Thoughts from the Frontline

The Future of Public Debt

By John Mauldin

February 11, 2011

Choose your language

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,…

Discuss This

16 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Page 2 of 2  < 1 2

Paul Speer

Feb. 12, 2011, 1:09 p.m.

If this paper does not scare you, nothing will.

The chickens are coming home to roost.  Blame is sufficient to go around to all parties,  The net result over the medium term can be nothing less than the slowdown in immigration to this country of those I would describe as the entrepreneurial class and the emigration elsewhere of those similarly endowed..

Free trade has proved an abject failure for reasons I have many times defined.  It only works for a country when the basis puts the cost of labor and the cost of capital in balance in the private sectors of the member countries.  Further, in the public sector,  the budget in each country must be reasonably in balance.  Huge trade deficits may not occur.  Otherwise, the income and savings of the private sector are indirectly used to subsidize the nations in surplus.

The key questions raised in Mr. Mauldin’s column are: is this crisis solvable within the framework of the Republic; does America have the political will to solve the problems within the bounds of the Republic and the requirements for National Security;  and, finally, what are the parameters of a solution.

It is evident to this person that the gut feelings of the Tea Party movement for whatever reasons, right or wrong are correct.  The Bernanke/Krugman Keynesians may believe that flooding the market place with paper money is the correct way.  That merely compounds the long term problem.  Given the requirements for health and income transfer payments, and the crowding out of private investment, the abyss is only deeper and the command economy necessary to replace the free market of the Republic will punish the good and the bad and postpone to an uncertain date any return to ‘normalcy’.

The time for assessing blame for the reasons we find ourselves in this slough is long past.  The claimants for public pensions and public health aid are many,  So too are the expenses of being an international superpower.

Until the 2010 election, in their zest for retaining office, our political class has concealed the large and growing problems.  The people had relied on the appearance of prosperity and gone about their private lives.  The initial focus of the Tea Party was on domestic spending and taxes.  Rightfully, cutting Defense is now on the table.  The last call was to reduce expenditures to the 2008 level and perhaps to an earlier date.

Whatever happens, change must now be both firm and permanent.  If we are to regrow our private sector—the only source of permanent employment—and expect business to believe it, permanent shifting of the tax rates and the incentive system must take place.  Five year planning is a must.  Stability of growth in the private sector is necessary.

At the same time, we must avoid the Axelrod inspired game playing by the President in his economic pronouncements.  His recent address to the U.S. Chamber of Commerce was no more than an airy-fairy waving of a wand.  The general corporate tax rate was to be lowered…but the total take from the corporate sector would remain the same through the elimination of supposed loopholes.  Burden would be transferred within the sector.  No total relief was forthcoming.  The average rate remained the same.  Like out of date Alka Seltzer, that relief was impossible to swallow.

David Bishop

Feb. 12, 2011, 12:55 p.m.

Mr Mauldin, in many of your newsletters you make the statement that debt level that are not sustainable will not be sustained, because the bond markets will rebel, demanding higher interest rates. My question, why has this not even started? The bond market does their homework, they see the same future debt problems, so why dont you see for example long term bond rates doubling from 3 to 6 percent. What is the mindset of the bond markets? Thanks David Bishop

Bryan Cobb

Feb. 12, 2011, 11:37 a.m.

Good article, why does noone have the wherewithal to ask the American public to make the broad and accross the board sacrifices that will be required to get this problem into a manageable and corrective trajectory?

Rodger Malcolm Mitchell

Feb. 12, 2011, 9:26 a.m.

If you want to understand the realities of the economy, rather than the debt-hawk, sky-is-falling nonsense, read this one page:  http://www.nakedcapitalism.com/2011/02/james-galbraith-deficit-hawks-down-â??-the-misconstrued-â??factsâ?-behind-their-hype.html

Rodger Malcolm Mitchell

Rodger Malcolm Mitchell

Feb. 12, 2011, 9:17 a.m.

Apparently, John still doesn’t understand that for a   Monetarily Sovereign nation, “debt” is an unnecessary description of sovereign money created.  The U.S. became Monetarily Sovereign in 1971, when it went off the gold standard.  That means the U.S. acquired the power to create an infinite number of dollars.

Because it now has this power, the U.S. no longer needs to borrow dollars.  Think about it.  The U.S. no longer needs to create T-securities from thin air, then exchange them for dollars it previously created from thin are (aka “borrow).

The only thing that constrains U.S. dollar creation is inflation.  Create too many dollars (increase the supply) and we would have inflation, unless we also increase the demand for dollars (interest rates). Despite massive increases in dollars (debt), we are nowhere near inflation, because the Fed has controlled inflation with interest increases.

The U.S. could have zero debt tomorrow. We simply could stop creating T-securities, and exchanging them for dollars we previously created from thin air.  Thus the   Debt/GDP ratio is meaningless. John mentions this ratio soon to reach 100, as though that had some significance.  It doesn’t.

This is the essence of Monetary Sovereignty and of Modern Monetary Theory (MMT) that I have discussed with John several times, but which he refuses to acknowledge.

Rodger Malcolm Mitchell

bob pressey

Feb. 12, 2011, 7:23 a.m.

I’m confused about the part that says entitlements are out of whack. Isn’t SS and Medicare running at least even right now? Isn’t the debt and deficit at this point from general budget, not SS/MC? Isn’t about half the general budget military (in a realistic accounting), about 20% interest on the debt, the other 30% everything else including all of government operations? Then there is all of the off the budget iraq/afganistan wars and bank bailouts racking up even more debt in huge leaps. Where does this add up to entitlements being the problem at present? In the future I agree yes entitlements will be a big problem, but the current mess just isn’t entitlements.

So why are you singling out entitlements with no mention whatsoever of military spending that is at the heart of the current debt? Your bias is showing in a very big way.

Page 2 of 2  < 1 2

© 2013 Mauldin Economics. All Rights Reserved.

Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.

Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.

To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe

To change your email address, please click here: http://www.mauldineconomics.com/change-address

Thoughts From the Frontline and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above as well as economic interest. John Mauldin can be reached at 800-829-7273.