The United States and the Federal Reserve are trying to inflate their way out of the debt crisis, says James Rickards, best-selling author of Currency Wars: The Making of the Next Global Economic Crisis. The problem is, Rickards explains, history shows us that debasing currency has only two possible outcomes—neither of them good.

In an interview with Chris Martenson, Rickards says the Fed and other central banks are taking a serious gamble that by inflating the currency supply they can inflate their way out of the worldwide debt crisis that threatens the global economy.

“Currency wars start when there is too much debt and not enough growth,” Rickard says. “The overhang of debt impedes growth because it clogs up bank balance sheets, clogs up the savings-to-investment mechanism,  and a lot of other negative effects.

“Countries try to steal growth from their trading partners by cheapening their currencies.”

The problem is, Rickards continues, currency debasement doesn’t happen in isolation. If one country devalues its currency in order to make its products cheaper, other countries quickly follow suit. In one historic example, following World War I, the entire world was in debt that could not be repaid. The losing Germany was saddled with war reparations it could not repay; allied nations England and France were in debt to the United States. Ultimately World War II commenced, and old debt was forgotten. But in the interim, world trade collapsed, unemployment rose, and the Great Depression ensued.

Rickards’ second example is the period between 1967 and 1987, when foreign runs on the dollar nearly bankrupted the United States, and President Richard Nixon ended the Bretton Woods international monetary agreement and severed the dollar’s relationship to gold. Nixon’s actions opened the way for massive increases in U.S. deficit spending to fund the Vietnam War and to pay for the Great Society social welfare programs of President Lyndon Johnson. The result was three back-to-back recessions and borderline hyperinflation.

Today, Rickards says, history is repeating itself in the European sovereign debt crisis, and Japan and the United States with real debt levels vastly exceeding GDP.

“Governments will try to inflate their way out of it,” Rickards says. “We’ll say to China, ‘We owe you a trillion; here’s a trillion. Good luck trying to buy a loaf of bread, because we’ve debased the currency…. The problem I see is they may not get there, and here’s why.

“The Fed thinks they’re playing with a thermostat: If the room’s too cold, you dial it up; if the room’s too hot you dial it down by adjusting the money supply, and by working a little bit with expectations on the behavioral side, they can gradually tweak economic behavior, lending and spending velocity, and money supply to achieve the desired result.

“The problem is they’re actually playing with a [solid-fuel] nuclear reactor. They’re playing with a complex system that’s in or near critical state. Now you can dial up and down a reactor, but if you don’t get it right, the consequences are worse than having to put on a sweater; the consequences are catastrophic. You can melt down a reactor and ultimately the entire financial world.”

There are three potential responses to the global debt, Rickards says: default, inflation, or growth. The second, inflation, is the preferred response of the Fed and other central banks. But anyone with sixth grade math skills can figure out there will come a point when continued inflation won’t work.

“What happened to growth?” Rickards asks. Neo-Keynesian economists talk as though consumer spending and government spending are the only two things that matter. A third way, investment, would both increase gross domestic product in the short-term and spur additional growth in the long-term.

“We ought to move from a consumption economy to an investment economy, but neo-Keynesians want to substitute government spending for individual spending, and that puts us on this road to ruin.”