Endgame; The End of the Debt Supercycle and How it Changes Everything

John Mauldin and Jonathan Tepper


Reviewed by Graham Mulligan


In the introductory essay the authors sum up the problem, quoting Wimpie from the Popeye cartoon, “I will gladly repay you Tuesday for a hamburger today” and Jean Mannet, “People only accept change in necessity and see necessity only in crisis”. The debt supercycle started more than 60 years ago and the first half of this book examines economic theory and recent economic research to make the case of the argument about debt. The second part of the book looks at particular countries, mostly in the developed world, to see what problems each faces.


The authors lean heavily on the 2009 book by Carmen Reinhart and Kenneth Rogoff, “This Time is Different: Eight Centuries of Financial Folly”. There is no exactitude in economic theory, things can be described as they go along and then suddenly everything changes. The authors call this a “bang” that no one expects, like Russia in the late 1990’s, or Greece in 2011, or Japan sometime in the near future (“a bug in search of a windshield”) or the US perhaps. The key point, they emphasize, is that debt went from homebuyers, to banks, to government. When people have too much debt they can default on it (bankruptcy rules exist for this). When countries have too much debt they can inflate it away (Germany in the 1920’s, Argentina in the 1980’s); or default (the ‘haircut’ imposed on Greece in 2011); or devalue the currency (a variant of inflation).


In the chapter on Rules (of economic theory) they point out that there are four theories competing for attention: Irvine Fisher, classical economics; John Keynes, the keynsian school; Ludvig von Mises, the Austrian school; and Milton Friedman, the monetist school or Chicago school.


Unintended consequences lie like minefields in any of these theories. Keynsians come in for the author’s criticism with respect to one of these minefields. Simultaneous government spending and consumer saving, especially by aging baby boomers, work against recovery.


Double-entry bookkeeping gets a turn in helping explain how the Rules affect us:


Domestic Private Sector Financial Balance + Governmental Fiscal Balance – Current Account Balance (either Trade Deficit or Surplus) = 0


Individual countries by themselves must obey this rule but every country wants to trade up and every country can’t have a trade surplus at the same time. Europe is stuck here, especially Southern Europe. They can’t devalue their currency to make their products cheaper.


Structural changes in the US economy will mean more frequent recessions and slow growth with significant unemployment ahead. It will be like this for a period of six or seven years as the debt deleveraging process works itself out. (see: www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp for a 10-page summary of this idea).


The point of Endgame is that increasing government spending (debt) will have to end and in fact be reduced. The authors use the work of Cechetti, Mohanty and Zampolli, “The Future of Public Debt: Prospects and Implications”, to build their argument. (see: www.bis.org/publ/work300.pdf?noframes=1)

The critical  issue is the interest rate on borrowing money. If interest rates are higher than the growth rate there is no way to stabilize the debt owed. The study quoted above makes a 30-year projection for the path of the debt/GDP ration in a dozen major industrial economies. Unsustained debt growth is driven by another factor – age-related government spending.  “Most of the obligations countries now have is to their pensioners and senior citizens” (p.129). There is a political imperative to act now, say the authors, because the majority of voters (in the US) will be pensioners by 2020.


Both inflation and deflation will continue to occur over the next few years. Collapsing home prices is an example of deflation. Classical economics (Irving Fisher) describes debt deflation as when everyone in a market tries to reduce debt which results in distress selling. Inflation, on the other hand, “is always and everywhere, a monetary problem” (Milton Friedman).


The second part of the book examines industrial countries and their likely, future bad choices, all with over-sized and growing debts. The chapter on the US situation plays heavily on the likelihood that instead of a gradual worsening leading to an eventual plan to resolve the debt issues, there will be a crisis situation, some kind of catastrophic situation that leaves no time to make a plan. Much of this chapter is, despite the author’s attempt to disguise their analysis as non-partisan, a polemical argument targeting the current president (Obama) and his policies, particularly obligations in the social areas of health and education. They point to the 2014 election as the key date for the change they seek particularly, not 2012.


Policy suggestions are offered as well. One idea is to follow Canada’s immigration policy that requires immigrants to have degrees and money enough to cover housing and health care. Another idea is a large tax on gasoline consumption earmarked for infrastructure. Other energy ideas like converting the truck fleet to natural gas (T Boone Pickins), which is an abundant resource, and building nuclear power plants to reduce dependence on foreign oil. US Education comes in for a kicking here too, but without any solid suggestions, just union bashing. Tax policy can also be changed to encourage saving and creation of new businesses.  (To see the updated situation on Europe (eg. Spain), go to: www.johnmauldin.com/PIGS type in email address and ‘Endgame’ as password)


‘A grain of sand’ is an analogy that the authors use to motivate the requisite anxiety or sense of urgency throughout the book. The idea of an event occurring suddenly, like a “bang” leading to disaster is continually present. Here is the analogy:


Imagine dropping one grain of sand after another onto a table. A pile of sand soon develops. Eventually, just one grain of sand starts an avalanche. Some avalanches are just small, ten grains or a hundred, sometimes the whole side collapses. The sand pile reaches a ‘critical state’ with ‘fingers of instability’ throughout, making it susceptible to collapse.


The analogy is effective and may or may not be true when transferred to the social world we call economics. (For more on the analogy see: Mark Buchanan, “Ubiquity, Why Catastrophes Happen”)

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