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Thoughts from the Frontline

An Economy at Stall Speed

July 29, 2011

Choose your language

The GDP numbers for the second quarter came in, and there is no way to spin them as anything but ugly. And the revisions were worse. We simply have to take a few pages to look at them. And, as I noted last Monday in the Outside the Box, I met with some ten Senators Monday afternoon (as well as Congressmen in the morning), plus a lot of staff. Getting ten Senators in a room for 90-plus minutes is not so often done. I will report in this week’s letter about our conversation and my impressions.

But first, I was in Vancouver for a few days this week at the Agora conference. I had dinner with old friends Bill Bonner, Barry Ritholtz, David Tice, Frank Holmes, and Keith Fitzgerald. I had spoken that morning and my speech was well-received, getting a fair complement of laughs. I was somewhat on a roll. I mentioned that I think a lot of the better financial speakers are actually frustrated stand-up comics, and there was general agreement on that.

I say that to set up the next item. This past April I spoke at my own investment conference in La Jolla (co-sponsored with Altegris Investments). It was a brand new speech, and I did something I have not done in years: I actually practiced it several times, as I did not want to embarrass myself, given the quality of the other speakers. I came off the stage feeling that I had given the worst speech of my career. The room was absolutely silent. I normally get a lot of laughs. I was getting no reaction at all. As I made my way to the rear of the room I was actually quite depressed.

Then several people (people who cut me no slack) told me that it was the best speech they had ever heard me give. I was surprised and said, “But the audience was so quiet. How come?”

“John, you just walked them through a scenario that was so compelling and so fraught with regard to our problematic future that it was very sobering. There really was nothing to laugh at.” This from a man who has been very blunt with me and has heard me speak many times and tells me if I am off my game. I got the same comment a lot.

I am now using a different speech, so we are going to make the one from our conference available online to all those who have signed up for my accredited investor letter. It is the last speech of the conference to be posted, so now every one is online – speeches by David Rosenberg, Martin Barnes, Neil Howe, Gary Shilling, and more, plus the panel sessions. A very powerful lineup it was.

If you are an accredited investor (net worth of over $1.5 million), you can go to and click on The Mauldin Circle and fill out the form, and one of my worldwide partners will get in contact with you and give you access to the speech. And if you have not yet reached that status, you can still sign up, and my partner CMG, based in Philadelphia, will make sure you get access. These all are management firms that, like Altegris, have access to some of the best alternative investments and commodity funds I am aware of. Let them show you what adding some of the managers they represent can do for your portfolio. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Please read the risk disclosures on the form and at the end of the letter carefully when you are thinking about alternative investments. And now to this week’s letter.

An Economy at Stall Speed

There is no way to spin the GDP report that came out this morning as anything but very bad. It was just last May that the consensus was that second-quarter GDP would be 3.3%. That had been revised down to 2.7%, but the number came in at 1.3%. Normally, at this time in a recovery we are growing at close to 3 times that number, or 3.6%. (You…

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Clint Dart

Aug. 6, 2011, 8:57 a.m.

John - thank you for taking the time to discuss this debt issue with members of congress.  I really hope they all find a way to work together to make meaningful changes.  Knowing they listened to your insight gives me some hope they can find a solution.  Thank you for all that you do in educating investors around the world.

Charles Yaker

Aug. 1, 2011, 6:41 p.m.

There is another view. Here is Mosler
Someday there may be excess demand from people with dollars to spend for labor, housing, and all the other goods and services that are desperately looking for buyers with dollars to spend.

But today excess capacity rules.

And an informed Congress
That recognizes itâ??s role of scorekeeper,
And recognizes the desperate shortage of consumer dollars for business to compete for,

Would be debating a compromise combination of tax cuts and spending increases.

presuming itself to be a player rather than scorekeeper,

Congress continues to act as if we could become the next Greece,

as it continues to repress the economy and turn us into the next Japan.

***comments welcome, feel free to repost, etc.

Share and Enjoy:

Barry Rose

Aug. 1, 2011, 7:12 a.m.

John - good article.  I totally agree that Medicare will not survive without tax help.  However, I also think it should be coupled with the elimination of all federal income tax & FICA withholdings, putting more real income in the hands of the wage earners.  Tax spending, not income, and level the playing field.
Our entire tax code must be overhauled, and a lower tax spread over all Americans and corporate purchases will do the job. The data at has been around for well over a decade.  But it is the same story, isn’t it?  Does Washington have the will to abolish the IRS and make the necessary changes to meet our country’s needs?

Jeff Little

Aug. 1, 2011, 5:58 a.m.

John - You wrote:

“The debate in 2012-13 will be, how much Medicare do we want and how do we want to pay for it? Sadly, I think the only way is with a VAT (value-added tax), since less than 50% of citizens pay any income taxes now. Want to run on a program of taxing the â??middle class?â? Didnâ??t think so. Want to run on a platform of cutting Medicare? That is not a winner either. We are at an impasse.”

I am not sure where you are getting those numbers.  According to my sources, if you look at state, local, and federal taxes, the bottom quintile earn 3.1 percent of income and pay 1.9% of all taxes.  The next quintile earn 7.1% of all income and pay 5% of all taxes.  The middle quintile earned 11.6% of all income and paid 10.2% of all taxes.  (Source:, scroll down and look at figure 6, which is a graph of income paid by quintile and figure 7, which is the percent of total taxes paid by quintile)  If you want to raise taxes by making our system even less progressive than it is, then I am afraid there is very little room to work with if the numbers I am seeing are correct.

I would like to also affirm disagreement with the larger premise that taxing the wealthy would do more harm than good.  A bit of History.  In 1932, there was a broad base of support for a flat tax to raise revenue that the country desperately needed.  There was a broad outcry against this and a large snail mail campaign.  The end result was instead Hoover signed into law a progressive tax increase that might have been the biggest peace-time tax increase ever.  The result?  The economy bottomed about 4 months after the bill was signed.  It was beginning a sharp upswing by the time April 15, 1933 came around.  Apparently the progressiveness of the tax outweighed the negative stimulus.  Of course, there were other things going on.  The aforementioned upswing also became visible around the time of the famous bank holiday.  Also, there were some financial reform and pro-union bills that happened at around the same time, but those are rules that Boehner, et. al. don’t like either.

In any case, the end result of the biggest peacetime tax increase in the last century was that the GDP growth went from -23% in 1932 over 1931 to +17% in 1934 over 1933 with the inflection point about 9 months after the tax bill passed and 3 months before the fireside chats started.  Ask any republican what impact they would expect if the top tax bracket was raised by 40 points and you can about guarantee that the answer would not be “A return to growth in one of the fastest spurts ever”.  To be fair, the inflation adjusted figures are probably only about 3/5’s as large as the nominal figures, but this is a brilliant example of supply side analysis not working on demand-side economic problems.

GDP source graph:

The above graph includes GDP nominal values and deltas for the US from 1929 to 1940.

Jeff Little

Aug. 1, 2011, 4:03 a.m.

I went to the website for fair tax and I have to admit that I am pretty skeptical.  It looks like a terrible idea.  For background, we are in the mess we are in in part because of the Reagan shifts from economic activity to capital activity.  The fundamental basis for economic reasoning is that every transaction has three parts:  1) production of a good or service, 2) the transaction, and 3) Consumption.  Whichever of the three is in short supply is the one you would have to stimulate to get increased activity, and generating increased activity is the quickest way to reduce pain in a downturn.
Mark -

What the last thirty years have shown us, with the shrinking middle class and the various asset bubbles we have seen, is that consumption is the problem and trying to fix it by bidding the stock market up is pushing on a string.

Now the tax, even if it is progressive, is 100% consumption.  The very best they could possibly do is decrease the tax burden on the poor by shifting it to the upper-middle, and meanwhile the tax burden of the wealthiest get shifted to the upper middle.  If you believe that consumption is the problem, which is pretty clear, then fair tax is exactly the wrong idea for the current situation.

Michael Norton

July 31, 2011, 10:15 p.m.

John, I’m really glad some folks on the Hill are starting to pay attention to you! Another reader commented that it was appalling that Senators were taking notes as you spoke—presumably because they should already be informed about the economic tar pit we’re in. Well, yes, they should be, but then if they were sufficiently educated in this field, the tar pit wouldn’t exist! Also, I concur with another reader who suggested the Fair Tax is the way to go, not a VAT. Folks argue that a consumption tax is regressive, but the people who came up with the Fair Tax have that very well thought out. It’s essential for this country’s survival that the tax system be revised, and the Fair Tax is the best plan I’ve seen yet. This country was started in part in objection to taxation without representation. With almost half of us currently paying no federal tax, we have a worse evil: representation without taxation, otherwise known as eating the goose that would be laying the golden egg otherwise. I could go on and on about that, but I’ll stop by saying again that I’m really glad “End Game” is getting attention on the Hill.

Bruce Doe

July 31, 2011, 5:21 p.m.

You have to remember that the main reason that 475 of the people pay no income tax is that they get $1,000/child deduction from their income tax, plus $600 from their income per child.  If you just rolled this back to $600/child as it was under Pres. Clinton(but raised to $1,000 by Pres. Bush), a lot more people would pay some income tax.  I think you would have to scale the child income tax credit back as there are people that may have had a child to get the tax benefits.  The tax was aimed at the poor and the lower middle class to encourage these lower income people to have more children (you don’t think a wealthy person would have a child just to get a $1,000 tax credit, do you?).  It is not stated, but the intent was to get more indigenous low-cost labor.

I feel the child tax credit is not working so as far as I am concerned the whole child income tax credit could be phased out.  But there are those who want to give the credit and then put a tax on it.  Doesn’t make sense to me, but that’s politics.

Bruce R. Doe

Tom Treadwell

July 31, 2011, 11:44 a.m.

That was very intersting as I live in Southern Spain. The real reson for a comment is that you said we need a new tax code and I agree 100%. Get behind that and really push. A simple tax with low % and no loop holes would collect money from most of the population and if it were extended to corp. tax think of all the aid money that could be saved. By the way I am a US citizen just can’t afford to live there. Also enjoyed your book (e-book) Tom Treadwell

Jamie Schlinkmann

July 31, 2011, 8:49 a.m.

John: I challenge you to provide more support to your claims that (1) a VAT is necessary, and (2) spending cannot be cut too quickly.

It seems to me that a VAT will will need a whole new bureaucracy; an entire new organization of waste for our nation full of organizations of waste.

As for spending cuts, a huge part of our economy revolves around attitude. There seems to be a large and growing group that appears to want reduced government,  and there’s nothing like a sharp and deliberate change like major spending cuts to set the mood. Tell us why in this case it won’t be the catalyst needed to move idle capital back into play.

Paul Dorio

July 31, 2011, 7:45 a.m.

Medicare was not conceived to care for and cover elderly folks from age 65 until 100 or older. Medicare was conceived when median life expectancies were closer to the age of 68. Therein lies the problem. The time is now to revise and adjust Medicare, regardless of the fact that there will never be a politically wise time to do so.

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