Excerpts from the recently published book, “Endgame” by John Mauldin and Jonathan Tappan give an in-depth look at recent global economic turmoil a nd a look to the future.
Every child learns about the Great Depression in school, but economists, historians, and commentators have not agreed on what we will call the turbulent economic period we are currently living in. Some do call it a depression. Others call it the Great Recession. And some refer to it as the Great Financial Crisis. The Great Financial Crisis is particularly apt, because crises force us to make difficult choices. And one thing that everyone can agree on is that this new era of turbulence will impose difficult choices on governments and voters around the world.
As a culture, the current mix of genertions, all over much of the developed world, have made some choices—choices that, inhindsight, leave the adult in us asking, “What were we thinking?”
In a way, we acted like teenagers. We made the easy choice, not thinking of the consequences. We never absorbed the lessons of the depression from our grandparents. We quickly forgot the sobering malaise of the 1970s as the bull market of the 1980s and 1990s gave us the illusion of wealth and an easy future. Even the crash of Black Monday seemed a mere bump on the path to success, passing so quickly. And as interest rates came down and money became easier, our propensity to acquire things took over. In Europe, the advent of the euro gave southern Europe the interest rates of the German Bundesbank, and the Germans got a southern European currency in return. And then something really bad happened. Homes and other assets all over the world started to rise in value, and we learned through new methods of financial engineering that we could borrow against what seemed like their ever-rising value to finance consumption today. Everybody was responding to incentives—the problem was that the incentives were misguided, and the regulators were not doing their job. We became Wimpie from the Popeye cartoons of our youth: “I will gladly repay you Tuesday for a hamburger today.
In the United States, Greenspan kept interest rates low, which aided and abetted the process. The Bush administration started two wars and pushed through a massive health care package, along with no spending control from the Republican Party, thereby running up the fiscal deficits. The financial industry’s regulators allowed credit default swaps to trade without an exchange or supervision. A culture viscerally believed that the McMansions they were buying were an investment and not really debt. Yes, we were adolescents at the party to end all parties. And as our friend Paul McCulley said, the ratings agencies were handing out fake IDs to this underage drinking party. Not to mention an investment industry that tells its clients that stocks earn 8 percent a year in real return. Even as stocks have gone nowhere for 10 years, we largely believe (or at least hope) that whatever the latest uptrend is will be the beginning of the next bull market. It was not that there were no warnings. There were many who wrote about the coming train wreck that we are now trying to clean up. But those warnings were ignored.
In the United States, we ran up unfunded pension deficits at many local and state funds, to the tune of $3 to $4 trillion and rising. We have a massive (multiple tens of trillions of dollars) bill coming due for Social Security and Medicare, starting in the next 5 to 7 years, that makes the current fiscal crisis pale in comparison. We now seemingly want to add to this by passing even more spending programs that will only make the hole deeper.
Europe has even larger underfunded social programs and banking systems that are quite suspect and heavily overleveraged with massive loans made to countries that will not be able to pay them back in full. Japan has taken the savings of two generations to amass the largest debt to GDP of any country in history, with little hope of avoiding serious pain as their population ages, needs to stop saving, and will begin selling their bonds to be able to live comfortably in retirement.
Now, we are faced with a continuing crisis and the aftermath of multiple bubbles bursting. We are left with massive government deficits and growing public debts, record unemployment, and consumers who are desperately trying to repair their balance sheets.
Yet voters all over the world act just like teenagers. We get frustrated when it takes more than a minute for our computers to boot up(thanks, Bill Gates!) or when it takes too long to
download a file. And we want our economic and political fixes to be the same: quick and easy. The problem is that the political and economic cycles are not the same. It is difficult for politicians to respond to the longer-term problem when they face voters often. ...........
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