Thoughts from the Frontline

The Unsustainable Meets the Irresistible

By John Mauldin

January 22, 2011

Choose your language

The Unsustainable Meets the Irresistible
State and Local Spending
QE Policy Meets the Tea Party
A Bug in Search of a Windshield
Miami, Vegas, Thailand, and Some Needed Help

This week’s letter is a result of two lengthy conversations I had today, which have me in a reflective mode. Plus, I finished the last, final edits of my book, all of which is causing me to mull over the unsustainability of the US fiscal situation. There is a true Endgame here, and it may happen before we are ready.

The first conversation was with Kyle Bass, Richard Howard, and Peter Mauthe, over lunch (more on Peter, who has come to work with me, below). Kyle is the head of Hayman Advisors, a very successful macro hedge fund based here in Dallas. Then I recorded a Conversation with David Rosenberg and Lacy Hunt, which is one of the best we have ever done. Subscribers will be very happy. The new Conversation with George Friedman is now online, too. You can learn more about Conversations with John Mauldin at www.johnmauldin.com/conversations/ . And please comment on this and future letters in the readers’ forums of my new website. Now, to this week’s letter. My goal is to make this one a little shorter than normal. We’ll see how I do.

The Unsustainable Meets the Irresistible

Kyle, Lacy, and David are typically pushed into the bearish category, but (not surprisingly to me) their forecast for the next few quarters is rather strong. None of us would be surprised by a high-3% number for GDP this quarter, and 4% is not out of the question. And we all see GDP tailing off as the year winds down. Inventory builds begin to slow, and in 2012 the…

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George Laugelli

Jan. 23, 2011, 11:15 a.m.

First let me say that I am a former Federal employee, so my biases are clear. Let me further add that I retired 10 years ago so I am describing the system as I knew it then.

1) Pay is a range of salaries. Also, Federal pay in some occupations varies by geography. Finally, the goal of Federal service is to encourage long-term employment which brings with it the benefits of experience.  So determining averages is very much subject to methodology. I’m sure the BLS is on top of things (despite what I read in your newsletter from time to time) but you have to wonder how they made the inevitable choices that attend such surveys. And did the USA Today folks tweak things any further?

2) Any article on Federal spending is disingenuous if it doesn’t come with a disclaimer noting the percentage of spending that is either defense, entitlement, or debt related. In essence, we are focusing on 25% of the budget and putting all the reduction weight on that. So until folks are willing to address the other 75% in a serious way nothing of substance will be achieved in Federal spending reduction.

3) Certain Federal jobs are unique. Nobody else has the statutory authority to execute them. Be it food safety or airline safety or preserving our environment or our civil liberties. Do you want the best and the brightest in those positions or not? You get what you pay for.

4) Federal employees are only doing what Congress tells them to do. Hello! Anyone up there in the House or Senate care to look in the mirror? That’s where you will find the true source of the problem.

5) People who work in the Federal government are just like you. they live and work and pray in all the same communities that you do and they are just as diverse in their political opinions and just as concerned about these issues as you are. If you asked them they could give you many ways in which the current system could be improved. Ask yourself why this doesn’t ever happen. Ask yourself whop benefits from keeping things the way they are. HINT: Read Number 4.

Is there waste fraud and abuse? Sure. But back 10 years ago we were already cutting deeply into the ability to handle existing tasks not to mention whatever Congress came up with next. I’m sure there will be many who disagree with this, but don’t pile all your frustrations on the backs of people who for the most part are just trying to do what they are tasked to do by law with an ever dwindling pile of resources.

Herman Bakker

Jan. 23, 2011, 12:56 a.m.

Regarding the private vs public pay scales.
The tables you have shown your readers reflect the difference between a stable workforce and the private workforce that is looking for better value for their labour or is getting pushed out. And the new hire is hired at a lower rate.
Most members of the public workforce have been on the job for a long time, providing continuity, maintaining quality work.
Also, public unions have done a better job of staying even with inflation.
Here in Canada, the average public workforce member has a much higher level of education than their private counterpart.
The difference is that governments want the best workforce, private companies want the cheapest: isn’t that like comparing apples and oranges.
I enjoy your letters, regards, Herman Bakker

Larry Beene

Jan. 23, 2011, 12:25 a.m.

unions seem to work pretty well for government employees. maybe the workers in the private sector need to be better organized.  we need to bring the private sector workers up not bring the government workers down. let’s don’t have a race to the bottom.
larry beene
clbe@bellsouth.net

Bryan Morrow

Jan. 23, 2011, 12:06 a.m.

Great article on the U.S. dilemma. The other issue, of course is, when/if the U.S. and its 50 states decide to reduce/eliminate entitlements and raise taxes (think consumption taxes) how will they deal with rising enemployment, for surely it will rise considerably, at least for 1 - 3 years. Also, we in Canada, had a relatively “easy” time of it in extricating ourselves from our fiscal mess. Firstly, we have a parliamentary system, so when The Feds bit the bullet there was no great debate. Secondly, we had the U.S. as a neighbour and trading partner. Who does the U.S. have??? Last but not least…we were in disinflationary times with falling rates. Today the U.S. faces deflationary times AND rising rates. YIKES!!! This is why, we are stashing available funds into precious metals - just in case…because if the U.S. implodes, I fear little countries like mine will explode…

Pan Skeptic

Jan. 22, 2011, 11:17 p.m.

Grover Norquist for years has been trumpeting an agenda variously referred to as “Starve the Monster” or “Starve the Beast.” Bush Jr. never vetoed a spending bill precisely to put us into this budget position, and now we’re hearing a lot of crocodile tears being shed.

Private workers have been forced to sacrifice, and now, we’re told, it’s the turn of public workers. But if we ask our very wealthiest to sacrifice, the article warns us that they’ll just change domiciles. This reveals the massive hypocrisy that underlies all this budgetary hawkishness. Everybody’s got to sacrifice, except the ones with the best tax advisors, and friends at court. As Warren Buffett says, â??Thereâ??s class warfare, all right, but itâ??s my class, the rich class, thatâ??s making war, and weâ??re winning.â?

Ben Hendry

Jan. 22, 2011, 10:21 p.m.

It’s a little difficult to believe that growth forecast with the budget crises in state and local governments and other headwinds that are listed here, but I’ve always valued your (compared to others I read) middle-of-the-road perspective (or is it muddle-of-the-road?)

Ben

Rodger Malcolm Mitchell

Jan. 22, 2011, 10:04 p.m.

John said, “At the very least, this sends very clear message to the states that the federal government will not come to their aid. It is not fair to ask states that have done what they need to do to keep their fiscal houses in order, to support states that have overspent, typically by trying to fund their pensions and run other well-intentioned but underfunded programs.”

I don’t know where John got the idea that federal spending is supported by the states.  The federal government spends by crediting the bank accounts of its creditors.  No tax money is involved, and no state money is involved.

The federal government, being Monetarily Sovereign does not use tax money or borrowed money to spend.  If taxes and borrowing were zero, this would not reduce by even one penny, the federal government’s ability to spend.

By contrast, the states are not Monetarily Sovereign. Monetarily non-sovereign governments do spend tax and borrowed money and cannot create unlimited amounts of money.  Mathematically, it is impossible for a monetarily non-sovereign government to survive long term, unless it has money coming in from outside its borders.  It cannot survive on it own tax money, alone.

Some states survive on exports and tourism.  For the others, federal support is necessary.  Raising state taxes or cutting state spending impoverishes the state.  Federal support enriches the state and the nation.

One day, John will understand Monetary Sovereignty, and he will slap his forehead like a V-8 commercial, and will write a letter of apology to all his readers, not only for misleading you, but for injuring you financially.

Rodger Malcolm Mitchell

John Morris 19380

Jan. 22, 2011, 9:36 p.m.

Mr. Mauldin,

I find it quite humorous that you spend so much of this week’s letter complaining about federal pay, and then immediately follow it with the Lindsay table showing that a freeze of federal pay would have (at best) a miniscule impact on the national debt. (Less than 2%, as of 2019, of the total Plausible Policy Changes, which you state “have so little impact”. I would submit that 2% of nothing is nothing.) Perhaps you, as well as Fox News, should stop pretending that federal pay has any real impact on the national debt.

And while you are at it, I wish you would admit that tax rates are irrelevant. You can pay off government spending now (i.e., repeal the Bush tax cuts) or pay it off later, with interest (i.e., keep the Bush tax cuts) but sooner or later it will have to be paid off. Taxes only determine when it will be paid off. The only issue that really matters is spending. Whatever we have to pay in taxes (in total) is based entirely on spending. Please try to refrain from framing taxes as the problem, or the solution, because taxes are merely a reflection of government spending. (To put it simply, a tax cut is exactly the same as paying the minimum balance on your credit card. You still have to pay off the entirety of your debt, you are just choosing to do it later, with interest.)

Regards,

John Morris
Fredericksburg, VA

Mick McGuire

Jan. 22, 2011, 9:11 p.m.

When I think back to the start of this ‘story’ three years ago, Bear Stearns, it is amazing that ‘suddenly’ we have reached the end of time! I think that comes from the magnitude of the problem and a rather ideological approach and analysis. There is no sense in any discussion to rectify the contraction of debt worldwide to waste time on political wishful thinking. Marginal tax rates are not relevant to collecting revenue. Simplistic discussions on public employee compensation lead no where. This is, we all agree, serious stuff. This requires intelligent analysis, auditing, line by line of expenditures…serious, unbiased assessment of revenue collections. Tired ideology that businesses are more than willing to race from jurisdiction to jurisdiction to save taxes, when they are not paying actual rates anyway is sort of silly. They have to have a lot more on the table than taxes. If we want to tear up contracts with public employees, revise benefit Programs, recalibrate entitlements we need a thorough, parallel analysis of revenues to assure a solution that sustains growth. This will take hard work, it is not something that politically became an issue in 2008…it is an issue that politically doesn’t work anymore.

Marilyn Jackson

Jan. 22, 2011, 9:07 p.m.

Another great letter.  Have you ever thought about doing investment recommendations for those of us who are not rich?

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