Thoughts from the Frontline

The Future of Public Debt

By John Mauldin

February 11, 2011

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The Future of Public Debt
A Bit of Background
Drastic Measures
The Future Public Debt Trajectory
Debt Projections
Phoenix, Tokyo, and London

This week I find myself in Bangkok, and I must admit to enjoying the experience a great deal, so much so that I am going to preview a portion of my coming book, Endgame, so that I can go back out and play tourist. Next week I get back to my more or less regular schedule, but I think you will enjoy this first portion of chapter six, where we look at an important paper from the Bank of International Settlements on “The Future of Public Debt.” It is not a pretty one. We are watching one of the last great bubbles begin to deflate – the bubble of government and government debt – all over the developed world. This is a serious weight that will be a drag on our growth, and it is interesting to contemplate as I sit in Bangkok, a city that is vibrant and teeming with opportunity.

Endgame will be in the bookstores in a few weeks, but let me once again ask you to not pre-order the book from Amazon or online. Pre-order books do not get into the book sales numbers (long story and more information than you want to know). I encourage you to pre-order from your local book store if you have one. Let me note that in the portion below, the pronoun we is used a lot. It is not the royal we – I do have a co-author, Jonathan Tepper, and this book has very much been a collaboration. More on some Thai thoughts at the end, but let’s jump into today’s Thoughts from the Frontline.

The Future of Public Debt

Our argument in Endgame is that while the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it. It is a world where not only will expanding government spending have to be brought under control but also it will actually have to be reduced. In this chapter, we will look at a crucial report,…

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Jeffrey Alldis

Feb. 15, 2011, 1:16 p.m.

The markets don’t see these concerns at the moment. At the moment the bulls are having a great party. And I like parties. For me it’s more interesting what the bulls are celebrating at the moment (the liquidity flood for example). Is there something they don’t see? The debt crisis is nothing new, meanwhile even my grandmother, who is not interested in the financial market, is informed about our debt crisis. If the politicians still don’t know it, we need a crash and new politicians. Simple.

About the debt problems you hear in every corner of the press. Normally, a crisis doesn’t start when everybody is expecting it… I will go heavily short when all the sorrows are out of the press and the market starts to turn down.

But otherwise I need some fresh air. John, is there anything you think which could be a black spot. Something you see and the rest is not yet recognizing it? Why are the bulls still celebrating even though they know about the debt problems? What’s your opinion about this?

Cheers,

Jeffrey
JIM - Jeffrey Investment Management

Richard Johnson

Feb. 14, 2011, 2:47 p.m.

We borrow from others in large part as an indirect means of causing the world’s nations to participate financially in a US led defense of a peaceful world community (tainted as our efforts may be). Can someone point to any thorough and objective financial analysis (does such exist anymore?)  connected with a decision to pull up most of our military stakes throughout the world (last count, I heard we had military ops in 80 some odd countries) and the commensurate fiscal impact such actions would have on our annual defense budget? Could we also bear witness to a thorough and objective financial analysis of the fiscal impact of winding down social security and medicare as government programs for certain defined members of the working class by means of fostering reliance on the private sector options as alternative choices - expanded availablity of nationwide private sector health insurance for the “working class” retired and expanded private retirement plan options for the “working class”. Could we not at least see objective analysis of these two issues before having to be subjected to the typical and vociferous partisan outcry that intentionally overshadows any chance for mass understanding at a basic level of the true “dollars and cents” involved. Our elected officials should be required to start any and all fiscal remedy discussions with basic educational presentations, “blackboard style” to a concerned but largely ignorant american public. We never seem to be offered a foundation of facts before the partisan rhetoric becomes outsized and decisions suddenly reached. We are left time and again to witness as the “FIX” decisions derived from mysterious back room dealings between leading special interest groups and our elected officials (is there a difference in these two anymore? Wall Street? Treasury? Federal Reserve? SEC? oh what a blur!!!). Do we really have to swallow a bill such as ObamaCare that not one elected official so much as read much less understood? We are treated like idiots capable of being satiated by the simple sound bite drivel of elected officials dedicated to appeal to our various partisan leanings distributed through increasingly partisan loyal media outlets. If this is America then I’m afraid we are indeed incapable of sufficient structural change and are truly witnessing the proverbial runaway snowball or a calamitous version of musical chairs. Who will be the last one standing? The one with the oil or the one with the bigger guns and greater supply of ammunition? Stupid and fatalistic - yes. Accurate - hope not.

Mark Akins

Feb. 14, 2011, 8:03 a.m.

I very much enjoy reading Thoughts from the Frontline as well as the Out of the Box articles.  I’m fairly ignorant when it comes to economics and have learned quite a bit reading these articles.  Unfortunately, I don’t seem to be reading much on solutions to the approaching fiscal apocalypse the GOP keeps bringing up.  I keep hearing that we need to cut spending, and entitlements, age-related and otherwise, seem to be the favorite scapegoats.  I hear some low-level grumbling on cutting Defense spending, no real commitment to that.  I am just not hearing the details. 

I hear that new taxes will stifle the nascent recovery, albeit a jobless one.  If we cut Social Security, will that not also stifle the recovery?  Downsize the government?  More people asking for unemployment, which we can’t afford to fund.  I do agree that something needs to be done, but I want to hear real solutions.  And, since I’m willing to say that I’m not hearing these things, I will offer a couple:

1) The government is too big and the average income for government employees, civilian and military, is too high.  The day when service members were grossly underpaid ended.  Freezing pay has started, which is a good thing.  (disclaimer:  I am retired military and a current government employee as a contractor.  I am willing to accept pay freezes or even a small cut.)
    a)  As the federal workforce ages, the size of the workforce can be reduced through attrition. 
    b)  A realistic look at the costs of doing business needs to be addressed.  A couple of examples:   
      - Rent, at least overseas, seems to be driven by what the government is willing to pay.  In Germany, the landlords typically charge what the government ceiling for rent is, rather than what a German would pay.  I have heard so many times from German friends that “no German would pay those rates.”
      - When it comes to the end of the FY, the military spends all remaining funds, because “they won’t get that much next year if they don’t.”  I’ll be honest.  I don’t know if this is reality or a long-standing myth that has become reality, but that practise needs to end.
      - Not all of a service member’s income is taxable.  Why any of it is taxed, I’ll never know.  In addition to the non-taxed income for housing and subsistance, when a service member is in a combat zone or dangerous location, all of their income is tax free and they get additional money.  If we are going to tax the military, then this is as it should be.  However, I know too many soldiers who barely have any taxable income as a result of combat time, and therefore get earned income credit of thousands of dollars, when in reality, they made two to three times more than national income.  If they pay no tax money, that’s fine, but getting money they should not really be entitled to is wrong.
      - Get realistic!  If we need government employees to do the job, hire them.  Don’t “reduce” the government payroll, but actually increase of the cost of doing business.  Contractors have their purpose, but if the need is long-term, it should become a federal position.  I do believe that Secretary Gates has begun a process to help resolve some of the costs of the Defense Department.  Hopefully, Congress won’t get in his way for their own pet projects.

2) Begin to scale back social security.

3) Stop wasting National Money for projects that the states should be spending their money on.

Let’s face it.  The way forward out of this debt is only going to happen if we start, but it isn’t going to happen overnight.  We have a great nation.  I don’t know that we are spiraling towards doom, but we have gotten off track in our values.  We can correct this.

William Maddaford

Feb. 14, 2011, 12:51 a.m.

Like my fellow Canuck below, I’m glad Canada is not included in the BIS paper. I think this is because Canada set up a system where the Canada Pension Plan invested the money it received so it’s there to pay out to people. The Old Age Security is paid out of general revenue but it’s a much smaller amount. The maximum payment is about $6,000 per person per year for OAS (except for an amount based on a means test). I’m amazed that in the USA they provided for “the fox to run the henhouse” by paying all the money into general revenue where it could be pissed away into politician’s favourite projects?

Kris Kalanges

Feb. 12, 2011, 7:39 p.m.

Sobering, Sobering, Sobering.  Like the line from the old country song, “There’s no way this can have a happy ending…”  The work of my lifetime is now, even moreso than before, being strongly assaulted by the work of the politicians’ and central bankers’ lifetime.  I do not intend to let their impoverished character and thinking impoverish me and my family.  In these times what matters is not how much you make but how much you keep from losing.  Any gain is frosting on the cake.  Thanks for the timely insight and guidance, John.

Kris K.

Dave Scotese

Feb. 12, 2011, 6:41 p.m.

“What answers I do have are not ones you will like, as I can assure you that I donâ??t like them myself. But when we are left with no good choices, we must choose among the poor ones.”

I am Ok with my answers.  I was lucky to meet a Libertarian minded guy several years ago and have since stopped counting on the government to keep things in order.  It has made me a better businessman and consultant.  My strategy will be to continue being as helpful to those around me as I can, as long as they recognize me for it.  Such recognition is one of the crucial missing ingredients when we - you and I - “help” others by paying taxes and getting less back than we put in.  It actually harms them by depersonalizing the source of the help - and everybody suffers.

“When the world’s crashin’ down, When I fall and hit the ground, I will turn myself around.  Don’t you try to stop me.” - Avril Levine, as Alice.

Timothy Bult

Feb. 12, 2011, 4:44 p.m.

For once I’m delighted to see Canada left out of an economic survey, but I still find the selection of 12 countries odd; how were they selected?  G7 minus Canada, plus a few more bad-debt nations at random? 

While extrapolating 30 years is instructive and interesting, I think several changes are likely to invalidate the BIS assumptions:

1. Global growth among the 5+ billion people not in Europe or the US will continue strong, creating huge markets and sources of capital. 

2. Bond markets will increase pressure on profligate governments over time, forcing change long before the 30-year horizon of this forecast.  I don’t think the rest of the world will allow Americans to continue living 10-20% beyond their means, on money borrowed from increasingly powerful countries, for another 20 years.

3. Technology can be expected to achieve at least twice as much, in the next 30 years, as it has in the past 30 years.  That’s a game-changer.  Look what mobile phones and the Internet did to global trade.  In the next 30 years, I’d expect the cost of energy to drop to near zero, and similarly the cost of labour (through robotics).

Timothy

Jim Fisher

Feb. 12, 2011, 3:02 p.m.

I only wish there were some way we could get every member of the U.S. Congress to read this! For generations, we have used appropriations to buy votes and the vultures have now come home to roost (they ain’t chickens!)

David Neal

Feb. 12, 2011, 2:30 p.m.

I shudder to think of the US that my children and grand children will live in.

Frank Blangeard

Feb. 12, 2011, 1:53 p.m.

The USA currently spends more on defense than the rest of the world combined. Instead of cutting age related liabilities the USA should cut defense spending by 5% per year for at least the next ten years. In fact, for a few years the cuts should be even larger. The age for Social Security retirement benefits should be lowered immediately. Yes, that’s not a misprint. I mean lowered. This would create employment opportunities for young people to move into. Instead of paying young people not to work on unemployment the USA would be paying older people who would inject the money into the economy. Those young people would also inject the earnings into the economy as they established households and bought…houses!

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