In his talk, Mauldin touched on three areas: the Quantitative Easing 2 (QE2) policy of the US Federal Reserve, the critical economic situation of the European Union and the credit crisis endgame in Europe and Japan.
Mauldin is not a supporter of what has come to be known as Quantitative Easing 2 (QE2) as he said, “They used the bullet they shouldn’t have used,” as he views recessions as a natural part of the business cycle.
It is his view that when a crisis hits, central banks usually resort to increasing currency liquidity to stimulate the economy. He is concerned that with the US economy moving forward, that QE2 was unnecessary and that the Fed “abused its credibility.” Mauldin maintains that when another crisis occurs, the US may not have sufficient ammunition to combat it.
He notes that the central bank theorists thought QE2 would raise interest rates but the opposite occurred, interest rates fell, “making the Keynesians look stupid,” he said.
He did observe, however, that the Federal Reserve’s second round of QE worth US$600 billion was a drop in the bucket considering the GDP was US$14 trillion. “Production in Japan, Germany, Korea and Taiwan fell far more during the 2007-2009 recession than U.S. production fell even during the Great Depression. Not only was the downturn steeper than during the Great Depression, but also the bounce back was even bigger,” Mauldin said.
Mauldin thinks we are in the half time of an American football game with future events leading the world economy up to the endgame.
INVESTMENT AND GDP
Mauldin referenced his remarks on the global economy with a focus on the Gross Domestic Product (GDP) equation: GDP = private consumption + gross investment + government spending + (exports − imports).
Since the period of 1945-1950, he notes that developed nations have gone from economies with low private debt to high private and government debt, as governments have stepped in to crowd out private investment. Mauldin feels the challenge is: “How do we increase private investment?”
EUROPE, JAPAN, RUSSIA
Mauldin then looked at Europe and Japan and observed that there have been 66 credit crises in the last 250 years. There soon could be multiple credit bubbles bursting in the developed world, especially in Europe and Japan, he feels.
Mauldin says, “Greece, Ireland and Japan are coming to the end of their ability to raise debt at an affordable level. There will be defaults in one form or another. Whether you call it restructuring or adjustments or printing money, it will happen.”
In Ireland there will be a general election on February 25 and there is speculation that a party might be elected that would refuse to bail out its troubled banks, the term being a “unilateral default.” If that were to happen, there would be a panic in the EU, Mauldin says. Other Irish political parties are more interested in finding a solution to strengthen the stability of the financial system and encourage associated existing and future flows of credit.
Another crisis could occur if Greece decides not to pay its debt. Mauldin observed that Greece has been in default for 151 years out of the last 200 years.
Mauldin proposes that the EU must rework its currency to become a more “economic currency” or develop “more control at the top” in managing the EU economy and the economies of its member states.
In Asia, he says Japan is 18 to 24 months from a blow-up as its debt is US$10 trillion double its $5 trillion GDP. Japan has the worst debt among industrialized nations.
Mauldin also singled out Russia as the country with the oldest population that is headed for trouble. He thinks that within a decade, Russia will not have enough young men to sustain its armed forces.....................