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    Thoughts from the Frontline

    A Bubble in Complacency

    January 29, 2011

    Choose your language

    This week I had the privilege of being on the same panel with former Comptroller General David Walker and former Majority Leader (and presidential candidate) Richard Gephardt. A Democrat to the left of me and a self-declared nonpartisan to the right, stuck in the middle and not knowing where the unrehearsed conversation would take us. As it turned out, to a very interesting conclusion, which is the topic of this week’s letter. By way of introduction to those not familiar with them, David M. Walker (born 1951) served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative. Gephardt served in Congress for 28 years, was House Majority Leader from 1989 to 1995 and Minority Leader from 1995 to 2003, running for president in 1988 and 2004.

    Some housekeeping first. We have posted my recent conversation with George Friedman on the Conversations with John Mauldin web site. And on Saturday we will post the Conversation and transcript I just did with David Rosenberg and Lacy Hunt, which I think is one of the more interesting (and informative!) ones I have done. You can learn more about how to get your copy and the rest of the year’s Conversations (I have some really powerful ones lined up) by going to Use the code “conv” to get a discount to $149 from the regular price of $199. (If you recently subscribed at $199 we will extend your subscription proportionately. Fair is fair.)

    And go to to contribute comments on this letter. I do read them!

    The Recent GDP Numbers – A Real Statistical Recovery

    Now, before we get into our panel discussion (and the meeting afterward), let me comment on the GDP number that came in yesterday. This is what Moody’s Analytics told us:

    “Real GDP grew 3.2% at an annualized pace in the fourth quarter of 2010. This was below the consensus estimate for 3.6% growth and was an improvement from the 2.6% pace in the…

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    William Thomson 19880

    Feb. 2, 2011, 10:34 a.m.

    Enjoy Bangkok and Thailand. It’s quite a magical place. I first went there in 1969 during the vietnam war and go back whenever I can. it was the famous 17th century English Diarist Dr. Johnson who said, and I take some artistic license: ‘when a man is tired of Bangkok, he’s tired of life!’.

    Aurelien Windenberger

    Feb. 1, 2011, 11:12 a.m.

    @Frank:  Both Social Security and Medicare are already bigger expenditures then defence and I think they are growing faster as well.  Clearly, all three need huge cutbacks.

    As a 27 year old, I have absolutely zero expectation that I will be collecting social security at age 65 (or 70 or 80 for that matter).  I wish I could take the FICA taxes and invest them in an IRA, rather then throw them in the money pit.

    @ John Mauldin:  How likely do you think it is that we get a Republican candidate whose main concern is a full on assault on the deficit?  The problem in both parties is that people are too concerned with relatively unimportant (in the grand scheme of things) but divisive issues such as abortion and gay-marriage.
    I don’t want to vote Democrat because none of them seem to want to deal with the deficit, but its hard to vote for a party that is for deregulating business but feels the need to regulate who people marry.  Makes me glad I’m only a permanent resident and can’t vote.

    Ralph Kehle

    Feb. 1, 2011, 9:01 a.m.

    GDP worked as a measure of the nation’s economic health for several decades post WWII when we imported only raw materials and exported finished products to the world.  Now, it doesn’t serve that purpose.  Because consumption represents the absorption of wealth and because much of what we consume comes from the rest of the world, it is an imperfect measure of how we are dispersing our wealth to the rest of the world (and to the unproductive members of our society such as retirees, like me). 

    A better measure could be constructed by measuring the generation of wealth (farm production, manufacturing, entertainment, education, anything that people will willingly pay for) and subtracting consumption.  If this were done for the last 60 years or so, I’ll bet the crossover to negative would occurs in the last 10 to 20 years.  Because we are so rich, it could have taken a long time to go broke, but with G in your equation growing exponentially, that day will come much sooner.

    Ralph Kehle

    Jennifer Brown

    Jan. 31, 2011, 10:45 a.m.

    Your comment about rates being raised to biblical proportions scares the hell out of me.  I’ve got an ARM on a home I never dreamed I would be in longer than 10 years and I can’t refinance because the house appraised for over $100K less than we’ve got in it. Do we do the right thing and continue to pump money into a depreciating asset because we’ve made a financial commitment or do we do what is right for us long term and bail now before our rate resets to over 11% and we can no longer afford to make the payments?  It makes me sick thinking about it.

    Andrew Caires

    Jan. 31, 2011, 9:06 a.m.

    Sorry, but I must disagree with the statement (given as fact) that “medicare is still on paper.”  For Part B, the statistics are that almost all claims are field & processed electronically.  You can find the data here:

    Rolf H Parta

    Jan. 30, 2011, 9:57 p.m.

    John, you wrote:  “There is about 30% of the electorate that is mad at Obama and the Democrats for not getting a single-payer, full health-care program. They want nothing less than that.”

    I wish that you and other commentators who refer to this would also do the holders of these beliefs the courtesy of gifting them a reality check.  Specifically, the Supreme Court ruled several decades ago that intangibles and rights [such as stocks and company values] are property in terms of the taking clause of the Constitution just as much as 5 acres of prime real estate is property.

    The single-payer, full health care program these people want would require that the government buy the existing private enterprise and non-profit enterprises which currently provide our health insurance and medical care.  My personal estimate of the value of these enterprises is somewhere north of $5 trillion—all of which would be added to the national debt and require interest payments.

    Jon Parker

    Jan. 30, 2011, 8:57 p.m.

    Iâ??m a pessimist. We have no leaders that will tell the population the truth, and too many who will shout them down with meaningless sound bites.  Gephardt hasnâ??t, Gingrich hasnâ??t.  Unless both sides tell the same story about how bad the problem is, the public wonâ??t believe there is a critical problem There can be no meaningful debate in the republican primary, because the person who tells it like it is wonâ??t win.  The time for debate is now, not in campaigns.  I also think Obama would compromise before the tea party.  As you, Pete Peterson, and David Walker have said, it will take more taxes than we want, and fewer services than we want.  Both sides will have to give.  The fact that the deficit commission could not vote to send the report to congress for debate is a bad sign.  Where was the outrage from 2002 to 2008 when we were adding half a trillion to the debt each year during a booming economy?  What did these politicians think would happen when we got a recession?
    Gephardt and Gingrich should recruit a dozen leaders each who will go out every week and talk to tv, radio, newspapers, etc and talk about what the problems are and what it will take to solve them.  Gingrichâ??s 13% waste wonâ??t solve the problem.  That would barley pay for the increase in fees we need to pay doctors and hospitals.  Congress has been trying to control Medicare costs by slashing fees for 20 years.  If that is such a good approach, why not have the pentagon do it?

    John Morris 19380

    Jan. 30, 2011, 8:32 p.m.

    Perhaps if the right would quit exchanging tax cuts (which are exactly the same to national debt as paying the minimum balance on a credit card is to individual debt) for increased spending, this country could move toward something that resembles a solution. Otherwise, we’ll just wind up with more moronic “compromises” like the Obama tax plan that your representative most likely voted for, because you let him. Until the public grows up and demands change, nothing will happen. (Which is unfortunate, because it appears that the Baby Boomers, as usual, will refuse to accept any responsibility, and will continue to demand their tax cuts, entitlements and whatever else they can wring out of this country, until such time as their kids can pay it off.)

    Dean Schulze

    Jan. 30, 2011, 7:04 p.m.

    Whatever you may think of the DoD it is not a dinosaur.  It is very much alive rather and certainly not extinct.

    Defense spending has been cut in the past (the 1990s), but entitlements have not been cut.  The inability to cut entitlements is what makes them such a problem.

    The events in the middle east this week underline how important it is that we have a military capable of keeping Iraq from being dominated by Iran or Islamists.  If Egypt, Jordan, and Lebanon come under the influence of Iran we will have more troops in the middle east longer than anyone anticipated.

    Frank Blangeard

    Jan. 30, 2011, 9:51 a.m.

    You mention the elephants in the room, Social Security and Medicare. May I remind you of the stegosaurus in the room which is the defence budget?