A stressed American consciousness focusing on material acquisition to the virtual exclusion of satisfying higher inner values has given rise to an unwieldy debt mountain. Now the U.S. government is borrowing and spending massively as it tries to pump-up the economy while backstopping much of the countries debt.

Consumers and companies have largely hit a ‘debt wall.’ And with a possible derivative meltdown and the recognition of enormous unfunded U.S. liabilities, we may see the U.S. government itself hit the debt wall in the not-so-distant future. The subsequent reaction would topple the debt mountain and pop the bailout bubble. But I believe a new higher consciousness will arise from these extraordinary events creating a truly enlightened economy mirroring our higher, inner human values.

Bailouts, guarantees, and write-offs galore
So far in this phase of the crisis the U.S. federal government and Federal Reserve have already guaranteed or spent around $13 trillion! And the current 2009 U.S. federal budget deficit will top $2 trillion, or about 14% of U.S. GDP. More stimulus packages are likely and massive deficits for years into the future are projected as it is unlikely that the economy will gain self-sustaining traction to stop unemployment from increasing. Economists such as 2008 Nobel Laureate Paul Krugman and others in the Obama administration are already discussing the possibility of another huge stimulus package.

Furthermore, the International Monetary Fund (IMF) on April 21, 2009, estimated global financial system write-offs to exceed $4,100 billion. The write-offs to-date are not anywhere close to that figure therefore, enormous additional financial system losses are yet to come.

A two-phased crisis
I see two phases to the U.S. financial crises. Each alone is capable of bursting the bailout bubble. Phase 1, which we are currently in, involves the write-offs of bad mortgages, loans, deleveraging, extraordinary U.S. government and Federal Reserve guarantees and financing, and a potential derivative implosion. Any sudden interest rate hikes and/or currency movements could trigger an implosion in the $450 trillion (ISDA April 22 press release) derivatives market and cause further financial chaos.

To enable U.S. government bond sales, it is probable that the U.S. federal government will, if it is not doing so already, pressure the banks with whom it has ‘invested in,’ to purchase considerable amounts of its bonds. The banks in turn will get substantial loans from the Federal Reserve for these purchases. In essence this is back-door ‘monetization’ (read ‘quantitative easing’) of U.S. government debt. Monetization simply means the printing of new money by central banks to purchase assets, in this case, U.S. government bonds.

Of course the U.S. Federal Reserve, the Bank of England, and other central banks have already engaged or have announced significant monetization efforts. The central banks claim that they will be able to drain this liquidity (excess money) out of the system as their economies recover. Unfortunately, historical examples do not give much reassurance that this can be done, especially in a global trading environment and where the major countries have amassed such extraordinary levels of debt.

Deeply indebted governments and societies have the choice of trying to reduce their debt levels—which can produce a potentially deflationary recession/depression—or they can encourage central bank monetization efforts that offer a ‘chance’ to get the economy rolling and create sufficient inflation, thus lessening the relative debt load. However, once started hefty monetization efforts often prove impossible to contain, leading to uncontrollable inflation—and even hyper-inflation. Subsequently, interest rates soar, the countries currency plunges in value, its debt mountain topples, and bailout bubbles burst.

Adding to the impetus for monetization will be when Phase 2 of this crisis kicks-in in 2010 as the U.S. begins to face its looming, huge, unfunded liabilities for medicare and social security. These are estimated by Shadowstats at $65.5 trillion. To properly fund this liability would require the U.S. government to put aside trillions of dollars yearly. Clearly, the U.S. government has no possibility or desire to put aside such funds. In addition, the current proposals for health care reform may add considerably to these numbers.

Taken together, these two phases of economic crisis make it unlikely that the U.S. can escape its fate of the bursting of its debt and bail-out bubbles.

Beyond 2012 a brighter future
I believe the underlying collective consciousness of U.S. society is moving toward higher values, and the more balanced approach to consumption and savings is evidence of this. However, in the course of these changes the likelihood of the debt mountain toppling, the bailout bubble bursting, and the onset of high or hyperinflation are real possibilities. By the end of this process, sometime around 2012, the American collective consciousness will have sufficiently evolved to begin the path of developing a truly sustainable economy mirroring the values of an economics based on our higher inner human values and consciousness—and that path is the realm of Enlightened Economics.

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© Ron Robins, 2009.