A portion of Thoughts From The Frontline by John Mauldin

Be Careful What You Wish For
Everyone by now is predicting the Republicans to take the House and pick up anywhere from 6-8 Senate seats. We'll see. This is going to be a very interesting election, as there is a whole new dynamic in place.

Let's look down the road. I think we will at best be in a Muddle Through Economy for the next two years. Unemployment is going to be above 8%, best-case, in 2012. If the Bush tax cuts are not extended, in my opinion it is almost a lock that we go into recession next year, unemployment goes to 12%, and underemployment gets even worse. That is not a good climate for Obama and the Democrats in 2012. It is especially bad when you look at the number of Democratic Senate seats up for re-election that are in conservative states. The Republicans could take a serious majority in the Senate.

And then what? Right now Republicans are running on promises that they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.

There are only the two options. Yes, you can reform medical care, and I think much of Obamacare should certainly be repealed, but that does not get us anywhere close to dealing with the real issue, and that's a fact. There are tens of trillions of unfunded liabilities in our future, which must be dealt with.

Let me be very clear on this. I am not really worried about the supposed $75 trillion in unfunded Medicare liabilities in our future. That is an impossible number. If something can't happen it won't happen. Long before we get to that apocalypse, we find a bond market that simply refuses to fund US debt at anywhere near an affordable cost. Crisis and chaos will ensue. Remember the quote that led this letter?

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.

- Jean Monnet

The simple reality is that if We the People of the US want Medicare, in even a reformed and more efficient manner, we must find a way to pay for it. It will not be cheap. Raising income taxes on the "rich" is not enough. You have to go back and raise income taxes on the middle class, too. Oh, wait, that will be a drag on the economy and consumer spending. And in any event it will not be enough.

The only real way to pay for those benefits will be a value-added tax, or VAT. And while it could be introduced gradually, let there be no mistake that it will be a drag on economic growth. Government spending does not have a multiplier effect on the economy. It is at best neutral. What creates growth is private investment, increases in productivity, and increases in population. That's it. Tax increases have a negative multiplier.

A significant VAT along with our current income taxes will give us an economy that looks more like the slow-growth, high-unemployment world of Europe. Can we figure out how to deal with that? Sure. But it is not growth-neutral.

Republicans in 2013 will be like the dog that caught the car. What do you do with it? The last time they (embarrassingly, we) really screwed it up. The defining political question of this decade will not be Iraq or Afghanistan, or the environment or any of a host of other problems. The single most important question will be what do you do with Medicare? Cut it or fund it? Reform it for sure, but reform is not enough to pay for the cost increases that will come from an increasingly aging Boomer generation.

There is no free lunch. At some point, you cannot run on "no cuts in Medicare" and "no new taxes" and be honest. At least not this decade. Maybe when we have cured cancer and Alzheimer's and heart disease and the common cold at some future point, medical costs will go down, but in the meantime we have to deal with reality.

You may be able to fool the voters, but you will not be able to fool the bond market. Not dealing with reality will create a very vicious response. Ask Greece.

And that is the national conversation we must have with ourselves. There is a cost to government. There is a cost to extended Medicare benefits. (I am blithely assuming we deal with all the "easy" stuff like Social Security, and make real cuts in other areas.)

And for my international readers, this is an issue that the entire developed world must deal with. We all have our problems created from years of very poor choices, overleveraging, and deficits. It will not be easy. I must admit to smiling when I see the protests in France over raising the retirement age from 60 to 62. Really? Amazing.

And while France causes me to smile and shake my head, the refusal on the part of the US leadership to give more than lip service to solutions that might disrupt their slim majority of voters is maddening.

This election next week will change very little in real terms, the things that matter, like whether the US economy can grow or will face a very real crisis and a true depression. That potential is in our future, and it is coming at us faster than you think.



I believe Mister Mauldin is telling us there ain't no Utopia awaiting us. The crunch still awaits and how the PUBS react will be telling.

Where to begin? First Mr Mauldin is wrong about so many things I doubt I can keep track of them all.

Republicans are not running on the platform that we won't cut Medicare or social security. That's just 100% wrong. We are running on the platform that people 55 and up keep the current deal and the younger people get something much less. Higher eligibility ages, more strings, less benefits.

As for the balance of power and the economy, we will have gridlock for the next 2 years. Make no mistake about it. I contend that gridlock will have a stimulative effect because it will reduce the level of uncertainty for investors who are keeping record levels of capital on the sidelines. We take the house, Obama's teeth are pulled on new liberal kicks to the crotch of the business community and money will flow in the form of new investment.

Don't forget that Obama has put himself on the wrong side of many 70/30 and 60/40 splits with the American people on issues from healthcare to immigration to the war on terror. Now we will submit bill after bill that will be popular with the American public but will be vetoed by Obama. And we both know he will do it because Obama is a true believer who cares more about his agenda than reelection.

Over the next two years we will paint him into a smaller corner and further marginalized him in the eyes of moderates. If we do it right then he might pull an LBJ and not even run for a second term.

Okay!

In addition we need to make massive cuts to discretionary spending. If the Republican Party doesn't take hard, aggressive, immediate steps to reduce the size of government then there will be a third party doing it by 2012 at the earliest and 2014 by the latest and the remnants of the Republican Party might as well start calling themselves Whigs.

Quote from: Dan on October 30, 2010, 07:32:38 AM
In addition we need to make massive cuts to discretionary spending. If the Republican Party doesn't take hard, aggressive, immediate steps to reduce the size of government then there will be a third party doing it by 2012 at the earliest and 2014 by the latest and the remnants of the Republican Party might as well start calling themselves Whigs.

Why not? The Whigs were their roots.

Shooter, can you post a link?

Shooterman you know I have been very positive and very hopeful that the Tea Party could restore the Republican Party back to its fiscally conservative roots. And I still think that's the more likely outcome, but even Ray Charles could see where this thing is going if the establishment wins out. We will leave the party and the Republican Party will cease to be relevant.

Quote from: Solar on October 30, 2010, 07:35:30 AM
Shooter, can you post a link?

It's an email subscription, Solar, but they do give a PDF

http://www.frontlinethoughts.com/pdf/mwo102910.pdf

Quote from: Dan on October 30, 2010, 07:42:21 AM
Shooterman you know I have been very positive and very hopeful that the Tea Party could restore the Republican Party back to its fiscally conservative roots. And I still think that's the more likely outcome, but even Ray Charles could see where this thing is going if the establishment wins out. We will leave the party and the Republican Party will cease to be relevant.

I have no problem with that, but keep in mind, you are then starting from Square One. Either way the process will be along drawn out affair, and I'm not sure ( with the gimme, gimme, gimme attitude ) the public will even go for it. Not in a two to four year time frame. This crap has been building for 160 years, ( or longer ) and it ain't gonna change overnight.

I bet we could cut gov spending in half just by optimizing processes.

Currently, if they go from A -> 1 -> 2 -> 3 -> 4 -> 5 -> 6 -> B, we could shorten that to A -> B.

Let's immediately reduce costs right now by using common sense, then work on the rest.

Quote from: taxed on October 30, 2010, 08:15:59 AM
I bet we could cut gov spending in half just by optimizing processes.

Currently, if they go from A -> 1 -> 2 -> 3 -> 4 -> 5 -> 6 -> B, we could shorten that to A -> B.

Let's immediately reduce costs right now by using common sense, then work on the rest.

Exactly what do you mean, Taxed? Give some examples, please.

Quote from: Shooterman on October 30, 2010, 08:28:18 AM
Exactly what do you mean, Taxed? Give some examples, please.

   I believe he means cutting all the red tape...instead of 7 steps to get something done...make it 2 steps and cut the additional costs....I agree with that any savings are good at this point

Keep anti-fraud checks. That's non-partisan common sense.

Quote from: taxed on October 30, 2010, 08:15:59 AM
I bet we could cut gov spending in half just by optimizing processes.

Step one is to having fewer lawyers in DC and more businessmen. Let's get some people up there who know how to create and manage as opposed to chasing ambulances and getting rich by exploiting technicalities.