John Mauldin: It's Time to Make the Hard Decisions

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Back in the 1930s, Irving Fisher introduced a concept called the 'debt supercycle.' Simply put, it posits that when there is a buildup of too much debt within an economy, there reaches a point where there simply is no other available solution but to let it rewind.

We are at that point in our economy, as are most other major economies around the world, claims John Maudlin, author of the popular Thoughts from the Frontline newsletter and the recent bestselling book Endgame: The End of the Debt Supercycle and How It Changes Everything.

For the past several decades, excessive and increasing amounts of credit in the system have allowed us to live above our means as both individuals and nations. We've been able to have our cake and eat it, too. Now that the supercycle has ended and the inevitable de-leveraging cycle is staring us in the face, we will be forced to set priorities in a way that has been foreign to our society for over a generation.

On the Debt Supercycle

You can’t look to monetary policy for help (which will try to stimulate businesses to get more debt) because debt is the problem. If you are drunk and you need to cure yourself; another fifth of the whiskey is not the answer. So when debt becomes the problem, when it gets to be too much, more debt is not the issue. You've just simply got to work it off. There’s no easy way out of it. And, it takes years to work through it. It takes a long time, generally – 60 to 70 years, in the US's case – for these debt cycles to build up. It’s when you can no longer adequately service your debt and the market loses confidence in your ability to service the debt at a price that it finds adequate.

On the Slow-to-No-Growth Future

The problem is, there are only really two ways that you can deal with the debt. You can grow your way out of it, which is what you can do in normal business cycles. For most times in most places, we can grow our way out of debt problems, which is what the central bank is coming in and trying to do. The problem is, when you’re at the end of the debt supercycle, when you’re running up against your ability to borrow money, that liquidity no longer works.

As Fisher pointed out, the time to solve the debt bubble is before it becomes a bubble. He was wanting separation of commercial banks and lending. He wanted a much less fractional-reserve-based banking because he wanted the debt to keep from building up past levels that we saw in the 1920s. He saw that as something that was so bad that it created the Depression. 

So you can either repudiate the debt, you can default on it, you can monetize it, you can try to grow your way out of it, but you’re going have to deal with it. And there’s no easy way, when you’re at the end of the debt supercycle, when debt has become too much. Printing money doesn’t work.

Now, upon reflection and thinking about it, we’ve gone too far. And, this is where they are in Europe. Japan is getting very, very close to that moment. I keep saying, I think Japan is a bug in search of a windshield. I think they’re going to collapse. Quite frankly, the credit crisis that Japan is going to have is going to be far more serious than Greece. Japan makes a difference. They’re a big country. Greece is an ant hill.

We in the U.S. can solve our problems, but not without paying a large price. We’re going to be locking in a slow-growth economy. It’s going to be very frustrating for politicians, because they are going to want to come in and sprinkle pixie dust on the economy and make something happen. And the reality is, we can’t.  And that’s a frustrating position. It’s five or six years of slow-growth economy. 

On Confidence (or Lack Thereof) in Our Leadership

There's a great line that people do not accept change until they see the necessity, and they only see the necessity in moments of crisis.  

Now, sadly, simultaneously we’re seeing that much of the developed world is going to have this crisis all at the same time, you know, within three to four years of each other. That’s not good for world growth. It’s not good for globalization. We’re at a place where we have to make hard decisions.

And when you get politicians with a crisis, it’s hard to say what they’re going to do. When you read the stories of how decisions are made by politicians in the middle of a crisis, it’s not comforting. I mean, they’re picking up the phone to each other and saying, "What do you think we should do?" They are working it out as they go along. There’s no master plan here. There’s nobody with a playbook. 

 Click the play button below to listen to Chris' interview with John Mauldin (runtime 38m:34s): 

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Or click here to read the full transcript.  

John Mauldin is a financial commentator and a New York Times best-selling author. Each week, over 1 million readers turn to Mauldin for his views on Wall Street, global markets, and economic history.

Mauldin’s weekly e-newsletter, Thoughts from the Frontline, was one of the first publications to provide investors with free, unbiased information, and guidance. Today it claims to be the most widely distributed investment newsletter in the world.

 

Our series of podcast interviews with notable minds includes:

This is a companion discussion topic for the original entry at https://peakprosperity.com/john-mauldin-its-time-to-make-the-hard-decisions-3/

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Thank you for your thoughts Chris and John.
I have not read John Maudlin’s book therefore I am open to correction.

It seems to me that inadequate attention is paid to the physical world and the constraints that these impose apon us.

How about Peak Phosphorus which is irreplaceable as the energy carrier of life in ATP.? What is the cycle of that? Are we implying that this too is just a supply and demand problem? If the price is right the phosphorus will appear? Well, the price might be too high. People might just not have enough of this "money" stuff to competitivly bid for the remaining stocks of oil so that the miners can make a profit digging it out of the ground in far away Africa. Too many real problems are glossed over.

I am not "to the Left" of anything. The fact that our civilization is collapsing does not fill my heart with boundless joy. I love root canal work just like James Howard Kunstler. But I do not think that we are going to be in a position to make choices.

I get from conversation that this is all very normal and that we will see it play out according to script, just like it did before. We have just had a wild party with free energy. People have been breeding like there is no tomorrow.

Gail Tyverberg (Gail the Actuary) has this interesting graph for you.

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Ah yes, the Club of Rome charts…  Sobering stuff.I get Mauldin’s newsletters, and he is certaily interesting and mainly on the ball, but you are right Arthur, he has no idea of Peak Everything… or at least he never ever mentions it in his newsletters.  Has anyone read the book?  Does he mention Resource Limitations in it?
Mike.

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Morning guys.  I have listened to the podcast three times now, and of course he gets the debt part.  But I think he is completely naive about politics.  There is NO way the Dems. and Repubs. could work on this.  We have seen it too many times.  It will take a total collapse of the dollar to fix it.  Why do you think the National Defense Authorization Act  repealed the 1878 the Posse Comitatus Act and suspended Habious Corpus?  The government is preparing for the wost.  Things are speeding up so quickly we may not have the time.

Ernest

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who has the ‘grade a’ butter?
write a book?  who reads books anymore.  let’s just yell and scream.

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You make a good point Kugs.  The butter I had in New Zealand was about the best I have had.  If anyone wants to listen to Jim Rickards new take on things here is the link.
www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/1/28_Jim_Rickards_files/Jim%20Rickards%201%3A28%3A2012.mp3

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Interesting piece but as with virtually 100% of economists I’ve heard from, whether Austrian or Keynesian or anything in between, there seems to be this attitude that growth is good, and that’s what we should be striving for. This debt problem is going to kill growth for a while until we solve it through whatever means we end up doing, then we can revert to growth and a return to some degree of prosperity…
This attitude has got to change. Growth IS the problem! Economists are the problem! They need a fundamental shift in their attitude to how economies function, because growth will not return! His disbelief in the reality Peak Oil is an all too typical symptom of this denial, and misunderstanding of how the real physical world interacts with the financial world which doles out that natural wealth amongst 7 billion of us.

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This Mr. Mauldin is in total denial and completely oblivious to the planet beneath his feat.
Arthur seems to have summed this podcast up best.

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Good point Mark.

  He does not understand that we may be on our last bout of growth.  There may be a few more on the plateau, but even if we start balancing the budget in two years, which is a big leap, there is no way we can even sustain the interest.  By then I believe we could be the victums of the Bond Vigilantes or something else make us collapse like a collapse of Europe…  I just think there are too many things at play as you guys have pointed out that this can be anything but disorderly financially and socially.

Ernest

Just think if we attack Iran, as I believe we will, there goes any recovery  with $200 oil.  He has a simple formula about bringing down the debt with no understanding of the other complexities and unknowns. 

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I agree ewilkerson, there is no way the monetary system could survive. One could argue that one of the main purposes of all the CB manipulation has been to prop up the current system well beyond when it should have died, decades ago. So now, if it was forced to face fundamentals, it would all vaporize in a heartbeat. There is no way the budget could be balanced now, not a chance. The deflation would be so severe it would quickly revert to hyperinflation and the end. Hyperinflation is the only end result now, barring a new gold standard but that would entail a violent currency devaluation of 10 X or more.
I remember debating with Peter Schiff about his recent book about economic growth in which he states that fish are "produced" by fishing nets. All’s we have to do is get the government red tape out of the way to let the fishermen "produce" more fish with their nets. I had to explain many times over that fish (shrimp) are actually produced by the ocean (even George Costanza from Seinfeld knows this). Then the escape argument was presented that when we run out of fish in the ocean we’ll just "culture" them instead, not understanding that in order to "culture" fish we have to feed them first, and this food ultimately has to come from the environment somewhere, whether the fish are in tanks on the land, pens in the sea, or swimming around free in the ocean. Economists just don’t get it.

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Chris,John, Matt Simmons, Hirsch, Janszen, Skrobowski, The Oil Drum, Zero Hedge, etc… were the first of just the beginning  of people, and places who I started off reading when I committed myself to all things OIl and Economies (committing 4000 hours a year for about 4 years now, admittedly still way behind the curve). Chris and John are my can’t misses each and every week. In saying this, John Mauldin has expressed today that he feels we are 5 or 6 years away from energy independence, and far be it for me to disagree but I wholeheartedly do. What he is saying to me is that 70% of all energy (Oil) used by cars, and the internal combustion engine, with a depletion rate world wide of 5 to 6% during a time when our President cannot even muster the will or guts to lay down an oil pipeline from Canada to the Gulf Coast, when Congress cannot pass a bill to use natural gas, the next highest BTU fuel that is portable and cheap, that can move heavy equipment, I would have to question whether he is smoking data that is wacky if not dangerous to your health. Other than that discrepancy it was a great interview. I just happen to think and believe that OIL makes the world go round, and we are in trouble because we are already 20 years behind the curve from a sustainable energy (new) source. Respectfully given…BOB

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…forgive me but I forgot a thought. Economists always say that when something gets too high the market will adjust. Hamburger for steak, that sort of thing. Well maybe before the EPA came along. I would gladly pay under $3 bucks for a cleaner, and more environmentally friendly natural gas as replacement for gasoline if I could just convert my carburetor in my truck to use natural gas (I think it’s illegal and I’m sure the warranty would be voided). A couple thousand dollar investment that would pay itself off in no time. But I can’t. Congress and the President won’t let me so I’m stuck using a fuel source I want to conserve, and use a fuel source that is cheaper. Because of their decision the economy loses out on what some claim would be hundreds of thousands of jobs. Additionally, natural gas costs would naturally rise, thus making the solar and wind more competitive on a cost basis providing us with more energy options, and more jobs! This is MADNESS folks, it is.
Arthur, you are correct. Without Oil, as it depletes, EVERYTHING depletes. That simple.

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 every time I read John Mauldin I am struck by the following thoughts:

  1. he is bright
  2. he references work with mega wealthy funds or similar
  3. he likes to mention how much he travels
  4. he, too frequently imo, 'drops' names
I continue to read what he writes because it is another piece of the puzzle  BUT #'s 2 -4 do distract me from the content

were I able to give him my two cents of advice to him I’d counsel ‘let the information speak for itself’

 

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Mark is right,

The only realistic outcome is a large devaluation of 10X or more.  We are already slowly doing it, but this will be insufficient.  Our government, unfortunately knows this.  I have pointed this out several times with little interest, but in the last Military Budget some big Unconstitutional changes were made.  Here is a quote from an article:

With the National Defense Authorization Act they repealed the 1878 Posse Comitatus Act, which used to prevent the military from taking over police duties and suspended Habious Corpus .
They could take anybody out there that disagrees with the government, call them a ‘belligerent of the state’ and the military could come and take them away with no charges.  No judge, no jury, no trial…

Now, I’m not saying we’re going to a police state, but when you take 90% of people’s money, they get pissed at their government.  In order to accomplish this there will have to be a bank holiday, so the military will be there to keep order.  I would expect we would go back to the gold standard.  The President has the power in times of emergency to confiscate gold or other things.  They won’t go after our small stashes, but there are tons in the NY Fed from other countries.  Large private gold stshes could be taken, too.

There will be unrest for a while because of unemployment, hunger, and crime.  Things could happen very fast.  Europe will probably collapse, then Japan, China, and on to us.  What is a gigantic military for except to maintain power.

We’ll try to slow it by bombing Iran to keep them on the Petrodollar and as many others, but our reserve currency status is slipping away and those dollars have to go somewhere and that is home.  Hyperinflation!

There really are so many things wrong in the world, so many things could cause it.  The one thing I know is that the govnment is preparing for the endgame. It will survive.

Ernest

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I can’t remember anymore the precise place in Shakespeare’s Henry V, nor the context within which the declaration was made, when Falstaff declares that "First, we will kill all the lawyers!" But, with due respect to Falstaff and apologies to Shakespeare, I say "Kill all the globalists!."
True, our profligate government deficit-spending ways pre-dated NAFTA, WTO, and all similar "Free Trade" agreements by at least 2 decades. However, the the process of destruction of our middle class and the degradation of our working class quickened to a sickening pace just after the passage of the WTO Treaty in 1995.

The "hard decision", that would bring with it the most gain and the least pain, should be the one that forces global business entities to produce and develop the products and services being consumed in America, by employing people living  inside America, and to do the same in Europe as well. If there was a 50% tariff applied to everything imported into the United States (Europe), there would be plenty of margin available for our private sector to hire, train, and reward people living in America to produce and consume what was made in America.

Banks and Blue Chip corporations, currently choking on cash, would have productive ways to loan/invest their money in plants, equipment, and distribution networks, in order to offset the offshore resources that would have become prohibitively expensive. Further, they could do so, knowing that no competitor could undercut them by relying on foreign suppliers.

The country could grow out of its debt crisis this way. 30 million or more people would have to be brought back into our workforce. The payroll tax collections needed to sustain social security and medicare would increase; and the needs for Food Stamps, unemployment compensation, and other forms of social relief would decrease.

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Globalization is DEAD in the very near future. OIL w/depletion will see to that. We won’t need tariffs. I cannot recall where I read this but it was back before the crash of 2008, but it cost more in bunker fuel for us to ship coal to China than the cargo on board was worth. That is a brolen business model, and IS Peak Oil.

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[quote=agbrina]The country could grow out of its debt crisis this way. 30 million or more people would have to be brought back into our workforce. The payroll tax collections needed to sustain social security and medicare would increase; and the needs for Food Stamps, unemployment compensation, and other forms of social relief would decrease.
[/quote]
Hi agbrina, welcome to the fray…
Trouble is, growth is not only undesirable, it won’t happen in an energy crisis. We need to change the way we do EVERYTHING. First, I would cancel the debts. They are totally unrepayable, we can’t even keep up with the interest repayments!
The whole "jobs jobs jobs" mantra is finished… "Working for wages" is unsustainable, and one day soon, it will start disappearing. We must go back to the simpler way we knew 100 years ago, with the great advantage that we know a whole lot more about all sorts of things like hygiene and alternative energy. But growth is finished, we need to think outside the square.
We must live more simply so we may simply live.  Ted Trainer.
Mike

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The answers we seek are necessarily small and local.  … Don Studinski … been saying it for years now.

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What a great discussion! If a bunch of "normal" people are enlightened/self-educated enough to go toe-to-toe with Mauldin (pointing out blind spots, seeing what he’s missing) there may yet be hope (at least for some of the population). Don’t you just love being in the CM community?! However, I do agree with those of you who have said it or implied it here: we aren’t going to get on with any solutions wholeheartedly until most of what we’re working with now is shattered into a billion little pieces.  That’s just human nature. So, it seems we are forced to look forward to total chaos or mere chaos (a nice distinction Mauldin introduced) as a necessary step toward a new day. The silver lining of the coming collapse is that it will be the sign that we are moving toward the new day. 

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I "heart" Mauldin. He’s a optimist by nature, an open-minded man looking for potential solutions rather than who to blame. Read his stuff for years. He’s a part of the puzzle. So is CM, and the community here.  So are very many other sources.
I’m happy that Dr. Chris brought John Mauldin’s insights to us. Sure wish he’d talk a little more about resource depletion, but I think he is a great commmunicator and an important voice.