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Thoughts from the Frontline

The Cancer of Debt and Deficits

February 18, 2012

Choose your language

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?

One by one, the countries of Europe are losing their ability to sell their bonds at an interest rate that is sustainable for their economies and revenue bases without severe and socially disruptive restructuring, even if a central bank that will accommodate their spending by printing money or other countries will tax their citizens to pay for someone else's debts.

The US will soon be faced with that same problem if we…

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David Dukes

Feb. 26, 2012, 7:31 p.m.

The Lindsey/Summerlin book had only 4 reviews on Amazon one each 5,3,2, and 1 star so evidently it was not a best seller so Summerlin probably had lots of copies left over.  The good news is I can get it used for a penny plus 3.99 shipping so I will buy it.  I am intrigued by these VAT and FAIR tax ideas. I wish you or one of your staff had read the whole book and not just the chapter on reforms.
I got a call from one of Senator Burr’s staffers last week and he mentioned the Fair Tax and I called it a VAT, but sent an apology since I found out from reading here that I was wrong.  Senator Burr and I are NOT on first name basis, but I subscribe to his newsletters since he is one of my senators.  I often sound off and disagree with him, which must be why the staffer called.  I hardly hear from our Democratic Senator, but I must admit I do not write her as much.  I guess I need to do that.

Mike Hardy

Feb. 24, 2012, 10:27 a.m.

Hi John, I have been reading you every weekend since 2001. Also for some years now Dr John Hussman, Karl Denninger, Bill Bonner (sometimes) & Zero Hedge. There’s a guy in the UK (Shaun Richards) who is quite good too. However, even in all that truly illustrious company there is one other economic blogger who I rate the best of all, because he is just constantly, consistently, achingly correct! His name is Mike ‘Mish’ Shedlock, and in a long piece on his blog today he has called you a friend ... and then shown no mercy! In my very humble opinion I think the whole nation of America would be well advised to simply zip their mouths and listen to Mish:
Best regards,

Steve Chambers

Feb. 21, 2012, 7:13 p.m.

I haven’t read the article this week, but only scanned the parts pertaining to taxes.

In addition, I have had a couple glasses of wine.

For the two of you still reading, here is my comment.

I have had many jobs in my life. I have worked with my fellow humans, fellow Americans in many different settings, and in not just a few of those jobs, among the lower rungs of society. I have observed that 95% (or more) of those fellow humans work diligently, even work hard, and expect to do so every day, every year, for all of their working career. They want a house, a life, a family, at least a modest representation of the “American Dream”.

A few of them will become (or already have become) entrepreneurs. Maybe 5%? 10%? maybe more. But the majority will not strike out “on their own”; they will be employees, and by and large, pretty damn good ones from what I have seen.

I see Mauldin’s (and the Republican party’s) approach what America should be (vis-a-vis taxes (low for well off “job creators”), spending (defund, destroy goverment), wages (low for the masses), the middle class (“they” are not us), health care (private, generating huge profit), government regulation (ideally, none), entrepreneurism (no employees - we can all be “entrepreneurs”) and many many more I have no need to list) as a ...


Americans taken as a whole are hard working people who will work every day for decades to try to achieve a modicum of the “dream”. They can’t, and won’t all be “entrepreneurial”. There has never been, and will never be such a country.

You know this. We know this.

The ideology of the current right wing is designed to achieve nirvana for the few as detailed in the paragraph above listing the wet dreams of the “intellectually sophisticated” thought leaders such as Mr. Mauldin.

I often read Mr. Mauldin’s newsletters, and probably will continue to do so. But when reduced to simpler language, and for the 80% or more of all us Americans, living our lives in America, the core meaning of what is actually being said is just BS, and a scam.

Joe Seager

Feb. 21, 2012, 5:15 p.m.

Well, where to begin.  I agree with your premise that we need to reduce our deficit and get our financial house in order.  But I have a very hard time accepting some of statements. 

In general you made reference to the multiplier effect of raising or lower taxes.  It always amazes me that these type of statements are made by very smart people.  I am sure that you know better and make these generalizations because they help make your argument.  But to suggest that no matter where we are on the tax curve if you lower taxes you will get more in revenue or a positive multiplier effect is just fodder.  If you lower taxes from 70% to 69% you are going to get a positive multiplier effect but if you lower taxes from 20% to 19% you will not get a postive multiplier.  Take it to the extremes, go from 2% to 1% or from 1% to .0001%?  What will happen?  You will get a negative multiplier.  Lower taxes does not always equate to a positive multiplier effect.  It depends on so many other factors. 

Total Tax revenue is a bell curve that will either lead to more taxes being collected or less as you slide down the tax side from 100% to 0.  At some point along the tax rate axis as you near zero you will get to a negative multiplier effect.  That of course depends on the level of spending and other independent factors. 

With that said anybody who says that no tax increase is good tax increase is not a reasonable person and should not be allowed to hold office.  Everyone who has signed the No Tax pledge of Norquest should be voted out of office. 

The solution is going to have to be from both a cut or reigning in of spending and new revenue sources.  The VAT discussions is worth having but I think the solutions is not going to be such a “radical” concept.  It is, in my opinion, tweaking our current system.  We need to extend Social Security, Means test anybody who is going to get Social Security, Deal with our Health Care situation, Reduce our spending on the Military (We don’t need a Navy that is larger then the next 13 countries combined) and other concepts to bring down our spending.  We then need to address the many tax code loopholes that exist today and make it so that no one pays less then a certain amount in taxes period depending on your income.  No one in this country should pay less then 30% or 25%  if you make more then $200,000, 15% to 25% if you make more then $50,000 but less then $200,000 and 10% if you are making less then $50,000.  We then should do the same for every business in America.  No company should be paying less then 20% or 25% in taxes. 

You hear about how companies will leave the country if we don’t lower the tax rate for them.  That is hogwash.  It is not right that companies don’t pay for the use of the infrastructure that our government builds and maintains.  It is everyones American Duty to pay taxes to make us a strong country.  Those that don’t want to pay their share can leave.  Go ahead and move your company to Malaysia or India. 

We are the greatest country in the world we just need to pay enough to keep us that way and then make sure the government is spending it on the “right” things and not wasting it by giving it to people.

Mike Morgan

Feb. 21, 2012, 4:49 p.m.

20% VAT on consumption is an interesting idea.  How do you propose to trigger it only on those who make more than $100K? Merchants won’t know that at the cash register.

Jaromir Siska

Feb. 21, 2012, 2:03 a.m.


I might be wrong but I think that the graph displayed in the chapter “Income Measures What You Contribute to Society” is a wrong one. It displays Employment level and not Private sector GDP.

Jeff Martin

Feb. 20, 2012, 10 p.m.

I am dismayed that the level of discourse on such an important topic has dropped to the level of a bad Fox news or MSNBC show. 
There is no “cure” for the cancer that John describes in his letter.  Ther are “treatments” however. As the last 30 + years have demonstrated, the “market” is just as imperfect as the government.  We, as Americans, elected the individuals that passed Gramm-Leach Bliley and NAFTA which effectively gutted American manufacturing.  The labor unions that demanded unsustainable pensions and benefits had a hand in there as well as did the myopic executives that approved those settlements.  That meant that wages stagnated.  The plan was to export manufacturing, import cheap products and get us to buy them on credit.
We, as Americans, bought in to the dream that all of us can grab that brass ring and become a millionaire.  That “dream” was created by the spin doctors for the banks that were more than willing to let us borrow our way to “prosperity”. Does anyone still have a HELOC that they can “tap” into? We substituted easy debt for hard work and innovation. We allowed the banks to tell us that unless we have a great credit score we are useless.  Good credit scores can only be achieved with multiple credit lines that are used and repaid regularly. It’s an Orwellian nightmare. The problem, my friends, is us.  We were greedy pigs at the easy money trough and now we have to pay it back. Let’s put the blame where it lies…on ourselves.  Our parents never would have done what we did.  Their work ethic and sense of fiscal responsibility were forged by the Depression and WWII. Ours were by AMEX, Master Card and Countrywide.
We have difficult choices to make.  We WILL have to ration health care.  We WILL have to spend less on education and have larger class sizes.  We WILL have to wean ourselves from the hydrocarbon breast and develop methods of transportation that use renewable resources (and not corn ethanol). We WILL have to develop efficient, wind, solar and nuclear power and NOT continue to even mention clean coal. We WILL ALL have to pay our fair share of taxes. We WILL have to do more with less until we can afford it. 
It’s time to get a glove and get in the game…before the game is no more; and it starts right in our own back yards.

Bill Walker

Feb. 20, 2012, 9:31 p.m.


One point must be made. We are already in a depression and have been since 2008. By definition in at least 90% or more of Econ 101 textbooks a depression is defined as occuring when a country’s GDP has had a 10% drop in GDP. The USA has been in that situation for the last four years if you take out the excess 10% ( $1.5 Trillion per year) spent by the Obama regime.

Next you need to check and the Gallop Poll survey for unemployment. We have been in the 20% unemployment or greater range for the last three years. The only reason there has been no great uproar and rioting in the streets is that the Obama regime has made sure that we increased the lenth of time for unemployment benefits to 99 weeks. Add to that that a huge number of families have been living rent free in their homes for the last three years ( that in itself is a major income subsidy).

As to the idea of a VAT Tax , I am totally against it. Lets just control our spending. That is what is going to be forced upon us anyway because we are never going to get the number of votes required to do anything until the next major leg down in this depression. I wish that it were not so, but that is human nature. Yes there are some very good thinkers that would like to get changes done ( Paul Ryan and David Stockman are two of the best). But in the face of going against the Democrats, ABC,NBC,CBS,CNBC,CNN, The Washington Post, and The New York Times I don’t believe we can have success until another crisis hits us. Then people will be willing to listen to reason.

Victor Wood

Feb. 20, 2012, 1:10 p.m.

Safe Haven:
Debt crisis in foreign lands will enhance, not inhibit, US borrowing ability.  Vociferous complaints notwithstanding, bankers and bond traders still think that the US is the safe haven.

Earners & Spenders:
Raising taxes will never pay off the deficit.  It will only fuel an increase in spending.  Witness the 2000 presidential election in which one of the top issues was how to spend the budget “surplus” resulting from the dot-com boom.

Bruno Rossetto

Feb. 20, 2012, 10:20 a.m.

“Not dealing with the deficit runs the very real risk of the bond market treating us just as it is treating Italy and any other country that gets to the point where its debt is unsustainable. Not this year or the next for the US, but almost certainly before 2016. And once the bond market loses faith in a country, it takes a massive restructuring to restore that confidence. And we can see how that is playing out in Europe. ”
I strongly oppose this view. The US govt is NOT revenue constrained, and therefore is NOT subject to “market discipline”  nor is it subject to “bond vigilantes”! The EU is structurally different from the US, so that their member countries have to tax or issue debt in order to spend. They are akin to your states, NOT to the federal govt!  Ever wondered why japan’s debt to gdp ratio of 200% is not a problem (as they pay very low interest rates on their public debts) ? because they have a CB and a treasury, they are the monopoly issuer of their currency and their public debts are denominated in the currency the CB issues! exactly as you guys in the US. you don’t have the problem where you can’t service your debt. And you actually don’t need to issue any debt to spend, so the problem of “the bond market loosing faith in the country” is really irrilevant as far as your (deficit) spending is concearned! (for a technical explanation of this latter statement refer to: ).  Summing up, we must stop treating the public sector finances as households’ or businesses’ finances in a modern economy (with a free floating currency and a public sector which has a monopoly in issuing its own non convertible currency).

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