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The need to end the debt supercycle in the U.S.
John Mauldin.
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Kai Ryssdal: We were talking earlier about the federal budget and, from Wall Street's perspective, anyway, the more important point: the federal debt limit. Thing is, pushing up the debt ceiling -- as we do regularly -- inevitably leads to more debt.
And that sort of thing makes a guy like John Mauldin crazy. He's the president of Millennium Wave Investments in Dallas, Texas. He's got a new book out, it's called "Endgame: The End of the Debt Super Cycle and How it Changes Everything." John, good to have you with us.
John Mauldin: Good to be here.
Ryssdal: So I think most people know what the business cycle is, right? That expansion and contraction of the economy that occurs at reasonably regular intervals. You are talking, though, about a supercycle, and specifically a debt supercycle. So I think we have to define some terms here.
Mauldin: What happens is people start borrowing money at the end of some great cataclysmic event -- in our case, it was World War II. When we were borrowing that money, we got a lot of bang for the buck; you'd borrow $1, and you'd get $5, sometimes $6 worth of GDP growth. By the end of the cycle, 60 years later, we were getting about 40 or 50 cents for every dollar. So we weren't getting really much bang for the buck, we weren't getting enough growth to overcome the growth of the debt.
Ryssdal: How does this supercycle end, though, John? I mean, we're not getting as much back for it, but consumers have been borrowing in this economy for a long time.
Mauldin: First, citizens, individuals, businesses come to the end of their ability to borrow, which is what happened with the sub-prime and all the mortgage debt. And so we started paying down the debt. The government stepped in, but the rule is that governments cannot grow their debt faster than nominal GDP -- that's just the growth of the economy -- for longer than a few years without running into trouble.
Ryssdal: Let me stop you right there for a second, John, because you point out and you make this point repeatedly in your book that people only change when they have to change. That is to say, the American taxpayer, the American consumer and American politicians are only going to change after things have come to a head.
Mauldin: Well that's been the tendency of humanity and governments over the last 200 years. The quote that we start the book out is from Jean Monnet, he's an Italian with a French name, and he says, 'People only accept change in the face of necessity, and only see necessity in the face of a crisis.' If we as the United States could understand, guys, we're going to have a crisis that will force us to change. And that crisis will mean we pay a lot more interest on our debt so that interest eats up a lot more of our budget so we have less money left over to spend on education and welfare and Medicare and defense and all those things.
Ryssdal: Well then lay it out for me: What are the choices left to avoid a crisis?
Mauldin: We've got to do two things that the polls say that people want to have and don't want to have. They want to have a lot of Medicare and they don't want to see their taxes raised. Those don't work together. And for me, as a Republican, just saying the word "tax" and "increase" in the same sentence, you know, I get hives. But the only reason that I would use the word "tax" and "increase" in the same sentence is that I am worried about the future of the republic.
Ryssdal: Those are serious words, John, the idea of the debt problem that we have being an issue for the survival of the republic.
Mauldin: I'm quite serious about it.
Ryssdal: I believe you are. But here's what I didn't see in the book: between all the macroeconomic examples and the charts, I didn't see discussion of the realities of the political system and how we're talking about our debt. We are still in this country having a debate over $60 billion worth of the teeniest, tiniest corner of the margins of the federal budget. And yet we are not in Washington having a discussion any place over the substantive issues.
Mauldin: Over the $1.2 trillion we actually need to cut.
Ryssdal: So how do we get there?
Mauldin: It's going to take more movement than anybody presently today thinks. The one thing that I don't believe that politicians are doing right now very well is they're not explaining the problem. Because if they explained the problem, then they have to start talking about, what's my solution? And they don't want to publicize their solution yet because if it was a real solution, it's going to make the voters upset that would vote for them. It's kind of a Catch-22 for politicians, I guess.
Ryssdal: John Mauldin. His most recent book is called "Endgame." John, thanks a lot.
Mauldin: Thank you very much.
Mauldin says: "The quote that we start the book out is from Jean Monnet, he's an Italian with a French name, and he says, 'People only accept change in the face of necessity, and only see necessity in the face of a crisis.' " I agree with much said and proposed here - but how was Monnet an Italian? He was born and raised in France and died in France. His family was in the cognac business. He's entombed in the Pantheon. Certainly Monnet would prefer to be to be called a 'European' - maybe 'The First True European' ...but 'Italian'?
Yes, the debt side is important, but so is the asset side. Worrying about debt without considering assets gives an incomplete picture. The US actually does have huge assets (wealth) that could offset the huge debt, except for three problems: The wealth is privatized, concentrated in a small number of hands, and hidden. It's in things like real estate, bling, yachts, and complex financial instruments that gamble risk. Investing it directly in private or public corporations, which would put the money to work generating real wealth (that would in turn pay down the debt), is considered too risky. So it remains unproductive. This is a drain on our economy. So, debt solution 1: Tax private wealth ("stranded capital," if you will). Mr. Mauldin does recognize (as do all of the rest of us outside of Washington) that taxes need to be raised. But I think he underestimates how much revenue a strongly progressive set of income tax rates could generate. With executives clearing over 500 times what their average employees make, that's a significant pile of money that could be put to use. (Taxing outsize compensation wouldn't put anyone out of work, because compensation is *not* investment. Encouraging businesses to invest is a good thing, but that isn't done by under-taxing compensation.) So debt solution 2: Tax income progressively. (N.B.: Income and wealth are *different* things.) (Taxing wealth and income can redirect them into activities with lower tax rates. Taxing wealth and high income more than the highest corporate tax rate would re-direct some wealth into direct investment and make executive compensation less appealing than re-investment in the corporation. Greater wealth generation would pay down debt via greater overall tax revenue.) The endgame in the US could take the form of marauding bands of out-of-work people that find rich people and forcibly liquidate their assets. That probably wouldn't be very efficient or pleasant, but the problem in the US isn't lack of assets, it's mis-allocation of assets in non-wealth-producing activities. If we re-allocate those assets into productive uses in an orderly way, it would solve the debt problem and benefit all of us in additional ways.
The debt problem is indeed *the* problem that we must solve or perish. (And kudos to Mauldin for talking about the survival of "the republic" rather than "our democracy.") But tax increases will not and cannot solve the problem, because nearly always increasing tax rates actually decrease tax revenue, and they shouldn't even be an option on the table as long as the government is spending trillions of dollars on things the Constitution gives it no authority to do, and rather explicitly delegates to the states and to the people.
Politicians aren't explaining the problem because those politicians subsist on corruption, what we tend to call "pork." But there are a few politicians who do understand it, and were elected on a platform centered around this issue. Invite Rand Paul to the program to discuss his budget proposal, for instance.
I am always amused (really angered) when a budget balancing Republican talks about ending the cycle of borrowing that created the National Debt by cutting $1.2 Trillion in needed services including Medicare. The purpose we gave the government was to provide for the common good and promote general welfare. That now only means the welfare of the very rich and the end of taxes for corporations.
Where was his voice in 1981 when Ronald Reagan's tax cuts for the rich created $7Trillion in debt, and Bush I added to it until he raised taxes. (I had a high salary and saw my taxes increase by his elimination of educational and professional deductions.) Then President Clinton raised taxes and created a budget surplus to pay off the debt. Republicans Howled! Leave it to proto Tea Party Republicans in the House and Senate and President Bush II to solve the problem by creating two tax cuts for the very rich coupled with deregulation of the financial services industry to land us with $14 Trillion in debt, 15 million out of work, 8 million foreclosures and their current effort to blame it all on Fannie Mae, Freddie Mac and unionized government workers. What a “job†on the truth. Please!
The problem was the tax cuts and deregulation, not new spending. We prospered, created the middle class and innovated from the mid 1940’s until the Reagan Revolution, who ended increases in the standard of living for all but the very rich. Now, after 32 years of Republican Dogma of tax cuts for the rich, no new taxes to support government services we have a real problem: more Republican sham. We need a housecleaning and I bet we'll get one in 2012.
