I think this is what might be happening now.
This will be a deflationary collapse rather than an inflationary blow-off because creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid -- junk bonds, failing banks, S&Ls & insurance companies, Donald Trump, & Campeau. Creditors will try to get out of those weak debtors & go down the debt pyramid, to the very bottom: currency (dollar bills), even though they pay no interest. Next above currency are Treasury bills, issued by the government & backed by the Federal Reserve, which supports the market through its open market operations. They are by far the largest component of Reserve Bank credit, so are really as safe as currency notes, plus they pay interest. Still, you can’t buy anything with Treasury bills; you have to liquidate the bills to get money of some sort to buy something.
The higher debtors sit in the pyramid, the less liquid they are. At the top are all the least liquid debtors that I’ve already mentioned. This explains why we are headed for deflation. Creditors will move out of debtors high in the debt pyramid as many of those debtors fail through defaults & bankruptcies. That is very deflationary.
The most important one is this flight to currency. It is bigger than anything I expected right now. We are still having troubles with banks, thrifts, insurance companies, & others, which will cause more people to move down to Treasury bills & currency. At some point they will go to gold. We’re at the threshold of that point. When they go to gold instead of currency or Treasury bills, the price of gold will take off. It will be a bandwagon everyone will want to get on. Then even those who have bought currency will see how foolish they were & that gold is far better to hold than currency, that it is the best store of value money man has ever found. It’s stupid for people to hold currency. The Fed can simply print all they want at very low cost. Paper money is as abundant as leaves on trees.