NEW YORK (
) - Stock investors focused on corporate profitability might not spend too much time worrying about the multi-trillion dollar debt problem in the United States.
But John Mauldin, financial expert and author, says investors should not dismiss the risk of default by big nations like the United States, remote as that possibility may be. Failure to address the debt issue now could leave the country with a permanent recession, he says, as the dollar would lose value and create financial market upheavals.
|John Mauldin, President, Millenium Wave Advisors
Mauldin is the president of Millenium Wave Advisors, an investment advisory firm. His free weekly e-newsletter,
Thoughts from the Frontline
, reaches an estimated 1 million readers.
spoke with Mauldin about his latest
New York Times
Endgame: The End of the Debt Supercycle and How It Changes Everything
, his thoughts on the solution to America's debt problems and his views on the market.
TheStreet: Your book, Endgame, talks about the sovereign debt crisis, which remains a major market headwind. The U.S. government is facing a possible shutdown over budget issues as we speak. What is the "Endgame" referred to in the book's title?
: Governments everywhere are going to have to figure out how to live within their budgets or they will hit the wall. They will become Greece or Ireland.
Greece hit the wall because they were a profligate, wasteful, "nobody pays any taxes" country. Ireland was the Celtic tiger. They could do no wrong. They were going at 7, 8, 10%. They built 300,000 too many homes in a country of 6 million people. Everybody was flipping homes. They made what happened in California and Nevada look like Sunday school picnic.
And then their banks became multiples of the size of their economy just like Icelandic banks. And then their government wanted to nationalize and back their banks. But, no! They are too big to save. It is beyond too big to fail. They are too big to save. That is why the Irish government was thrown out.
The new government coming in wants the bond holders to share the pain. Ok. What does that look like? Those bondholders are British, French and German banks. They, quite naturally, want the taxpayers to pay it. The taxpayer doesn't want to. That puts pressure on banks that are levered 40 to 1. If a German bank writes a credit default swap against a sovereign nation, that does not count against their Tier 1 capital. That's crazy. Because regulators say: Well, a government cannot default.