"Everyone" is upset with the level of fiscal deficits being run by nearly every developed country. And with much justification. The levels of fiscal deficits are unsustainable and threaten to bring many countries to the desperate situation that Greece now finds itself in. We must balance the budget is the cry of fiscal conservatives. But there are unseen consequences in moving both too fast or too slow in the effort to get the deficits under control. Today we look at them as we explore what a fine mess we have gotten ourselves into. (I am working without internet today so the letter will be shorter with fewer references than normal.)

We have discussed the above equation before, but let's look at it again from a different angle. Basically, the equation is another accounting identity. GDP (Gross Domestic Product) for a given country is the total of Consumption (personal and business) plus Investments plus Government spending plus exports minus imports.

The Keynesians argue that when there is a drop in C due to a recession that the G must rise to offset the drop. That was at the heart of the argument for stimulus packages in so many countries. And there is no doubt that stimulus did help keep a very deep recession from turning into an even deeper depression. One can legitimately argue about the size of the stimulus, or about the nature of the spending, but it is difficult to argue that it did not have an effect.

Now, of course, the hope is that a recovery will allow C to begin to rise so that there is no more need for government deficits. Keynes argued that governments should run surpluses in good times, which is conveniently forgotten by most government spending types. The problem is that we are still running massive deficits. Tax receipts are way down (10% unemployment will do that to you!) and show no sign of turning back up soon all over the developed world.

If you reduce government spending, that also has a negative effect on GDP in the short run. But in past recoveries the growth of the private sector has overcome that negative effect. Normally at this time in a recovery growth is in the 7% range. This is a very tepid recovery in the US and the developed world.

In a 1975 playoff game, the Dallas Cowboys were nearly out of time and facing elimination from the playoffs, down 14-10 against a very good Minnesota Vikings team. The Cowboys future Hall of Fame quarterback Roger Staubach had no very good options. He later said he dropped back to pass, closed his eyes and, as a good Catholic, said a Hail Mary and threw the ball as far as he could. Wide receiver Drew Pearson had to come back for the ball and, in a very controversial play, managed to catch the ball on his hip and stumble into the end zone. Angry Vikings fans threw trash onto the field, and one threw a whiskey bottle that knocked a referee out. After that play, all last-minute desperation passes became known as Hail Mary passes. (That was a very thrilling game to watch!)

And that is what Europe did last weekend. They threw a Hail Mary pass in an attempt to avoid the loss of the eurozone. Jean-Claude Trichet blinked. Merkel capitulated. Today we consider what the consequences of this new European-styled TARP will be for Europe and the world. We do live in interesting times.

(At the end of the letter I note that I will be speaking at the Agora Financial conference in Vancouver July 19-23. This is a wonderful conference and a lot of my good friends are speaking. They have extended their early-bird registration for one week for my readers. Join me!)

Also, I am finalizing the details on the next two Conversations with John Mauldin. The first will be on China, where I have two experts who disagree with each other. It will be fun and most enlightening. The next one will be on energy and oil. They will both be out in June.

We get a lot of positive responses to this service. Herb wrote about the last Conversation, "Wow. What a great discussion. What smart guests, how little BS. Congratulations. It's the best of your Conversations that I've listened to."

And ACK wrote: "Wow!! Just the most important discussion I have been treated to as an investor and fund manager this year or last. Your product is dreadfully underpriced, as it delivers more value and education than almost any other subscription that I have... Thanks so much... This particular conversation was just mind-blowing!"

"Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that 'this time is different.' That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy."

- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. "The subprime problem will be contained," said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about.

But first, I want to give you a chance to register for my 6th (where do the years go?!) annual Strategic Investment Conference, cosponsored with my friends at Altegris Investments. The conference will be held April 22-24 and, as always, in La Jolla, California. The speaker lineup is powerful. Already committed are Dr. Gary Shilling, David Rosenberg, Dr. Lacy Hunt, Dr. Niall Ferguson, and George Friedman, as well as your humble analyst. We are talking with several other equally exciting speakers and expect those to firm up shortly.

Comments from those who attend often run along the lines of "This is the best conference we have ever been to." And each year it seems to get better. This year we are going to focus on "The End Game," that is, on the paths the various nations are likely to take as they try to solve their various deficit problems, and how that will affect the world and local economies and our investments. We make sure you have access to our speakers and get your questions answered, and you'll come away with excellent, practical investment ideas.

Peggy Noonan, maybe the most gifted essayist of our time, wrote a few weeks ago about the vague concern that many of us have that the monster looming up ahead of us has the potential (my interpretation) for not just plucking a few feathers from the goose that lays the golden egg (the US free-market economy), or stealing a few more of the valuable eggs, but of actually killing the goose. Today we look at the possibility that the fiscal path of the enormous US government deficits we are on could indeed kill the goose, or harm it so badly it will make the lost decades that Japan has suffered seem like a stroll in the park.

And while I do not think we will get to that point (though I can't deny the possibility), for reasons I will go into, there is the very real prospect that the upheavals created by not dealing proactively with the problems (or denying they exist) will be as bad as or worse than the credit crisis we have gone through. This is not going to be something that happens overnight, and the seeming return to normalcy that so many predict has the rather alarming aspect of creating a sense of complacency that will only serve to "kick the can" down the road.

This week we look at the problem, and then muse upon what the more likely scenarios are that may play out. This is a longer version of a speech I gave this morning to the New Orleans Conference, where I also offered a path out of the problems. This letter will be a little more controversial than normal, but I hope it makes us all think about the very serious plight we have put ourselves in.

Let's review a few paragraphs I wrote last month: "I have seven kids. As our family grew, we limited the choices our kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, 'What were you thinking?' and get a mute reply or a mumbled 'I don't know.'

We have arrived at this particular economic moment in time by the choices we have made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week's letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip recession? Read on.

But first, I want to make a very important announcement. There are not many times in a career when you can say that something new has been created in the financial services industry and that you have been a part of it. But now I can say that and, I must admit, with a little pride in helping to bring a new creation into the world.

For years, Steve Blumenthal and I have shared a passion for bringing Absolute Return Strategies to all investors, not just the wealthy and institutional investors.

I want to introduce you to a new mutual fund, one that is different than the typical long-only equity mutual fund. My friends and partners at CMG have created a mutual fund that is comprised of 9 different trading strategies, a "fund of trading strategies," so to speak; and it's one that I believe will be strategically suitable for the economic environment that I think we face. And, as a mutual fund, it is open to all investors.

You can learn more about it by reading a report I have prepared, entitled "How to Deal with Volatility in Extraordinary Markets - Introducing the CMG Absolute Return Strategies Fund." Simply click here.

If you are an investment advisor or broker, you especially should read about this new fund and contact CMG directly for more information and reports. Full disclosure: as a consultant to the Advisor to the fund, my investment advisory firm does participate in the fees. And be sure and read all the disclosures and risk factors in the document.

And now, let's look at the choices we face.