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The deficit is money owed by the government to several different places. Examples are, U.S. citizens, U.S. companies, Japan, China, other goverment agencies that didn't use precious budgets… Interest is paid on this balance every year. As the national debt grows so too does the interest paid. Because the government also makes the money, they could in theory simply print more money and give it to their creditors. If they did that, the U.S dollar would become weaker compared to other countries money. Cutting a pie into more slices without making the pie any bigger will mean each slice of pie is smaller. Same principle applies to monetary policy.

As the government makes more money, inflation kicks in. A dollar in 1940 could buy a lot more than it does today. People that invest in things like banks and the stock market expect to beat inflation and even get more. For instance inflation runs about 3 percent per year on average. So on any investment you need to get more than 3 percent return or you will loose purchasing power.

To pull it all together. Government gets to a point that interst owed on national debt is higher than GDP. This means that we can not make more in a year than we owe. (Not likely to happen but proves a point) The only way the government can pay its debt is by doubling the amount of money in circulation. This would cause every dollar to loose 50 % purchasing power. The only way you could convince me to save my money rather than spend it would be by offering more than 50 % rate of return. If a bank is offering lets say 55 % interest rates then they too have to make more return on their investment. The people they loan the money to (home owners through morgages) would have to pay more than 55 % on there home loan. People would stop borrowing money at such a high rate, demand for houses would fall. The supply of houses would stay about the same. Decrease demand holding supply the same would lower the price of homes. Thus create a market crash

I talked to a co-worker's husband who happens to be a real estate agent at the recent company holiday party. In short, his answer was yes, there is a bubble and that the market really is cooling considerably.

The problem with this is that free market was never in play. HUD and FHA were backing loans that lenders would never have made if it was a free market system. But the lenders could make loans to people that shouldn't get loans, make a bunch of money, then sell them to Freddie and Fanny May. The lenders had nothing to loose. People that had no business buying homes were able to because the government was helping them. So the demand on homes was higher then the supply so the prices went up, once people started falling behind and couldn't make the payments lots of foreclosures came on the market, also credit got tighter. Then the supply was higher then the demand so prices came down.

This wasn't a free market caused problem, this was a government caused problem, but you'll never hear that on the nightly news.

At one time up to 40% of the loans that Fannie and Freddy were buying were sub-prime loans.

There was a lot more to it, but this was the biggest part.