Blog of Intellectual Capital

Here is some excellent reading from John Maludin from Investor Insight. Please see below for more information in regards and links to further materials.

John Mauldin is a multiple NYT Best Selling author and recognized financial expert. He has been heard on CNBC, Bloomberg and many radio shows across the country. He is the editor of the highly acclaimed, free weekly economic and investment e-letter that goes to over 1 million subscribers each week.

“Last week I outlined three possible paths for the economy based upon the political
choices we make about the budget deficits.

First, there is the benign path, where we more or less roll back the Bush tax cuts,
and do not increase spending for new programs. The fiscal deficit falls into a manageable
range. We repeat the Clinton years where spending is help below increase in revenue so
that over time the budget gets balanced. While a large tax increase would have negative
consequences for the overall economy, it is far better than the other two paths strictly
from the perspective of growing the economy as much as possible. This path also has a
very small probability.

The second path is that the Obama budget is passed, the Bush tax cuts go away
and we have a decade of projected trillion dollar deficits. By the way, those deficits
assume 3% growth rates, low unemployment, low interest rates and very large health care
savings, and a withdrawal from Iraq and Afghanistan. The deficits are likely to be MUCH
larger then the CBO forecasts. This on top of exploding entitlement expenditures in the
middle of the next decade, which are underscored in the opinion of more conservative
analysts (including me).

The third path is the same as above expect that large new taxes are passed in order
to bring the deficit to a manageable size relative to the growth of GDP. This means that a
tax increase over and above those projected by the Obama administration of around $700
billion a year (about 5% of GDP!). Deficits would still be in the $3-400 billion range, but
from a funding perspective, it could be done.

The second path is one that will end in heart ache. I do not think that the world or
even US investors can buy multiple trillions of dollars of debt for more than a few years
without rates rising significantly. That, as Gross points out, will affect both businesses
and mortgage borrowers. It is a disastrous train wreck.

The third path is the more likely. I think (hope?) there are enough economically
conservative Democratic that will realize the problems of trillion dollar deficits. But they
do want a fully nationalized health care, and thus they will pass enough in taxes to pay
for it. If they are going to do it, this is their one chance, as Republicans are likely to do
better in the 2010 elections and get enough votes to push back any real tax increases other
than letting the Bush tax cuts expire.”

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore