Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘savings’

• Debt/Bailout Bubbles May Burst. Brighter Future Beyond 2012!

Posted by Ron Robins on July 19, 2009

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.

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• Interest Rate Manipulation and Loose Money Promote Economic Collapse

Posted by Ron Robins on April 6, 2009

Few people would compare downward central bank interest rate manipulation and loose money policies to Soviet style command economics. But I do. And I suggest that if these policies continue for much longer, it could lead to an economic collapse, something approaching that of the Soviet Union’s in the late 1980s. Consider the outcomes for the United States of excessively low interest rates and loose monetary policies in recent years fostered by the U.S. Federal Reserve:

  • A real estate boom and bust, with massive over-building.
  • Discouragement of savings which fell to all-time lows relative to incomes.
  • The taking of inordinate financial risks.
  • The creation of excessive debt, particularly by consumers.
  • The expansion of total debt far faster than either GDP or income.

Furthermore, the Japanese experience with many years of zero-based interest rates and easy money has enormously compounded its economic problems. Here is the situation in Japan today:

  • Japan cannot raise interest rates in any meaningful way due to its gargantuan public debt. To do so could bankrupt the nation. The country is trapped into lower rates.
  • Until recently, Japan had become the financier of ultra cheap plentiful loans that artificially boosted global asset prices. The so-called ‘yen carry-trade’, and, its recent collapse has helped crush global asset values.
  • Zero-based rates combined with major monetary expansion smashed down Japan’s exchange rate, making imports expensive and discouraged balanced domestic consumption.
  • A ‘cheap’ Yen gave Japanese exporters an unfair trade advantage relative to other developed economies, particularly that of the United States.
  • Japan has failed to pull itself out of an almost twenty-year slump.
  • Japan has produced a situation of significantly diminished resources to fight its present downturn, not only due to the enormity of its government debt, but also because of deteriorating savings in recent years and lack of domestic consumer demand.

With central bank rates of zero per cent proving inadequate to get individuals and companies borrowing, and banks lending again, governments now seek to lower their bond yields. Thereby rates for mortgages, auto loans, consumer loans, etc., are also manipulated down, hoping to kick-start consumption. Hence, the U.S., Japanese, British and other central banks are engaged in a massive ‘printing money’ exercise to buy huge quantities of their respective governments’ bonds in an effort to lower their bond yields and create the easy money. Such policies usually have the following outcomes:

  • If successful, debt levels go from really bad to extremely bad!
  • Short-term artificial demand stimuli distort longer term supply/demand relationships. Look what has happened to the American auto industry arising from zero-cost financing a few years ago. It appears that much of the increased sales was at the expense of future consumption and has helped shape the horrendous situation for the industry today.
  • Financial and economic imbalances mount, producing an ever more unstable economic environment. As Stephen Roach, Chairman of Morgan Stanley Asia, wrote on March 10, 2009 in the Financial Times, “Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers… It is a recipe for disaster.”

Economies with excessively loose monetary policies and who force interest rates to ultra low levels for extended periods of time eventually succumb to a massive top-heavy debt structure which at some point ‘topples over.’ These countries then suffer either a deflationary debt implosion/depression in which much of the debt is liquidated, or the country’s central bank instigates a huge inflationary push to reduce the value of all credit market debt in the country by vastly increasing the amount of currency and the expansion of its money supply.

A big inflationary push frequently leads to a lack of confidence in the country’s currency and hence the possibility of ‘hyper-inflation’ occurring as everyone unloads the country’s currency for real goods or other currencies. Argentina earlier this decade and Zimbabwe recently, are examples of central bank sponsored inflation that led to no confidence in their currencies, resulting in hyper-inflation. The inflationary approach is what appears to be favoured by the American, Japanese and British central banks.

From an Enlightened Economics perspective, the actions of manipulating down interest rates and the over printing of money by central banks fall under a terrible fallacy: the belief that we can resolve our short-term economic problems by going more into debt and not concern ourselves with the long-term consequences. A global consciousness has to arise which understands that manipulating markets, most especially interest rates and money supply, leads to highly unstable economies which in time either implode or explode!

Sometime in the next few years we will again learn history’s lesson concerning long periods of ultra-low interest rates and loose money. And the lesson is that by artificially enforcing such policies for extended periods of time leads to an inevitably unwieldy mammoth debt structure that eventually crushes the economy. As I mentioned at the beginning of this piece, it is comparable in my view to that of the Soviet command economy which finally imploded after trying for decades to make it work.

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© Ron Robins, 2009.

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• ‘Voluntary Simplicity’ Brings Higher Consciousness into Economics

Posted by Ron Robins on February 3, 2009

A sweeping new consumer frugality is enveloping the developed world bringing higher consciousness into economic affairs. Some call it ‘voluntary simplicity.’ And it ties in well with my thesis that as a more balanced, higher consciousness arises in consumers, their consumptive and savings habits will change significantly and more sustainably. Thus, I believe the age of Enlightened Economics is ahead us.

Voluntary Simplicity defined

The term voluntary simplicity (VS) according to the Simple Living Network is first thought to have been used by “Richard Gregg who, in 1936, was describing a way of life marked by a new balance between inner and outer growth.” Some might argue that numerous people are being forced into VS-as the unemployed might be, for instance. There is some truth to that. Nonetheless, I believe that most of us are sensing a new reality dawning in the consumptive habits of almost everyone around us.

For example, more and more people in developed countries are realizing that their lives have become so dominated by material possessions that the caring, maintenance and use of some of these possessions take too much of their time, energy and money! (i.e. ‘McMansions,’ large homes for just two or three people are going out of style.) They are also realizing that many of these products are damaging to the environment. Thus, a degree of frugality is coming to be seen by countless numbers of people as the way forward. It is important to understand though, that this VS style of living is not to be compared with an agrarian ‘back to nature’ lifestyle, nor related to material impoverishment.

The Simple Living Network states that the values underlying VS are: material simplicity, human scale, self-determination, ecological awareness, and personal growth. These personal values are often attributed to individuals of higher consciousness, and mesh well with the understanding of Enlightened Economics, which believes that with rich inner development of our minds will come the ability to fulfill our individual and collective economic aspirations.

The exact numbers of individuals abiding by the VS lifestyle, either knowingly, or unknowingly, are not known. But it is apparent that its ranks are growing fast. Evidence of this is seen in the cutting back of material consumption, increased spending on education, and a deepening interest in the environment, personal growth and spirituality.

Modern economies lose their way as happiness fades

Economics should be about assisting us in fulfilling our dreams while allowing us to enjoy great happiness and fulfillment in life. However, as practised today economics is sorely lacking in achieving such goals. In fact, when looking at measures of happiness, authoritative research by Dr. Robert Lane of Yale University, shows happiness actually declines as GDP grows! Other studies such as the one by Prof. Arthur A. Stone, of Stoney Brook University School of Medicine, demonstrate that happiness is unrelated to income.

People in developed countries everywhere are beginning to understand the deep flaws of a modern life based principally on the acquisition of material possessions. Hence, our lifestyles are increasingly favouring the nourishment of our subjective values and inner development, over outer material goods.

The coming era of voluntary simplicity

VS lifestyles encourage more entrepreneurship, independence, self-employment, the purchase and manufacture of sustainable products and services, lower debt levels, reduced consumption, and higher savings rates plus a tendency to save and pay cash for purchases. (For related reading, see my editorial on the Investing for the Soul website, Everyone Becoming A Cultural Creative.)

With society favouring qualitative and subjective values related to lifestyle, there will be considerably less emphasis on the Gross Domestic Product (GDP) statistic. This statistic simply totals the market value of all final goods and services sold. New economic measures that include quality of life factors will become the norm. These other measures might include the Calvert-Henderson Quality of Life Indicators, the Genuine Progress Indicator (GPI), the Index of Sustainable Economic Welfare (ISEW), and variants of them.

The economic transformation giving rise to voluntary simplicity

Almost nobody in the mainstream economic community predicted our present circumstances, illustrating the deplorable state of economics in our institutions today. They naively believed it was fine for debt to grow exponentially while incomes stagnated and savings crashed. And then they wondered why the consumer stopped spending and acting more frugally. It’s amazing how such brilliant minds could get it so very wrong. It was primarily only those (like myself) adhering to the ignored and maligned Austrian School of economics who largely got it right.

People in developed countries are increasingly favouring more non-material growth that is founded on higher inner values, knowledge, simplicity and sustainability. They will not abandon material joys, but the emergence of VS is telling us that long-held so-called economic ‘truths’ are shattering before us. An age of Enlightened Economics is being born.

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© Ron Robins, 2009.

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