In this book, John Mauldin does an admirable job of explaining our current economic crisis and how we got here. I feel smarter, and more scared, after reading his work.

Smarter because I can understand more concepts. Scared because of the forthcoming pitfalls, traps and decisions (or lack of decisions).

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repetitive ( )

In this excellent book, John Mauldin and Jonathan Tepper follow the theme of their last book "Endgame: The End of the Debt Supercycle and How It Changes Everything" but explore in greater depth the subject of central bank QE (quantitive easing) - printing money to you and me.

Essentially it's a story about government budgets where expenditure exceeds revenue and borrowing covers the shortfall.

The focus is on Japan and the US and they show that each country arrived at the same place by different routes. The Japanese followed standard Keynesian policy after the collapse of their property boom in 1989 by trying to replace lost demand and jump start their economy but it's still not working 20 years later. The US simply had legislatures that persistently overspent their budget from the early 1970's until the present with a current revenue shortfall of 40 %, not to mention impossible future commitments.

The authors show that Japan and the US meet their budget shortfalls in different ways. The Japanese who are big savers have mostly funded the deficit themselves (eg Japanese Post Bank savings) but Americans who are not big savers have mostly borrowed the money from abroad (e.g. from the Chinese and Japanese).

The point of the book is that both sources of funding are no longer working. Japan has an ageing population that wants to tap its pension savings and the Chinese and Japanese have had second thoughts about buying US bonds, so both Japan and the US are obliged to buy their own bonds (issue money to do it) since their deficits are so large that any real world tax increases or spending cuts aren't going to fix the problem.

This is QE and the authors note that it serves a dual purpose in keeping interest rates low (reducing the governments interest payments bill) and removing money from savings accounts where the artificially low interest rate is below the rate of inflation. A quick check of the Economist Magazine's statistics page (Dec. 2013) shows that the US and the United Kingdom have QE interest rates of about 2.7% on 10 year bonds whereas countries with similar trade and budget deficits (as a percentage of GDP) like Brazil and India pay around 10% on a 10 year bond - not directly comparable, but this is still a 7% gap.

Mauldin and Tepper could have stepped outside economics to look at the Counter Culture Problem which seems to have been at the root of the growing US deficits from the early 1970's. Instead of meeting the post war challenges of reconstructed industrial competitors like Germany, Japan and China, the US embarked on a counter-cultural revolution targeting the institutions that had generated its wealth and stability in the past. "The Man", "Squares" and "Anglo traditions" were tossed out along with sound finance, the Constitution and anything else "bourgeois" to be replaced with leftism, multiculturalism, anti-nationalism and a general liberal personal freedom in all things. This divided house is where the US is now and it seems to be getting worse with a gridlocked legislature and Anglo traditionalists moving to Red states and leftist liberals moving to Blue states ( see Bishop & Cushing's "The Big Sort: Why the Clustering of Like-Minded America is Tearing Us Apart"). No national unity here.

Equally they could have looked at the new way that modern technology is producing automatic deficits as new factories employ many fewer workers for the same output with the new variant that professional work is also bring automated. This is a qualitatively different sort of technological change that produces big profits but low employment (see Martin Ford's interesting book, "The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future") suggesting that profits need to bear a greater share of taxation, when in fact the opposite is happening.

However, sticking to the main theme, the authors currently see " A Beautiful Deleveraging" (Ray Dalio's phrase) in the US as sufficient liquidity is created to balance deflationary forces and produce positive growth with a gradual eating away at debt through mild inflation (price increases ahead of the interest rate) and they finally ask if it isn't time to wind down QE.

They support their argument with the clear evidence of a US recovery that can be seen in housing, manufacturing, greater productivity, auto sales at a normal rate and the new fracking based oil and gas boom. They highlight the serious inflationary risk posed by enormous bank reserves waiting to be turned into loans. To use their terminology the vast reserves of "ice" could turn straight into the "vapour" of inflation without passing through the water stage.

This raises some questions about the FED and they are very dismissive of central bankers in general and Alan Greenspan in particular. They view Greenspan and Bernanke as incompetent with major failures being Greenspan's inability to recognize a property bubble when it is staring him in the face , and his full approval of the scrapping of the Glass-Steagall Act and enabling bank 30x leverage.

A simpler explanation (that the authors don't consider) is that they weren't incompetent at all, they were/are just playing on a different team.

The removal of the Glass-Steagall Act gave Team Wall St. access to non-speculative high street bank deposits and combined with new 30x leverage allowed them much larger profits, with Treasury Secretary Robert Rubin and Deputy Secretary Larry Summers pushing hard to repeal of the Act and face off critical regulators. The same team went on to organize their own Bailout at public expense such that AIG got full dollar for their semi-worthless paper, bankers got their bonuses and no one went of jail despite breaking dozens of laws.

So probably a more relevant question is, "What will Team Wall St (both in and out of the government) do with the present QE/ deleveraging situation to again maximise its profits?

The authors are possibly already be looking at the first stage of the answer as they puzzle over the extent of continuing FED QE in the face of an economic recovery. If one takes the view that this is a pure money game that has nothing to do with the interests of the American public then the most profitable FED organized play could have the following sequence:

1- The present bubble (2013) funded to the maximum (no tapering) until it collapses.
2- A large scale sell off that surprisingly includes stocks, bonds and the dollar. In fact Team Wall St is fully exiting the dollar(probably for the euro).
3- More QE but with an add-on of direct payments to all government employees (no need for a transmission mechanism + we need to be more aggressive).
4- A fast recovery with higher employment but accelerating inflation.
5- The public finally realizes that their savings are at risk and the "ice" reserve base quickly "vaporizes" = hyperinflation.
6- The critical point here is that the FED deliberately holds down the interest rate which is rationalized as, supporting employment, lowering government debts and interest payments, avoiding another crash, the poor don't have any savings to lose and the bond holders who are getting wiped out are foreigners anyway (Chinese and Japanese)
7- At the height of the chaos when all financial assets are viewed as worthless, Team Wall St can return to the US with hard currency to buy up Berkshire Hathaway etc.at fire sale prices (for a prequel see the German hyperinflation of 1922 where Mercedes Benz could have been bought for the price of 190 of their cars) and finally clear out middle American ownership.
8- The FED can then "discover" its error and Yellen can save the day by introducing some kind of asset backed hard dollar (1 gold eagle = 1.000.000 greenbacks?)supporting financial probity and Team Wall St.gets to keep its winnings (again).

Nothing is certain, but Ray Dalio does allow the 3rd option of a self-reinforcing upward inflationary spiral.

If this script comes into play then it may be time to look again at Fritz Lang's 1922 film "Dr Mabuse the Gambler" and check Simplicissimus magazine covers from 1918 to 1924 (see simplicissimus.com and Bernd Widdig's excellent book "Culture and Inflation in Weimar Germany (Weimar and Now: German Cultural Criticism)"). ( )