The need to end the debt supercycle in the U.S.
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.
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