Outside the Box

Ending the Era of Ponzi Finance

January 4, 2013

            There is a level of (let's call it) discomfort among investors and business people everywhere I go in the world now. It is becoming increasingly palpable with each passing month. The overriding sentiment seems to be, "That which cannot be sustained will not be."

            We live in a world that is premised on economic structures that are now unsustainable, and that is a word we are going to hear used more and more this year. Unsustainable. It will be a theme in my writing, not only in my annual forecast issue, which will be out in a few days, but throughout the year. But just because things are unsustainable does not mean the end of the world for you and me. It is just that our world will change. Our job is to make sure that we manage the transition.

Transition. That is another word we are going to see a lot this year and next. I am going to invest a great deal of my intellectual capital (meager as it is) in thinking about how we transition our lives (not just our investments!) through the Endgame of the biggest bubble in the history of the world, that of government debt and promises. That bubble is going to collapse, in one way or another. Our job is to make sure we are not in the vicinity of ground zero. Meanwhile, there are a lot of positive things happening that we do not want to miss while our governments are busy rearranging deck chairs and kicking cans.

In today's Outside the Box, the first of 2013, we’ll look at the opening pages of an important paper written by Daniel Stelter of the Boston Consulting Group. I have his permission to send it on to you. At the end of the letter is a link to my site, where you can read the rest of the piece (his suggestions for government action) if you are interested. If you are not registered on Mauldin Economics, just put in your email address and then you’ll have immediate access.

Warning: there are sections of Daniel’s article that are not politically correct! I can guarantee you that you will not agree with all of his ten suggestions. Some will raise your blood pressure. But I suggest you read from the point of view of understanding just how difficult it will be to resolve the problems our governments have created.

Let me quote from Daniel’s piece (emphasis mine):

No one knows how long the developed world’s Ponzi scheme can go on without causing major social and economic breakdowns. As long as it does, however, economic uncertainty will remain high. One indicator of growing uncertainty is an index developed by economists Scott Baker and Nicholas Bloom, of Stanford University, and Steven Davis, of the University of Chicago. Their “economic policy uncertainty index” shows not only that overall levels of uncertainty have risen since the financial crisis, but also that this uncertainty is increasingly driven by political disputes over economic issues rather than by events such as 9/11, for example, or military conflicts such as the First Gulf War. To the degree that politicians and other leaders fail to address the structural challenges described in this paper, the odds of economic paralysis go up. The underlying issues cannot be ignored any longer. The developed world faces a day of reckoning. It is time to act.

I will be with Dan in London in 10 days, along with my Endgame co-author, Jonathan Tepper, as well as Simon Hunt, Dylan Grice, and Anatole Kaletsky, among other notables. It will be an interesting discussion.

I am sitting in a rather idyllic setting as I think about unsustainability and transition. I am at Jon Sundt's Hollister Ranch home in the mountains overlooking the Channel Islands and the Pacific. It is remarkably beautiful and serene. I am glad he pays California taxes so I can come and enjoy this piece of heaven a few times a year. Jon is a world-class surfer (even at 50), and the surf the last few days has been huge. The best surf in California is arguably right down at the foot of the mountain here. But as with our global transition, to get from the top of the mountain, where all is calm and serene, down to the exciting edge between order and chaos where the surf rolls in, involves trekking over some narrow, twisty roads and rough terrain. If you have the right vehicle and know what you’re doing, it’s no problem. But you have to be careful on the hairpin turns, to make sure not only that you stay on the road but also that there is not someone coming the other way. Local knowledge is critical for a safe transition from the mountain to the beach. A rather fitting analogy for what we face in our lives.

I have been having serious hardware issues with my nearly new Hewlett-Packard laptop for the last few days, and it has again broken on me. I have a less-than-optimal workaround, but that might mean that this weekend's letter will be a day late, as I may have to finish it in Copenhagen, since I won't get new hardware till Sunday. We'll see.

Let me wish you a very Happy New Year. I will do what I can to help us all think through the issues we face, and I will even try to suggest a few solutions. Now, let's see what Dan has for us and mull over the Ponzi scheme that is government.

Your thinking about the road ahead analyst,

John Mauldin, Editor
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Each week, John Mauldin highlights a thoughtful, provocative essay from a fellow analyst or economic expert. Some will inspire you. Some will make you uncomfortable.
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Ending the Era of Ponzi Finance

Ten Steps Developed Economies Must Take

Daniel Stelter, with contributions from Ralf Berger, Jendrik Odewald, and Dirk Schilder

“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi finance. . . . The greater the weight of…

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Jan. 9, 2013, 9:18 a.m.

I’d like to take action. Can anyone recommend a group to join towards using collective might to reduce the government debt?  How about “FixtheDebt.org” founded by Simpson and Bowles? Opinions, suggestions?

hugh owens

Jan. 7, 2013, 11:31 a.m.

Thanks to Dan and John for yet another summary and warning of our impending splat against the brick wall with a series of oft repeated suggestions as to how the developed countries can right our respective listing economies and restore sustainable growth. It ain’t going to happen John and Dan. There are too many entrenched interests who have too much to lose and who could care less about the generations to come so long as they can get what’s left for as long as they can. We will do what we have been doing for as long as we can until we can’t. And then we wont. It also seems odd there was minimal to no mention of the population bomb, instead an emphasis on having more babies who can kick in more FICA taxes and compete for jobs that aren’t there now and may not be there in the future. John loves his robots as well, as the model to increasing productivity. That is a real job creator. No mention of global warming and the likely increased costs associated with flooding of the world’s coastal populations. So governments need to rebuild crumbling infrastructure, improve education and shrink in the process while collecting more taxes and reducing waste and corruption all with a political system led by donkeys. There are lots of productive measures we can take as individuals to prepare for this impending collapse but wishin” and hopin” that somehow we can turn this baby around and kickstart our economy back to the way it has been running for the last 100 years is a fools errand. Ponzi Schemes are not fixed and the notion that the world’s financial ponzi can be fixed by 10 suggestions however well thought out and well intentioned is entirely hopeless. The world is past the point of rescue. Since I am a doctor I will use a medical analogy. The world has a metastatic Ponzi carcinoma as lethal as Pancreatic Cancer and some problems like some cancers have no happy solution no matter what measures might be employed. As old George said, “This sucker’s going down!”.At some point I expect John will have to stop flying around the world burning up JP-4 as a waste of his time and ours and get back home to Texas and take care of his family. BTW, Please excuse the double post mistakenly entered under my daughter’s name. I am hugho in Jackson WY.
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Simon Maughan 48114

Jan. 7, 2013, 11:15 a.m.

The solutions proposed are hardly controversial, although political extremists, i.e. those who deal with the world as they want it and not as it is, will recoil at the renewable energy and higher tax proposals. What is contentious is the extent of the decline of the West that most contributors to ME see as plausible. Increasingly this is a website for a handful of likeminded analysts to huddle together with their arguments cross referencing each other and predicting impending disaster if nothing changes (things don’t stand still). The facts are increasingly irrelevant.

For example, take this rather important point from the above “But according to projections by the United Nations, between 2012 and 2050, the working-age population between the ages of 15 and 64 in Western Europe will shrink by about 13 percent (to 15.8 million people). In Japan, it will drop by 30 percent (to 23.8 million people).” Perhaps the word “to” is a typo and should say “by”, but this statement implies that Japan has a working population far larger than the whole of Western Europe, which on most measures is larger than the US. What ME needs is a strong editor and a variety of opinions. We’ve already got Fox News.


Jan. 6, 2013, 3:15 p.m.

This is a solid analysis but is quite similar to a number of other analyses which all need to undergo a change in approach.  This country and world are headed for a train wreck but we have known that for some time.  Consider a few points.
1.  Without being too cynical it is quite probable that the wreck will not be averted.  If so, how does an individual best position himself to survive the wreck.  Buying gold and going into long term debt at low rates are obvious starters.
2.  All these analyses are from the perspective of a representative American who has the best interests of the entire country at heart.  But unfortunately that is not reality.  The American left is no different than the left in any other country.  They are motivated solely by greed for power and are quite willing to sacrifice the national interests to obtain it. The left has been knowingly pushing illegal immigration for years on this basis.  Think about it, if someone was truly interested in the plight of low-income Americans, the first thing they would do is shut down illegal immigration.  The left likely believes they would benefit from a financial collapse.  Remember the new White House mantra - “Never let a crisis go to waste.”  The left is not going to change.

3.  Getting the country headed down the right paths will require broad public support which can only be obtained by presenting them with a clear presentation of the facts.  Now, we have all seen analyses such as the present one, but they have all been on the internet and similar platforms.  This information is never on the national news media.  They are part of the American left and intentionally do not present such information.  Look at the present conservatives in Congress who are trying to do exactly the right steps to reduce spending, etc.  The media continually present them as hard hearted right wing obstructionists who only want to help the “rich.”  American universities play a similar role.

4.  There is altogether too much talking among ourselves and not facing the reality of how to actually accomplish the necessary steps in the face of a good part of the population who really don’t want to avoid the wreck.

Michael Bell

Jan. 6, 2013, 9:34 a.m.

Good range of comments.
My 2 cents: Life comes and goes: individuals, societies, planets, ...you get my drift. Life is a gift and it is up to you what to do with it.


Jan. 5, 2013, 7:13 p.m.

All of this article makes sense.
But without credible leadership, there’s no way in hell it will come about.  So,  there’s no way in hell it going to happen.  Unless… we have some VERY BIG crisis.  This will allow an autocrat to take charge and allow real change to move forward.  I’m not necessarily advocating this, I’m just saying that we need leadership, and that there is no sign of that forthcoming, and a crisis is on its way to create conditions favorable to getting real results.  I think its too late now to avoid the crisis, so we need to start thinking about what sort of autocrat we want running things, and how we can try to position ourselves for survival.

Girish Vinod

Jan. 5, 2013, 6:12 p.m.

I have one practical solution. Every retiree should be allowed pension and other benefits for 10 years. But everyone will be given choice to select their own retirement age.

Jim Johnson

Jan. 5, 2013, 5:01 p.m.

If only we were smarter and wiser, we would solve all our problems. Every paper I’ve read deals either with fantasy or addresses the symptoms.
The problems are systemic to our government. We are stupid enough to give politicians power to confiscate our money, and to spend even money they don’t have in order to buy votes to get reelected.


Jan. 5, 2013, 4:35 p.m.

Having recently read several books on the subject, and being a Mauldin fan and following these discussions, all the astute presentations of the problems and solutions are extremely interesting and intellectually stimulating.  Hopefully, these will help me steer my way through the social/economic wreakage (assuming I survive) that is due to arrive very soon. 
Given well-documented history relating to these kinds of economic problems, with human nature being what it is, I don’t see anyone (or even a group of people) willing and capable of executing/implementing the solutions proposed.  Those who understand the problems and correct solutions do not have the political power to impose what is necessary.  There are too many opposing forces that will not allow this to happen.  We can try to be “opimistic” if we want, but it won’t stop the economic/financial tsunami that is rapidly heading our way.  IMHO, we need to brace ourselves the best we can.

David Oldham

Jan. 5, 2013, 3:04 p.m.

I find myself in far more agreement with the majority of comments already made here than with Daniel’s unrealistic optimism. Most JM readers already know all about the problems (and many of the potential solutions). But alas, the 10 point plan is a non starter—short of genetically modifying human nature on a global basis. By that I mean such a program would have to include for all politicians, bankers and leaders in positions of responsibility to mankind. I don’t believe Daniel’s aspirational plan has a cat’s chance in hell of leaving the starting grid.

After the last 2 yrs of witnessing the european farce and more recently Congress’s pathetic performance my confidence level for the survival of this planet is ever decreasing, and it was pretty darned low 5 yrs ago.

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