Bob Moon: Last week, in kicking off our special coverage The Breakdown, our economy one step at a time, we were looking for a name — a definition — for our current economic situation. Investment banker and Lords of Finance author Liaquat Ahamed called it a debt overhang, and it’s hanging over countries and individuals all over, including our own.
So how do we deal with it? To explore that question, we’ve brought in financial expert John Mauldin. His latest book is, Endgame: The End of the Debt Super Cycle and How it Changes Everything. Good to have you with us.
John Mauldin: Hey, it’s always good to be with you guys.
Moon: As individuals, we are still looking at mountains of debt. Same goes for the U.S. and nations all over Europe. So where do we go from here — what can we do about it?
Mauldin: The good news is that we’re going get through all this. The bad news is that it’ll take five to six years. We’re in a different type of economic environment. We’re coming to the end of individuals being able to borrow, we’re seeing that. And now we’re coming to the end of governments being able to borrow. And we’re at a place where we’re going to have to drop about $150 billion a year — $200 billion, you know, pick a number — of deficit, over the next 10 years. We can’t do it all at once, and we’ll get through it.
Moon: You know, not too long ago, I had the chance to sit down with a great-uncle of mine, and hear his tales of growing up in the years out of the Great Depression. And I was struck by the fact that that was the whole of his formative years — the entire family just lived from one job to the next for years and years. Are the Americans struggling to find work today in that kind of cycle now?
Mauldin: I’m actually afraid so. I have seven kids, from 34 to 17. Six of them are out in the real world now — married, grandkids. And they’re struggling to find good-paying jobs; some of them are struggling to find paying jobs at all. There is one group in the United States that has seen their employment rate rise: the 55-and-up group. We’re all working longer. Older people who are recognizing their paychecks, their retirement plans aren’t going to be able to get them to retire, and they’re going back to work. They’ve got a lot to offer — they’re diligent, they get up in the morning, you don’t have to worry about them being hungover. And people are hiring them.
Moon: So is this just the new reality, then? Everyone cutting back, watching pennies, working longer — for how long?
Mauldin: Five to six years. That’s how long it will take us to get our deficit down below the growth rate of our economy.
Moon: Is there not a more immediate approach, though? Last week we had a guest, an investment banker, who said that banks might just have to write down something of this debt. What do you think?
Mauldin: Well banks will have to write down a lot. They have already written down a lot. I mean, the Austrian economic school, the von Mises and Hayeks of the world, would say, let’s have this one big cathartic event where we just write down everything. We’ll take it all down to zero; our houses drop another 20 percent; stock market falls out of bed and we have a depression. And then we can start coming out of the depression. And that worked, by the way, for Iceland. However, I don’t know that I want to go through 20 percent unemployment and the pain of that. I think I’d rather my pain in measured portions over the next five or six years.
Moon: How quickly does something need to be done for us to start that five-year recovery cycle that you’re talking about?
Mauldin: I think the markets will let us slide through the beginning, the middle of 2014. They’re going to want to see whatever new administration comes in, or old, whatever the new government in 2013. They’re going to want to see a really credible plan that says, we’re going to attack the deficit by reducing it over time. And you know, I’m a card-carrying Republican. But as a businessman, I would rather see some combination of lots of spending cuts and lots of reorganization of government, along with — if we have to — tax increases, in order to keep the system going. I want an environment where I can see some certainty, I can make some plans and I can look into the future with some degree of comfort, saying, I can see where we’re going.
Moon: John Mauldin is author of Endgame: The End of the Debt Super Cycle and How it Changes Everything. Thanks for joining us.
Mauldin: It’s good to be with you, Bob.