Governments can only default when they don't control their own currency, or don't have their debt denominated in their own currency. The big players, therefore, are completely immune to default while we remain in a liquidity trap.

The policies haven't been working because even as central banks attempt to pump up the economy, the actual governments have been strangling it by misguided "austerity" plans, especially in America, where the fixation on debt is completely counter-productive.

Austerity plans? What austerity plans? Government spending has increased in just about every single major Western economy (I say "just about" I would say "every", but I'm not too sure). You could argue about tax increases, and I'd agree with that.

If there's no-one to buy, all the production in the world isn't going to matter. There have to be buyers *first* before people will bother to make anything

This is false. You first have to make the rod before you can consume the fish. You have to produce before you can first consume, because nobody's going to trade their produced goods with you, unless you have something to offer them. True, you can borrow from somebody else, but that other person still would have had to produce the thing that is being borrowed.

, otherwise the upper class just invest in assets and create asset bubbles, as is going on currently as the real estate and stock markets "rebound" while everything else languishes, because the money is just getting passed around in asset markets and not going out into the consumption economy.

What you're saying about the symptoms is true, but you get the causes wrong. It's not because of too little consumption that prices are being bid up, it's because there's an increase in the money supply without an increase in produced goods. So all this new money goes into a marketplace with a static amount of goods, as a result, prices get bid up.

The reason why the prices are bid up mostly in financial products is because it is the financial institutions who receive most of the new money first, and so their new Benny Bucks pours into the finance, as that money flitters its way through the economy, other prices also start to increase.

In the UK, since 2007, average incomes have gone up 10%. Food prices are up 30%. If your food budget used to take up 5% of your income, it now takes up 5.85% of your income. If your food budget used to take up 50% of your income, it now takes up 58.5%. FYI, Government spending has increased every year since 2007, and the BoE has been printing like it's going out of fashion.

Governments can only default when they don't control their own currency, or don't have their debt denominated in their own currency.

In theory this is false, historically this is false. There comes a point where the populace won't tolerate the price increases any longer, and printing to pay your debts is no-longer a viable option. Also, from the creditors point of view... if they receive a dollar worth half of what they lent, do you not think that this has the same impact on them as just receiving half the number of dollars? Default is default.

http://en.wikipedia.org/wiki/List_of_sovereign_defaults

The big players, therefore, are completely immune to default while we remain in a liquidity trap.

Deflation sure as hell isn't going to help exports, either. You only want prices to cool during a bull market to prevent overheating.

I don't believe any country has their debt completely denominated in their own currency.

The US for example has about 1 trillion dollars in debt owed in foreign currency.

Which sounds small compaired to the 16 trillion it owes in dollars... but if you start inflting the dollar to pay off that debt... it'd get much higher.  So it serves as plenty big enough balance to avoid simply trying to infalte out of the debt.

So the US could totally default.

It's not about inflating their way out of debt, more that QE can proceed indefinitely until it works (as in, kicks inflation into gear). Too much would be bad, but it would not be immediately harmful, as opposed to those who call for hyperinflation.

obviously we need inflation to be kicked into gear so that the economy can recover. higher prices is a good thing because then businesses will have more money to hire more workers due to the higher prices they are charging for goods. i also believe we can do even better than QE. how about bombing US cities with trillion dollar bills?

surely the aggregate demand line will shift to the right and prosperity will follow.

It's not about inflating their way out of debt, more that QE can proceed indefinitely until it works (as in, kicks inflation into gear). Too much would be bad, but it would not be immediately harmful, as opposed to those who call for hyperinflation.

Inflation is not the only ingredient, of course, but weakening the currency strengthens demand for exports which helps raise production, then hiring. Demand need not be entirely endogenous.