Thursday, November 12, 2009

But, what is the recipe?

Today, I listened to one of my favorite thought leaders, John Mauldin of Dallas, author of Bull's Eye Investing. He spoke of the difficult state of the U.S. economy and the few but painful choices we have:

1. The Argentine Solution - induce hyper-inflation to "inflate away"
the huge indebtedness of our country. He gave this a 1% probability.

2. The Austrian Solution - induce a collapse to eliminate the weak,
effectively flushing away the problems but creating 30%
unemployment now,while insuring the good times will return sooner.
He also gave this a 1% probability.

3. The Eastern Europe Solution - following the Soviet collapse,
that part of Europe had no choice but to make huge re-structuring
changes. However, given our inability to re-structure the health
care system, which "everybody agrees needs to be re-structured",
how can the U.S. effectively make the necessary decisions within
our current political system.

4. The Glide-Path Solution – announce an exit strategy for the huge
government deficit to expect an eventual return to the good times
at some point in the future, without trashing the dollar in the
meantime. This, he said, is our best hope!

My judgment is that he is correct, but we will have to experience all of the above before the good times return. We will experience significant inflation, as soon as deflation is eliminated. We will allow some companies to fail, as we did with Lehman. (We should have allowed GM to fail.) We will make some re-structuring decisions, e.g., health care, energy, or whatever. (The real restructuring we need is to improve our decision-making system, which was devised in the 18th century.) And, of course, the Fed has already made numerous comments about devising an exit strategy but cannot put a timeline on it, for obvious reasons.

It is not a simple trade-off between raising taxes or cutting spending. There are real strategies to be implemented.

Q: Which one is best?
A: All of the above!