By Michael Pento 

It is abundantly clear to this writer that the U.S. Central Bank and our economy have become addicted to asset price inflation and monetary excesses. This should lead investors to become addicted to hard assets and foreign currencies as a hedge against the falling dollar and inflation.

Why do I say that we are now addicted to monetary excesses? The Fed's last two attempts to raise interest rates in order to combat asset price inflation--the equity bubble of the late ‘90s and the real estate bubble in the first half of this decade--had to be quickly annulled due to the economic consequences of their actions. In other words, the Fed had to reverse course and lower rates because of its new mandate to repeal the laws of a business cycle and guarantee that a recession will never occur.

What is interesting is that compared to today's macroeconomic environment, the acute problems of rising interest rates, falling dollar, weak economy and rising inflation are still about three-five years away. Why 3-5 years? In 2011, the first baby boomers reach age 65 and will begin to qualify for Medicare. According to the Trustees of Medicare and Social Security, those trust funds become cash flow negative in 2013 and 2017 respectively. That means the pressure on annual budget deficits will raise dramatically as the government will no longer be able to borrow from the unified budget. In fact, for fiscal 2007 the budget deficit would have been $1.3 trillion (source: USA TODAY) if it were not allowed to "borrow" from both those entitlement programs.

Future Debt Explosion

The U.S. government currently needs $59 trillion invested today and earning interest to pay for all the unfunded liabilities the government has promised to retirees. In addition to our fiscal deficit, we continue to have about a $2 billion per day trade deficit. Is there any wonder why the USD continues to set new lows against the basket of our major trading partners? What is needed to be done now is to cut spending and/or raise taxes drastically to reconcile the imbalances. However, that would result in an economic depression that would make today's situation seem like Shangri-La. Clearly such actions are untenable for those who currently hold office.

To a great degree we have had to rely on foreign sources to help fund our debts. Foreign central banks hold 63% of their currency reserves in U.S. dollars ($2.45 trillion) and the amount of our publicly traded debt owned by foreigners is 53%. It is not reasonable to assume that the U.S. government can count on foreign investors to continue to purchase Treasury debt, especially in light of our falling currency. The most likely scenario is that the Fed will be forced to monetize the debt by outright purchases of newly issued Treasuries.

This upcoming financial crisis has been predicted by some very high profile experts. For instance, the head of the General Accounting Office, David Walker, and Nobel Prize winning economist Joseph Stiglitz.  Even Alan Greenspan and Ben Bernanke are actually in accord that the debt situation is unsustainable.

Here is quote from noted economist James Galbraith of the University of Texas, who is considered an optimist on the subject of America's approaching debt crisis. "Unless the government goes broke, Medicare isn't going to go broke, and the U.S. government isn't going to go broke because it can print money." Unfortunately the current Fed head agrees with the above quote. Chairman Ben Bernanke is a student of the great depression and blames much of the economic stress of that time on the inelasticity of the gold standard.  There now is empirical evidence that he will print money to whatever degree is necessary to inflate falling asset values.