We are coming to the point in the United States when even the US government will no longer be able to borrow at very low long-term rates. That point is a few years off, and we have time to change paths; but as I have shown in previous letters, the longer we wait to get the deficit under control, the fewer choices we have and the more painful they are. NO country can run deficits the size we are currently running, along with unfunded deficits over four times the size of the economy and a growing overall debt burden, without consequences. At some point, investors in bonds will start wondering exactly what the process is by which they will be repaid. And what will the value of those future payments be?

2012 will be the 11^th time in my short life that I will be able to participate in the choosing of a president of the United States. While it may just be me, it seems like each and every election is cast as the most important election of our time and a defining moment for the American Experiment. The future of the Republic was being weighed in the balance, and only the proper outcome (which would of course be the election of the candidate you supported) would assure its survival. This week we will continue our meditations on the economic choices that confront the world, this time focusing on the US.

We will start with a thought experiment, in which I invite you to think about alternate histories. Just how important are presidents (or leaders in general) to the success or failure of the economy? And then how critical is the coming election this fall? We will assault a few of our most cherished beliefs, both from the left and from the right. If I do not offend you in the first few pages, I invite you to keep reading; I will get to you somewhere.

(Warning: I risk upsetting more people than usual, as this letter is centered on the politics of economics. I will do my dead level best to be even-handed, but there is just no pleasing everyone. So better to write what I think and at least have one person happy. Which is pretty much what I do every week, anyway.)

As I continuously argue, the most important issue facing the US is dealing with its deficit, just as that is the defining issue in much of Europe and will soon be in Japan. The longer we put off the decision, the more difficult the task and the more serious the economic impact. Without action, Italy all too soon becomes another Greece, but with real impact. They realize that and are making the efforts. But would it not have been easier for Italy with about 40% less debt-to-GDP? Perhaps not politically, at that time when they should have been working on it, but in hindsight I bet the politicians now wish they had done more. It seems we accept change only in the face of necessity and see the necessity only in a time of crisis (as one Italian more or less put it, long ago).

So we discuss politics, because the looming debt crisis (and its solution) is at its very core a political creation and must have a political solution. And once the bond market decides to provide its own solution by demanding much higher interest rates, it is too late. That's game over, and a prolonged recession if not a depression will ensue.

But before we go any farther, and quickly, if you are an accredited investor (or professional investment advisor or broker) in the US, let me invite you to a live discussion/webinar with myself and Tony Fenner-Letto of Winton Capital Management this next Tuesday, February 14, 2012 at 10:00 a.m. Pacific / 1:00 p.m. Eastern. This presentation will be hosted by my partners at Altegris Investments. Winton Capital Management is the largest and arguably the best-known managed futures firm on the planet. We will discuss their strategy for dealing with today's market environment. I will also share my current thoughts on the global economy and its outlook. Hopefully we can talk about something besides Greece (are you tired of Greece yet?).

You can get an invitation to the webinar by calling your Altegris representative at 800-828-5225. If you have not yet opened a relationship with them, I will have them call you if you register at The Mauldin Circle. A replay will be available to registrants unable to attend. I apologize for limiting this discussion to accredited investors, but we must follow the rules and regulations. I am working on doing a webinar in the near future that will not be restricted. Stay tuned. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

One further note. At the end of the letter, I will give you information and a link to be able to register for my Strategic Investment Conference, May 2-4. I expect it will sell out, as always, so I would suggest making your reservation promptly.

Now, we start today's letter in South Africa, as I wonder which continent I will finish it on. In order to be able to hit the send button while on layover in London, we'd better jump in.

Turning and turning in the widening gyre
The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

- The Second Coming, by William Butler Yeats (1865-1939)

This coming week we shall likely see Congress pass an extension of the "temporary" payroll tax cut, first enacted as a stimulus to the economy in January of 2011. As I write, the extension is just for two months. We'll leave aside the politics and look at the economic implications of the extension, and then go on to examine the deficit in the US. That will give rise to some thoughts about Europe and what would have to happen for a country to leave the euro. We'll finally close with some thoughts and graphs about the more controversial part of the tax cut extension, the Keystone XL Pipeline. Just how radical is it to build such a pipeline in the US? And what are the implications for the deficit? I think looking at a few maps might surprise some readers. It should all make for a rather controversial letter, but then controversy is my middle name. (Note, this letter will print longer as there are lots of charts.)

But first, I want to thank one reader for helping to increase my reader base in a rather unusual way. I was sent this bit from a blog by Edward Ream today:

"I came across John Mauldin, http://www.johnmauldin.com, when someone left a printout of his blog in a railway carriage. His ‘Outside the Box' column is free to all.

"I enjoy his column, and I think some of you may enjoy it too. I especially admire his thirst for knowledge and his tolerance of diverse viewpoints. He actively seeks disconfirming evidence and the views of those who disagree with him. Imo, this stance is a model for what politics should be, and isn't :-) – Edward"

Thanks, Edward, and to whomever left the letter on the train. We take expansion of the number of our friends wherever we can find it. And let's see how he feels after this letter.

This week we are going to revisit some themes concerning the problems of the debt and the deficit. I am getting a number of questions, so while long-time readers may have read most of this in one letter or another, it is clearly time for a review, especially given the deficit/debt-ceiling debate. I will probably offend some cherished beliefs of most readers, but that is the nature of the times we live in. It is the time of the Endgame, where things are not as black and white as they have been in the past.

This week I finish the two-part letter on the Endgame and give you my thoughts on the economy and how it all plays out over the next five years. This is the second part of a speech I gave last week at the Strategic Investment Conference in La Jolla. It is a rather bold forecast, and fraught with peril and likely errors, but that is my job here. Damn the torpedoes, etc. I must offer one large caveat! If the facts change so will my forecast, but this is the view into my very cloudy crystal ball as I see it today. As always, remember that those of us in the forecasting world are often wrong but seldom in doubt. Read accordingly.

But before we get there, two quick things. I want to really show my strong appreciation for the work done by my co-hosts, Altegris Investments, at the 8^th annual Strategic Investment Conference. We had a packed house with almost 500 people come to see what I think was the best line-up at an investment conference this year. Each year we say there is no way to get any better, and each year we somehow manage to do so. And that is due in no small part to the considerable effort of the team at Altegris. I am proud to be associated with them. This year we did video many of the speakers and panels, and over time we will figure out how to make some of this available. I will keep you posted.

Enemy of Spain

Second, Endgame continues to do well, so thanks to those who have purchased it, and if you haven’t already got your copy you should go to www.amazon.com/endgame and do so! And quick kudos to my co-author, Jonathan Tepper, brilliant young Rhodes scholar and head analyst at Variant Perception. Apparently, he’s on a small but prestigious list of enemies of Spain, according to El Mundo, one of the biggest Spanish newspapers, for the sin of pointing out that Spain is in a crisis (we have a whole chapter on Spain on the book). Their article appeared in print in the weekly finance edition, but is not online. Other papers have been called by government officials and asked not to quote him. Oddly, the people who helped inflate the enormous construction bubble and the incompetent government officials who denied for years there were any problems are not enemies of Spain. Go figure. I guess if you have to be on an enemies list, you could do worse than Spain (where, oddly enough, Jonathan spent most of his childhood growing up in a drug-rehab facility). Congratulations, young man! (Oh, and a publisher in Korea picked up the Endgame Korean-language rights, so we will soon be in bookstores in Seoul.)

And now to the second part of the Endgame. And for those who want to review the first part, you can read it at http://www.johnmauldin.com/frontlinethoughts/the-endgame-headwinds/.

I have written repeatedly about the Endgame in the weekly letter, as well as in a New York Times best-seller on the same topic. By Endgame I mean the period of time in which many of the developed economies of the world will either willingly deleverage or be forced to do so. This age of deleveraging will produce a fundamentally different economic environment, which the McKinsey study referenced below suggests will last anywhere from 4-6 years. Now, whether this deleveraging is orderly, as now appears to be the case in Britain, or more resembles what I have long predicted will be a violent default in Greece, it will create a profoundly different economic world from the one we have lived in for 60 years. This makes sense, in that the prior world was defined by ever-increasing amounts of leverage. Outright reductions in leverage or even a significant slowing of the rate of growth is a whole new ballgame, economically speaking.

In all this I have explained the various options facing the developed world, but I have refrained from putting forth my own estimates as to what will actually happen and what the environment surrounding that outcome will be. That is about to change. I have been giving this a great deal of thought and research. While my conclusions will be somewhat controversial (I know, surprise, surprise), with enough to offend almost everyone on some point, I hope that I can muster enough clarity to help you think through your own personal views and how you will respond to what I think will be yet another crisis on the not-too-distant horizon. Whether that is Crisis Lite or Crisis Depression is up to us and the politicians we elect. I argue that we need to choose most wisely, because we are at a crossroads that is as critical as any since 1940.

As I start this letter, I am on a flight to San Diego, where I will co-host my 8^th annual Strategic Investment Conference. As usual, I will be the last speaker on Saturday. This letter will be the beginning of that speech, and we will conclude (hopefully) next week. What I hope to do here is summarize the main points, add some new ones, and then move on to how I think the Endgame will play out. These next two e-letters will be among the more critical ones of the last few years. Feel free to forward, and if you are reading this letter you can join my one million closest friends and sign up for my free weekly letter at www.johnmauldin.com. (This letter may print longer than usual, as it will have a significant number of graphs.)

But before we jump in, many of you know that I am a serial entrepreneur. I look for business opportunities for inclusion in “the Mauldin companies.” My “hobby,” if you will, is looking at cutting-edge biotechnology. You have been asking for details and an update on one I mentioned last year. We partnered with a very serious biotech research firm, International Stem Cell Corporation, whose scientists discovered a patent-pending formula that rejuvenates skin. We continue to partner with them to help augment this breakthrough and, most importantly, to help fund their therapeutic research to find cures for very serious diseases. You can learn more at www.lifelineskincare.com/antiagingbreakthrough. Now, let’s get into the letter.

People only accept change in necessity and see necessity only in crisis.

—Jean Monnet

The economy is doing better, and we will survey some of the highlights. But does this mean the stock market is headed higher? A chart from Louis Gave got me to thinking, and I shot off a few thoughts and questions to Ed Easterling and Vitaliy Katsenelson. What ensued was a lively “battle” of charts and thoughts and more questions, so this week I let you look over my shoulder at our conversation. This letter will print longer than normal, as there are a lot of charts. I think you will find it very thought-provoking, if only a little cautionary. And we start with a look at a survey about what Americans think of the current fiscal deficit and the ways to remedy it.

At the end of the letter I give you a link to a speech by my friend Pat Cox, which is one of the best speeches and PowerPoints I have seen in a long time. It will only remain up for another ten days, per agreement with his publisher, so you really do want to find some time to listen. And I remind you about my conference in La Jolla April 28-30, with its gonzo all-star lineup, which I modestly think makes it the best investment conference anywhere. It is rapidly filling up. Don’t procrastinate. And I have some TV and radio times for next week as well. Now, let’s jump in to today’s letter.

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 www.johnmauldin.com/conversations. 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 www.johnmauldin.com to contribute comments on this letter. I do read them!