Tuesday, March 22, 2011

ENDGAME

ENDGAME - The End of the Debt SuperCycle and How It Changes Everything  By John Mauldin & Jonathan Tepper

Latest book by my favorite writer, economist, analyst, author, father, friend and a great human being, John Mauldin.

I've been reading John Mauldin's newsletter and research on Economics, Finance & Investment for over few years now.  Let's put it this way, I have been in a School of Global Economics, & Finance and the teacher is John Mauldin.  I don't know the exact current statistics on the number of friends John has but it should be easily about 1.7 Million.  If you want to know what kind of person John Mauldin is, you can subscribe to his FREE newsletter called "Thoughts from the Frontline" and you can also read about this highly acclaimed writer at, About John Mauldin.  Do yourself a favor and signup for this newsletter and see what you've been missing.  It may give you a fresh new perspective on how economies actually work at a global level and more importantly how to benefit from it by investing in the right vehicle.

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Endgame - The End of the Debt SuperCycle and How It Changes Everything  

Q&A with Authors John Mauldin and Jonathan Tepper (From Amazon.com)


Author John Mauldin


What is the debt supercycle?
Over a period of about sixty years, debt levels grew faster than incomes. This increase in debt became particularly pronounced in the 1980s, 90s and finally went parabolic after the Federal Reserve lowered interest rates to 1% after the Nasdaq crash. The increase in debt was not just a US phenomenon. As interest rates fell structurally with the fall in inflation from 1982 onwards, people took on more debt because it became more manageable. However, by 2008 the burden of debt became too much to bear and the debt supercycle came to an end. People started deleveraging and banks started collapsing due to low levels of capital and large losses from loans people couldn't pay back.

How does the sovereign debt crisis play into this?
The rapid contraction in debt levels due to default and deleveraging lead to a fall in economic activity as people started saving and cutting spending. Governments immediately stepped in and backed bank debt with explicit guarantees. Governments also started borrowing and spending to transfer money to the private sector, for example via unemployment insurance. So in a very real sense, private borrowing was replaced with public borrowing. Debt was added onto more debt. Rather than free itself of debt, the system now has more debt. The sovereign debt crisis is the recognition that most of this debt will not be paid back, and governments are making promises to pay debt and other obligations, for example general spending and pensions, that they simply lack the ability to fulfill.

What is the impact of the end of the debt supercycle?
Author Jonathan Tepper

The end of the debt supercycle and the beginning of the sovereign debt crisis present problems and challenges for investors and governments. Governments will need to either 1) inflate, 2) default or 3) devalue, which is similar to inflate. That is the way governments have historically dealt with too much debt. Some countries will experience deflation and others inflation, depending on what choices governments make. Currently governments have only bad and worse choices. Let's hope they can choose wisely.

What do you predict for the next ten years?
Central banks globally have shown a predisposition to print money to solve problems. We forsee rising inflation in many parts of the world, reductions in real income as people lose purchasing power due to higher food and fuel prices and more macroeconomic volatility. Some countries that do not control their own money supply or are running pegs may experience deflation as they are forced to delever and cannot increase the money supply to counteract the weight of deleveraging.

You cite the events in Greece as an example of a country continuing to run massive deficits. Is there an example of a country making a better choice?


The UK is making some of the right steps to control spending, but even the UK could be more draconian. In nominal and real terms, government spending in aggregate will not be cut in the UK. Also, Iceland has made positive steps by defaulting on its debt effectively. Default is a good way to cure too much debt.
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This book is an encyclopedia about the Global Financial Systems. It takes you on a journey through the complex and dynamic formation of various kinds of debt, The Debt Supercycle.  Debt, whether public or private needs to be checked, sooner rather than later.  There is no kind of money printing that can save anybody from it.  Most of the Governments have run deficits for many years, let's talk only about United States where we have run massive amount of deficits for last few years and our debt burden has grown to about $14.5 trillion, numbers these scary, disasters are wating to happen.  It's only a matter of time, until the Button is pressed.  I have not read this completely but it looks like a great read.

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