August 2, 2011
Reducing our nation’s debt burden is no longer only the rallying cry of Tea Partiers and fiscal conservatives. As the debate over the debt ceiling proved, it is now the goal of the president and many fellow Democrats. John Mauldin and Jonathan Tepper’s book, Endgame, published earlier this year, makes a compelling argument as to why reducing the deficit is so critical and why we face a long, slow and ultimately painful period of deleveraging. I will explain their thesis and then provide the counterargument.
Mauldin writes the weekly newsletter “Thoughts from the Frontline,”which claims over a million readers. Tepper is the founder of Variant Perception, a macroeconomic consulting firm.
The next phase of the debt super-cycle
Mauldin’s regular readers (of which I am one) will be very familiar with this book’s presentation. Its nearly 300 pages can be summed up as follows: Global economic growth benefited from a number of bad choices by policymakers — excessive leverage, financial engineering and, to some degree, lax regulation. But in the 2008 financial crisis, government leveraging replaced consumer leveraging as the most imminent danger. The financial crisis did not trigger a normal business-cycle recession. Instead, we are experiencing a balance-sheet recession, which can be conquered only when governments reduce their debt burdens.
This era of deleveraging will be the next and final phase in a long-term debt supercycle, according to Mauldin and Tepper. The endgame the authors foresee is the crisis of excessive public debt.
The book draws heavily on the work of Carmen Reinhart and Ken Rogoff, authors of This Time is Different. They argue that financial crises such as we experienced in 2008 are fairly common and are typically followed by a seven-year-or-longer period of deleveraging and recovery. Reinhart and Rogoff point to the debt-to-GDP ratio as the key metric in assessing the fiscal health of a country and identifying when its debts will become unserviceable.
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