Thoughts from the Frontline

The Beginning of the Endgame

By John Mauldin

August 13, 2011

Choose your language

The Big Bang Moment
Bang, Indeed!
“It’s the Economy, Dummkopf!”
The Long and Winding Road to Crisis
Are We Already in Recession?
So What Can We Do?
Home and then Ireland, London, and Geneva

I came away from Maine, and meeting with some of the most astute economists in the world, with a series of impressions that will be the core of this week’s letter. On Friday night, S&P downgraded US debt, and of course I need to comment on that. But as we talked the next two days and into the nights, I came increasingly to the opinion that this is indeed the Beginning of the Endgame. I must admit it has come about faster than I thought. But that is the nature of these things. And so, with no “but first,” let’s jump right in.

The Big Bang Moment

I think it relevant to start off by quoting from my book Endgame, where I quote in turn from what I think is the most important book of the last decade, This Time is Different: Eight Centuries of Financial Folly, by Ken Rogoff and Carmen Reinhart. I truly urge you to read it. The book is consciously designed so you can read the first chapter and the last five…

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Walter Bruno

Aug. 23, 2011, 3:08 p.m.

Mr. Mauldin, “Dummkopf….”, by quoting Michael Lewis (obviously siding with him) in your article on German attitudes toward money ( excrement, and the country’s Nazi past) which allegedly “all of which help explain its peculiar new status”, you are showing little restraint, insight and knowledge towards Germany.
From your travel itinaries, I detect a certain reluctance to visit this place in the heart of Europe with people running the risk of becoming the scapegoat for bankrupted PIIGS eventually, resembling those thrifty Jews in the Middle Ages with their money helping to rescue Kings and Emperors from bankruptcies. When those dignataries could not repay their debts to unfortunate money lenders, they not seldom applied ruse or plain force to rid themselves from repayment.
Since then, methods may have changed somewhat. However, spreading misinformation and lies remains part of the armory for profligates and their supporters.
May I, therefore, suggest Mr. Mauldin, put the enshrined fobie towards Germany - prevalent among US academics especially in monetary circles- aside and visit this beautiful country. Form your own judgement instead of relying seemingly on a biased “Dummkopf”.

Robert Kenagy

Aug. 21, 2011, 5:54 p.m.

A friend, upon reading your latest, sent me his opinion.  Quoting you, he says:
1.  â??We now need to focus on what we can do to get out of the way of the private sector, so it can find ways to create new businesses and jobs. And that means figuring out how to get money to new businesses, because that is where net new jobs come from.â?
2.  â??The NFIB survey I cited last week showed there was no great demand on the part of small business for loans.  91% had what they needed.â?

I interpret #1 as the usual plea for a tax cut (which have never stimulated our economy).  But #2 basically says they donâ??t want itâ?¦they have nowhere to spend the money.  Itâ??s basically free, like a tax cut (at least to them) and they donâ??t want it now.

â??May you live in interesting times.â? â?? Old Chinese Proverb.

John, if you think tax cuts stimulate the economy, get off your ideology horse and read:
“Facts don’t support belief that tax cuts spur growth” by Bill King in the Houston Chronicle of August 18.
    http://www.chron.com/disp/story.mpl/editorial/outlook/7701906.html

andre therien

Aug. 18, 2011, 9:22 p.m.

Why are easy solutions ignored ? Encourage foreigners to buy real estate with keys to citizenship, it works, look north . Once construction starts again, it will be the beginning
of a sustainable recovery. Cut income taxes on middle call and replace with VAT, they will
consume, as always. All Europe needs to do is print EUROS and bail-out, inflation is the solution.
Political paralysis and ignorance are the problem !!! If not for Bernanke, we would be in a
major depression. I think Business-man are better economist than the ones that claim to be and i’m both. Come on AMERICA, get your act together.

Tom Jones A Foundling

Aug. 18, 2011, 1:54 p.m.

To answer Gail Kraker’s question above about what will happen to Gold prices.. no one knows of course, but long term Gold would rise if inflation rose. So how you position in gold depends how you see inflation vs deflation. There are many who believe we are now in a deflationary period .. which could either change to hyperinflation, or long term stagflation. There are good arguments all around and I’ve yet to be convinced enough to make a decision about buying gold - simply because I don’t know. Right now people are buying gold mainly for Jewelry, mainly by Indian and Chinese housewives who feel emotionally safer with their protection hidden in a mattress than in a bank. I know that sounds anecdotal but seriously, it is the main source of gold buying in the world right now. So if you can understand the psychology of Indian women, you might have insights on the future of gold.

Gerald Ferguson

Aug. 17, 2011, 2:36 p.m.

The likely austerity in the GOP programs, if they win election will reduce the size of the economy. This retro behavior smacks of the 19th century, before the Fed and regulations. And when things were down enough, including salaries, the economy starts to recover (after much pain). We have not progressed much in politicians understanding of finance. It is as if they don’t know we are off the gold standard, and can issue money, independent of tax returns, or issuing bonds.

Rob R

Aug. 14, 2011, 7:47 p.m.

It is amazing how you can get it so right and so wrong all in the same article.  You say early on you say “The NFIB survey I cited last week showed there was no great demand on the part of small business for loans. 91% had what they needed. What they want are sales and customers!”

But you end with “And that means figuring out how to get money to new businesses, because that is where net new jobs come from”.

Do you not see the fallacy of your own arguments?  Consumers are broke and in debt.  There is no demand, and until there is there is no reason to start a new business or current ones to hire anyone.  Your one commenter - the so-called rich guy not starting a business due to laws is lying.  He has no business idea since he has nothing to sell to anyone because most everyone is broke.

When an economy is going thru massive delevaging after the private sector and consumers drowned themselves in debt, money is being sucked out of the economy with a massive vacuum.  To counteract this phenomon the Govt has to spend.  Not with QE, but with jobs programs and tax cuts to every day people.  Austerity and tax hikes will further derail our economy - that sucking sound of money leaving the economy doesn’t need more money sucking programs.  But as one of your comments said - the US is a soveriegn issuer of its own currency and therefore can spend to its heart’s content until there is a sniff of inflation - which will be a LOOOOONG time from now since there are many trillions of dollars of deleverating left.

And to those who say the government is in debt - but to whom?  They are mostly in debt to themselves.  If you owed yourself money - how much debt are you in?  The Chinese?  The mere fact of their trade surplus - a surplus of US dollars - forces them to buy treasuries.  If they don’t want treasuries they have to stop selling stuff to us.  They will never, ever turn away from our debt because if they do - say they buy someone elses debt - that someone else will be forced to buy US debt.  And so we service that debt - who cares, we print more money.  That money they earn won’t lead to inflation here.

Anyway - it’s shame you think we need to help businesses when they are sitting on hoards of cash and the only real way to help them is to put money in the pockets of consumers - and the only way that is going to happen is via tax holidays and jobs programs.

Jonathan Grossl

Aug. 14, 2011, 6:33 p.m.

“So what can we do?”

At this point not much, there is no time to wait for China to pick up the stick and keep moving the world. Just one exit out, and the sooner the better: Gold Revaluation. There is nothing more deflating that for Congress be paid $42 per ounce for its gold by the Federal Reserve. We have to reset the system and everybody to keep their hands out of the table to count the chips. At this point the credit beast is so big that the current monetary base cannot stabilise it. As the US revalued its gold, the balance sheet of the Federal Reserve gets increase, but still gold will need to be a few times higher to stabilise the pyramid.

As mentioned before the sooner we start with this process the better. 
References: Gerbino principle of liquidity, John Exter’s Liquidity Inverted Pyramid.

Brent Leonard

Aug. 13, 2011, 9:52 p.m.

Question: With nearly $20T in interest rate sensitive securities (including insurance and pension companies), how much consumerism would be enabled with a 1% increase in short rates? As a sequel to This Time Is Different, I’d recommend the equally tedious;y detailed but necessary Reckless Endangerment; then if time allows - Fooled by Randomness by N.N. (Black Swan)Taleb about probabilities.

jim mcwhorter

Aug. 13, 2011, 8:28 p.m.

John, in spite of the regression associated with the reduction in government spending on GDP and the economies, it seems to me I read a study of various countries economies as their exports and imports varied with time as compared to future economic growth with the component of normal GDP allocated to government spending omitted. The conclusions, if I recall them correctly, were simply that once the balance of trade continued beyond some range in the 25 to 35% area for more than five years the future economic fortunes of the country were poor and after seven to ten years almost certain to fail entirely of their own weight. The onlly recourse to prosperity at that point was military in nature. In each case cited my recollection was that GDP concurrently dropped below zero exclusive of the government spending component.

Michael Wheeler

Aug. 13, 2011, 6:46 p.m.

As someone who lives across the border near Vancouver I see things a little different than those who live in the US. We went through our (painful) upheaval in the 90’s with many cut backs and lots of people being laid off. I am sure that many countries including the US will have to go through the same process. As for the various government indicators that can be manipulated or massaged to give an okay or not so bad reading I feel that the US is now close to (if not) already in a new recession. Several writers have recently written that if one digs deep into all the government statistics they will find that income tax revenue has fallen by 4.6% compared to last year! They go on further to say that there is strong correlation between falling tax revenue and the start of a recession. If this really is happening then we are in for a bad time indeed. Going by the FED statement this week that they will keep interest rates on hold indefinitely is nothing more than a confession that it does not understand the situation does not know what to do.

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