In Barry Wood's Article “Buffett's silly talk about the US debt” he poses this question indirectly, that when the debt is too much to handle will it affect the US in similar ways as it has in Greece and other countries that defaulted on their loans. The main reason for the writing of this article was a statement made by Warren Buffett where he states “The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.” which by economists and historical debt followers standards seemed to sound naïve and shortsighted from the comments on the subject provided within the article by Niall Ferguson, Allan Meltzer, and Carmen Reinhart to just to name a few.
From what I gather having a debt that is close to matching the GDP seems uncertain and potentially dangerous. Inflation will ensue but at what rate is dependent on how the US debt is purchased and what advantages having debt can bring. Japan who owns a considerable amount of our debt just had a huge disaster which could get worse before it becomes better. This creates an indirect instability for the US. Although it's highly doubtful Japan will sell off our debt, it's not impossible. China could also kill our economy by selling treasuries it owns and make it worse by making the Yen too strong. The way the monetary policy is being run it seems very Keynesian with very little planning for the future.
Aggregate demand seems to be low which can cause less inflation but this is not the largest effect on inflation. Inflation historically increases dramatically usually due to a devaluation of a currency. So more buys less. Spending more privately can increase inflation but at this point I think the hyper consumption of Americans has calmed. There could be a combination that makes inflation rise significantly. People are given more money and most of which is newly printed but instead of investing it, it's spent on mass consumption of non-durable goods. Devaluation is not the answer, although in small amounts it can help reduce debt. By AD increasing there would be an increase in jobs, spending would be compounded, aggregate supply would rise, but inflation would also increase. It seems like a way to stop the bleeding but wouldn't heal the wound completely. Long term the best solution would be to increase effective schooling with an emphasis on global knowledge and added social programs that promote self help through local communities. Also a program that promotes small businesses which have strong potential for success.
Say we have debt that matches our GDP or exceeds it by 2016(which at the moment we are supporting a 94% debt to GDP ratio). The US could come back due to the sale of securities like bonds, reinvesting in infrastructure, and low risk investing of the dollar within strong financial markets. Another options would be that the US could sell it's debt as bonds to the top...