it would lead to high levels of inflation that would end up hurting both the economy and the dollar. That is the inflation scenario that folks fear, hence the calls for the Fed to remove this excess liquidity from the system sooner rather than later.

Obviously, taking on additional debt, in the hope that it would solve the original problem of too much debt, is not the answer. As I have written in previous posts, the answer will involve a long-term structural change in this economy.

If I am right and we are witnessing an unfolding deflationary collapse brought about by a collapsing debt bubble, the only avenue that avoids such an outcome in the immediate future would be to blow up a new debt bubble --, i.e., bail out, as it were, the collapsing debt bubble with one of equal or greater magnitude that takes its place.

But a new credit boom, as one would imagine, not only doesn't appear to be happening, but might not even be possible. After all, how do you create a new debt bubble to replace back-to-back, most improbable, epic stock & real estate bubbles from the last 10 years alone?

Those two bubbles had massive participation at the retail level, and those folks have been burned and are in intensive care. What the country experienced in the fall of 2008 through March earlier this year was something the majority never thought possible. As noted above, banks are not lending. Credit conditions are tight. It seems to me those in the hyperinflation camp yelling at the top of their lungs are wasting their efforts on a phantom threat. Banks will simply not lend money in this environment, but even if they wanted to, the demand is not there in the way it was. This isn't the roaring anything's. Those years are behind us.

Let us not forget that gold went from $250 to $1000 in this decade because of the ballooning of credit, which blew up bubble after bubble, and as a result weakened the US dollar. In order for gold to go to the moon, as some are expecting, it will need a catalyst of equal and/or greater proportion to take it there.

If there is no new credit bubble that would do that, the only other means by which it can get to much higher levels is outright money printing, or a total loss of confidence in paper currencies altogether and the US dollar in particular.

As discussed last post, I don't believe the US will resort to outright money printing as per Weimar Germany in the 1920's or more recently Zimbabwe. The bond market has a gun to Ben Bernanke's temple, and is telling him in no uncertain terms that if he were to drop dollar bills from helicopters, he would get his head blown off. Think of it as the bond market staring down the Fed and telling it that the dollar had better start behaving like gold.

All sides agree we will see deflation in terms of gold. What happens in nominal terms is the big question. A bond market up until now going along with Fed actions is not signaling that the Fed has or will lose control of the dollar. In fact, it is signaling the opposite. Bernanke's SAT score was 1590 out of 1600. He's no dummy. He knows who his bosses are, and he will do what they ask. He and the government tipped their hands in that respect during the crisis, when they chose who they chose to bail out in a massive way, while the first tent cities where going up across the country.

That leaves a loss of confidence in all paper currencies and specifically a collapse of the US dollar as the only other trigger that takes gold to much higher levels. But that would also mean the US's friends and allies turning their backs on this country at a time when it could be argued the US is most in need of their continued support.

It would mean the world turning its back on a new administration and a new president loved the world over. And whom might the world have to deal with next, should a collapse of the US dollar ravage the economy and Obama in 2012?

If the world turning its back, and dumping the dollar in a coordinated effort, is the scenario that plays out, then holding dollars will prove to be a bad move. But I don't see that scenario playing out. Sure, at some point foreign creditors will tighten the screws on the US, and it won't be able to borrow as much as it has been. That is the day of reckoning I have written about.

That is when the US will be forced to make the tough choices. That is, cut deficits and perhaps negotiate repayment terms on its debts. I suppose those are the key issues that all of these arguments rest on.

Will the US make the tough choices and retain some semblance of self-respect, or will it simply print money and go the way of Zimbabwe?

I would argue that anyone who believes there is no difference between a Zimbabwe and the US -- in that the US takes the easy way out and literally prints greenbacks to pay off creditors -- simply does not understand how the world works, and should they be investing in anticipation of such an outcome, will be looking at substantial loses in the near future.