Earlier this month, I did a blog entry warning of worse times ahead with the US debt hitting $12 trillion.

Just how bad is it going to get? As the New York Times warns, the US is now facing waves of debt payments. Servicing that debt will exceed $700 billion a year in 2019, up from $202 billion this year. Now, the extra $500 billion is more than more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The US is now facing the problem of new debt, short term borrowings and the prospect of interest rates rising again. And when that happens, it will be ugly.

The problem is compounded by growing unemployment and an ageing population, putting enormous strain on government funding.

The debt burden will keep a lid on the dollar, stopping any prospect of its recovery. And it will drive investors to the bond market which has now become the next big big bubble.

Where will it end? Ultimately, it will drive up inflation. As Doug Hornig from Casey Research says, the US can't expect foreigners to keep buying its debt, not with the way the dollar is heading, and that means the Fed will end up being the lender of last resort. Hornig writes: "The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must."