Life after the debt supercycle.
“There are no good choices – only bad ones” could sum up John Mauldin and Jonathan Tepper’s Endgame which looks at how our economies will evolve the end of the late 20th Century debt “supercycle” that has driven the world economy for the last fifty years.
Endgame examines the choices that confront governments, societies, businesses and investors as the world economy adapts to the realities of the West’s aging populations and excessive debt levels.
Much of Endgame relies on This Time Is Different by Carmen Reinhart and Kenneth Rogoff which the examined eight centuries of financial crises. While Reinhart’s and Rogoff’s conclusions are that speculative bubbles driven by debt almost always result in a banking crisis and painful economic restructure, each episode does have unique characteristics.
In each case governments have three basic choices; reforming spending which is rare and maybe impossible given the debt levels in many nations, inflating debts away as Western governments have done since WWII or through outright defaults which have been associated with less developed nations.
As we see with the convulsions the European Union is currently going through and the massive support given to banks around the world since the 2008 banking crisis, the default option is the one which governments will avoid at all costs.
While the bulk of the book concentrates on the US, John does dedicate several chapters to the how the debt endgame will play out in other nations including Japan –“a bug in search of a windshield” – the UK, Eastern Europe and Australia, where he finds a massive property bubble that he believes could be the most spectacular endgame scenario of all.
The clear lesson from Endgame is the post World War II social compact of working taxpayers supporting the aged, the sick and unemployed is over and was only propped up the illusion of wealth generated by loose credit and financial engineering throughout the 1980s, 90s and early 2000s.
Some are hoping the Chinese economy can provide the global demand that was provided by US consumers. While Endgame doesn’t specifically look at this aspect, it’s unlikely China’s economy can do this.
With consumers and governments now exhausted by debt and at the limits of what they can spend, the assumptions that have driven the economy along with our investment and consumption patterns of the last fifty years no hold true.
Endgame is primarily a book for investors and John Mauldin’s emphasis is on where the safest investments will be in at the end of the debt supercycle. His view is it depends on whether governments choose to eliminate their national debts through deflation or inflation.
For business owners, wage earners and retirees this is an important question too and Endgame describes what the consequences for everyone are under either scenario.
The message of Endgame isn’t overwhelming negative; John Mauldin also looks at where the opportunities will lie after the credit endgame plays out. “We don’t know where the jobs will come from, but they will come” is another theme of the book.
Whether you’re an investor or a business affected by the changing economy or building those businesses of the future, this is an important book for understanding the changing economic world in which we live.
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