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Thoughts from the Frontline

Forecast 2013: Unsustainability and Transition

January 14, 2013

Choose your language

“There are decades when nothing happens and there are weeks when decades happen.” – Vladimir Ilyich Lenin

"People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them." – Jean Monnet

"If something cannot go on forever, it will stop." –Herbert Stein

As we begin a new year, we again indulge ourselves in the annual (if somewhat futile) rite of forecasting the year ahead. This year I want to look out a little further than just one year in order to think about the changes that are soon going to be forced on the developed world. We are all going to have to make a very agile adaptation to a new economic environment (and it is one that I will welcome). The transition will offer both crisis and loss for those mired in the current system, which must evolve or perish, and opportunity for those who can see the necessity for change and take advantage of the evolution.

This is my most-read letter of the year, by the way, and if you’re not yet a subscriber you can join my “one million best friends” and receive both Thoughts from the Frontline and my other weekly letter, Outside the Box, as well as Grant Williams’ rollicking Things That Make You Go Hmmm…, all for free, by simply entering your email address on my site:

Unsustainability and Transition

Think back to 2001. It was the opening of a new millennium. While that was auspicious enough, several events then ensued that shaped the future for decades to come. China was admitted to the World Trade Organization, leading to a revolution in its production and global trade. The euro was launched with much fanfare – and a minor chorus of criticism.  We are now in a midst of a…

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Feb. 6, 2013, 9:52 p.m.

Very insightful article but I found your rejection of the argument that the world is running out of food, energy, etc, is not as strong as the rest:

“I reject those arguments. I have a great deal more faith than that in our ability to transition to new forms of food and energy production.”

It’s based on faith.

I’m not so optimistic about the fact that the economy can quietly transition from a diminishing supply of oil. The equilibrium of most world economies is based on growth, and growth is based on growing energy supply (or diminishing energy intensity, but that probably implies lifestyle changes that I’m not sure the American citizens are ready to accept)

Ronald Nimmo

Jan. 20, 2013, 3:45 a.m.

Mass immigration is destructive to the fabric of society in a much deeper way than can be remediated by any taxation schemes, though the financial burden from this practice is very heavy indeed. David Webb’s comment is right on the mark.
  We must eliminate chain migration by virtue of family relationship (other than the spouse and dependent children, who should be part of the original quota.) We must also get rid of the idiotic lottery quota and replace it with admission slots for people who possess skills that are scarce and much needed here. The H1-B program pretends to represent such a policy, but it is just a way to displace American technology workers with much cheaper and more docile Asian workers, thus creating the conditions that Dr. Friedman of Stratfor discusses in his article on the disappearing middle class in the US. We should be bringing in just the real geniuses that we simply can’t find here in enough numbers.

Jan. 16, 2013, 2:40 p.m.

Mr. Mauldin,
Let me start by telling you how much I appreciate your insight and analysis. Few economists are willing to really “put it on the line” the way you do. You’re what Reagan would call “a one-handed economist”, and I appreciate that.

Let me also get another thing out of the way: I am a staunch Keynesian. However, I think Japan is mis-reading Keynes’ work; they still haven’t straightened out their real estate ledger’s, which everyone knows are works of fiction. ‘Nuf said.

Let’s get to the “meat” of why I’m commenting on this post: I really have to call you on one cause-and-effect relationship that I think is unfounded: You say,
“At that point [2015], I think it is too late and the bond market, having watched Japan and France and much of Europe descend into chaos, will simply begin to demand higher rates, no matter what the Fed does.”
I suggest that the bond market will flock to US Treasuries in a “flight to safety”, similar to what happened when the S&P lowered the US government’s bond rating, and the yields actually went down. There was a time when people were paying a negative yield in short-term bonds, presumably because they couldn’t find anyplace to put their money that wouldn’t be eroded when they got it back.

Re: Your suggestion about getting radical in tax reform. I agree.
One simple but effective measure is to:
1) Get rid of all corporate taxes.
2) Withold taxes on any non-citizen shareholder (make them file a return to get it back if it is deserved)
3) Tax all income under the same (existing) marginal system (and rates) whether it is from wages, capital gains, or dividends.

From all I’ve read of your work, I think we’re “on the same” page on this one. One supporting evidence is from “Crisis of the Middle Class…” by George Friedman is the quote: “Statistics reveal that, since 1947 (when the data was first compiled), corporate profits as a percentage of gross domestic product are now at their highest level, while wages as a percentage of GDP are now at their lowest level.”
Do we—collectively—really need to incentivize people to invest when those investments are doing so well (assuming corporate profits translate into share or dividend growth)?

Every time I see the phrase “entitlement reform” I read it as “underfunding entitlements” (see Medicare), because that is the easiest answer. Of course, poor, sick, and old people will start “piling up like cord wood”, and that is such an eye-sore for my daily commute to the office. That last sentence is completely tongue-in-cheek, but I’m really asking, “Do we want to become another India, where a square meter of sidewalk space is handed down from generation to generation as a domicile?” Let’s see if we can’t really epitomize “in a rising tide, all boats rise” despite the last two decades. I expect more from my country and countrymen.

When some people say, “Isn’t it a shame that 47% of people don’t pay any taxes?” I say, “Yes, but not in the way you mean it.” It’s a shame that we can’t find a way to bring that number down by making systemic changes that will employ more people, and pay a fair wage for an honest day’s work. I have no idea how to do that, but I think it is the direction we should be headed.

Keep up the good work, and I always love hearing about your upcoming travels.
—Toby Sarver

Ken Grakauskas

Jan. 15, 2013, 2:38 p.m.

Mr. Mauldin;

You said “We all know that social security can be resolved rather quickly”. I wished you would expound on this because you seem to be espousing the presidents view as well and he generally does not speak the truth. The system is in the red now by 50 billion a year. I read there are 80 trillion dollars in unfunded mandates through 2050. The stagnant economy’s driving people into the disability program. How is this easily fixable?

Jan. 15, 2013, 2:23 p.m.

Gentle readers,

  Here is my suggestion for a compromise on immigration reform for illegal aliens.  Since we have a entitlement problems allow the illegals to qualify for citizenship under 2 conditions.
  1.  They are taxed an additional 3% of their gross income for their whole lives and this be used to increase the Social Security old age fund.  They would benefit from a solvent SS old age fund.
  2.  Illegals cannot qualify for welfare except for 10 years after they get their green cards.  This would not apply to unemployment compensation and educational benefits for children. 
    Obviously, this idea would need fleshed out in more detail, but it strengthens the argument of those wanting citizenship for illegals.
Jack Delivuk

Dallas Kennedy

Jan. 15, 2013, 8:48 a.m.

It sounds as if John is one with Kyle Bass. Makes sense to me: the US will enter a bond market crisis in 2014-15.

As for Krugman, the best advice to ignore him. He’s an irrelevant ranter, and the economics profession, such as it is, treats him today as an embarrassment.

Jim Summers

Jan. 15, 2013, 6:16 a.m.

John, if you want Krugman to go on the record, you have to go on the record too.  What would you define as a “successful” outcome to Japan’s problems?  Your analysis is that there are no good choices for Japan; so by your analysis, Krugman’s choice is guaranteed not to be a good one.  Krugman’s choice might be the best choice, but unless you define realistic criteria for success in Japan, you will be easily be able to claim that his choice was a bad one.

I have already seen this in your analysis about the U.S.  When the crisis hit, you repeatedly (and correctly) stated there were no good choices.  But that doesn’t stop you from calling Obama’s (and Bush’s) choices bad, even though you know all his possible choices were bad.


Jan. 15, 2013, 6:12 a.m.


I only hope that the Republicans do NOT follow your advice on immigration reform.

Do you not understand how America is being transformed?  Have you visited border towns? Southern California?  You like numbers.  Have you seen these statistics?  Don’t shoot the messenger.  These are serious facts that will have a sustained impact on our children’s future:

Hispanics drop out of high school at three times the white rate and twice the black rate.

Fifty percent of Hispanic households use some form of welfare, the highest rate of any major population group.

Hispanics are 3.3 times more likely to be in prison than whites; they are 4.2 times more likely to be in prison for murder, and 5.8 times more likely to be in prison for felony drug crimes.

The average Hispanic 12th-grader reads and does math at the level of the average white 8th-grader.

Sources:“Attitudes Toward Immigrants and Immigration
Policy” (Washington, DC: Pew Hispanic Center,
“The Wealth of Hispanic Households:
1996-2002” (Washington, DC: Pew Hispanic Center,
“Youth Risk Behavior
Surveillance—United States, 2003,” CDC Surveillance
Summaries, Morbidity and Mortality Weekly Report, Vol.
53, No. SS-2 (Washington, DC: USGPO, May 21, 2004),

and others.

Take whatever GDP, stock prices, tax law, and budget proposals you wish, the true “unsustainable” situation will be a prosperous American future if we continue to ignore the transformations that are taking place right in front of us.  Are you willing to roll the dice with America’s future with a “buy and hope” strategy of continued mass immigration from the Third World?

patrick thiele

Jan. 15, 2013, 3:54 a.m.

I can’t dispute your economic analysis but, like Ms Owens, I think there’s a large piece of the sustainability picture missing from this article that I’d like to hear your thoughts on.  In a nutshell, globalization & technology are rapidly eliminating labor’s place in production.  As corporations exploit IT/robotics/outsourcing to optimize the bottom line, fewer humans will be involved in production,fewer humans will pay taxes and ultimately fewer products will be purchased because fewer people will be employed.
We’ve seen this scenario play out repeatedly, think industrial and agricultural revolutions but always with the unexpectedly happy ending of new employment opportunities being created to engage those displaced.
I can’t see the new opportunities for most of us, can you?

Jan. 15, 2013, 3:17 a.m.

Great Job John, I always love reading your stuff, keep up the great work! I just finished reading H. Woody Brock’s book American Gridlock, though it has some ideas that seem like they are too good to work in the real world, it does seem like a solution that we could use right now. What are your thoughts on his “win-win” solution for a lost decade? Also was recently having an interesting discussion with a German client of mine who I think has forgotten history. I seem to remember that Germany had quite a few economic troubles of its own pre-Euro. In my humble opinion this whole euro issue boils down to, how much is a competitive currency advantage worth to Germany in terms of transfer payments to its southern neighbors? There has to be a cost-benefit analysis they can run and end this water torture.

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