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I think we need to take this representative by representative and leave the parties out of the equation as the opposition is going to take the worse part of each party and make the inference to the whole. The US is a diverse and bottoms up nation and has very few monolithic aspects. Portraying opponents as monoliths when they are not is just making you look foolish not the other side. That is why the party of no line is not effective. People are not that naive. That I think is what the Dems biggest issue is. If they acknowledged the diversity and tried to build bridges with actual compromise, then they would be easily re-elected. However, early on they lost patients and decided to it on their own and burned many bridges (even within their own party). If the mis-representation continues, I would not be surprised to see some Dems after November switch parties as in the Repub party they can make an impact as they do not have a strong centralized leader (sort of the like capitalism (Repubs) versus central planning (Dems) approach to politics). Packer

I am not sure there is going to be inflation but there will be de-basement of dollars versus other assets who retain their value (good businesses, in-demand commodities). The holder of fixed-income dollar assets will be de-based. The inflation if it happens will not be the type in the 1970s push-type we have seen in the 1970s but based upon import prices rising. As our trade deficit is significant, this is where the inflation will come from. Think Iceland. In the 1970s/1980s, we had high unemployment (surplus labor) and high inflation. The inflation came from oil imports and modest competition that rippled through the supply chain. I see price competition declining from China as folks are paid higher wages. So the conditions are their for inflation. I have not heard Hoisington's argument for why deflation has not occurred anywhere in the world except Japan post WW II. Japan has some unique characteristics that would lead to deflation that may not happen in other parts of the world like: home-country bias (esp. with savings), a price-down driven manufacturing culture and endurance of deflation because the welfare state has taken care of the failures. Other parts of the world that don't have these characteristics will induce inflation at all costs (and this has been born out through the history of debt crises). I recommend you get "This Time is Different" and see if you question deflationary assumptions. If there were more historical examples (post WWII), then I would probably be in Hoisington's camp but history doesn't appear to be on his side. Packer

What will come is a debasement of the currency. That is why gold and some value investors are bullish on gold. A primary reason we had deflation with a debt de-levering was we had a dollar tied to something which was a store of value (gold). Once the link was broken there was inflation. In reading "This Time is Different", I cound not find an example outside of 1990/2000s Japan in the post WWII era, where deflation ocurred. Part of it may be the Japanese culture of price-down of suppliers or other factors. All other debt crises were resolved via debasement which may or may not lead to inflation. The amount of inflation is dependent upon the ratio of imports to GDP as inflation will be imported from abroad. I would go with the odds of debasement/inflation for resolution of debt de-levering versus cutting and deflation. In a democracy the latter is politically unacceptable. This can happen by either tax cuts or more spending as Watsa has pointed out. Packer

I think we can see the steps to a depreciating event coming but the markets will not re-act until a trigger/tipping point is reached. In the cases of both the gold standard and going off the US dollar standard, the markets did not see it coming until the events occurred. We are in a similar situation and adding more debt gets us closer to the tipping point. Unfortunately know one knows where the tipping point is until after it is reached. The increase in value of treasuries I think is a dangerous momentum bubble and those insurance companies that have alot of treasury exposure may get burned. It would be interesting to hear Hoisingtons reactions to Niall Ferguson and Reinhart and Rogoff's historical points. Packer

Depending on what you are buying options may offer less risk. I would compare an options based alternative as it limits the downside. I have only used leverage on a portfolio of value mutual funds before I had kids. It worked out fine but I did not have the need for the cash for awhile. Now that I have more financial commitments I only use options as they reduce my downside. In addition, recourse leverage can reduce your margin of safety as the point/price of total loss is increased. Packer

I used to believe Hoisington but based upon reading "This Time is Different", I think Hoisington's views lacks historical context. His views are correct if there is no gov't intervention. The last time this occurred was in the Great Depression. Based upon historical precedent since then, debt-induced deflation leads to some type of depreciation event (in the 1930's it was going off the gold standard later it was some type of delinking to a standard of value (Argentina going off the dollar standard) which can lead to inflation goods or inputs are purchased from others who are tied to the standard. In this case, I think a depreciating event will lead to inflation due to out large trade imbalance. If the trade imbalance was smaller, the inflationary affect would be muted. Packer

I see it differently. There may be hard times but how has the US historically reacted? We have re-invented/brought to market new ideas/products in a market that is the most competitive in the world. In terms of culture, the US has been inclusive which makes the markets better and the superiority of one group versus another has been dis-proven the marketplace. The marketplace has done more for equality than any gov't can hope to do by fiat because it creates equality based upon skill level and not any other characteristic. The real question is do you want to allow freedom and the market to generate equality as the result or do you want to have equality by fiat by other autocratic (non-volentary means). I think the former versus the later has been more successful historically. I think equality will result from the system we have and most efforts to use autocratic means to achieve equality are either gamed or develop resentment for those not included in the special deals. The use of autocracy to achieve equality has a terrible historical record of working. In terms amnesty, I think there are 2 issues (the flow) and the folks here. They both need to be addressed. Packer

You are right. I hope more of American youth are more persistent than this guy. He had at two leads where persistance (Hanover and Marine Corps) could have paid off but he gave up. His parents/grandparents also seem to missing why they did well (persistance) with some chance. It is hard to have chance work for you when you are not in the game or your expectations are too high. Packer

I think Krugman should study history before the 1940's. In the 1930's & 1890's, the money supply contracted in combination with a deflationary debt burden. In this case, the money supply has increased with a deflationary debt burden which historically led to inflation (which is what I think will happen in this case). Whether inflation is long-term or short-term problem will depend on wether a structurial deficit can be brought under control. Packer

I agree with you on healthcare, both sides did not take advantage of the 50 laboratories we have to try many solutions and see which ones work best and what should be adopted nationally. This allows time for buy in and to see what works and what doesn't. What this national system does is force decisions that do not have to be made now based upon a little or no data (a bad situation for any decision maker no matter how wise he or she is). I still think the selective default (stretch out the maturity with lower interest rate) is part of the deficit solution in addition to restructing entitlements and pulling out of the wars. I am a little more skeptical about the gov't choosing the best technologies to invest in as the history has been pretty poor (remember Carter's alternative fuels disaster). Most of the innovation has come from a focused effort to solve a defense issue from which this technology could be used for civilian purposes. I think we should put money into alt fuel research but subsidizing fuel prices to me is like flushing dollars down the drain as the dollars are not focused enough for taxpayer to pay for. I think a corporate tax reduction could unlock some of the cash in firms' balance sheets. Packer

Apparently according to Tim's March update he picked up a Greek bank. An interesting pick for a deep value guy. The biggest one, NBG, has operation through the region including Turkey and the Balkans. If Greece does not drop out of the Euro, then this may be a good time to pick a bank that has regional exposure to emerging markets like Turkey. Packer

Some of the smaller media names have unlevered FCF yields of 14 to 24% and levered yields of 24 to 56%. They were cheap before the sell-off and are super cheap now and many of them have managable debt loads. I purchased 2 of the cheapest names that already did not have full positions in namely LNET and MGAM. Others that already have full positions include SURW, SGA, SALM and NRG. I am also looking at TRK and GCI but the others are so cheap that I may sell some holdings to buy more. Packer

Becasue it may not be what you expect. Politically it may be bad for the base but as you say the bases of both parties can be out to lunch on many issues. If you reduce spending when the multiplier is low you may actual be able to retain low interest rate financing. If you don't, then you will cuase interest rates to go through the roof and you will be forced to cut back versus choosing where and when to cut back. I think it just provides you more options and flexablity. More spending just cuts down on the options and boxes you in a corner of either doing something drastic or defaulitng. As for health care, I think there could have been more compromises in allowing the states to try different approaches and see the results rather than trying to ram something through because you think you are going to loose your political support or you want to be remembered for something. In order to do health care right, you need porlonged support and forcing people to do something without trying alternatives at the state level will only lead to opposition of the type we are now seeing. Remember you need funding every year to make this work and if you have not built trust by taking baby steps that funding will be endangered and may cuase a repeal backlash that may have unintended consequences (which is what I think will happen). I think the biggest mistake is not getting a good old fashioned compromise out of health-care bacause the guys driving the train were opportunists not compromisers. The true genius of the US is compromise and the folks driving the train do not understand this. Packer Packer

True enough about unemployment but we need to find money from somewhere else to pay for it. Just adding more spending at this point is just pushing us closer to the point of no return. I think Paul Ryan has a serious plan but no one considers it because in part the crew in the WH thinks we can still spend our way out of this. I think we can have a debate about this but the WH is preventing (like on health care) the real debate and compromise from happening with their my way or the highway approach to problem solving (and you thought Bush was bad - Bush only did it for Iraq these guys are doing it in everything). Packer

I think a key premise about the argument that we can print our way out of it is that others will be willing to hold US gov't debt. Why do people hold our debt? Because they think our gov't can tax and get the money (not print our way out of it). Taxing in theory is doable but in practice I think is impossible. I think holding US gov't debt is different than holding US dollars which is backed by the US economy. I think there may be a decoupling of the US dollar and gov't debt. It is interesting that even though almost 40% of our debt is due to roll between now and 2012, that the duration of US debt is shrinking. What that tells me is no one will lend to the US gov't long-term and why would they when the crew in Washington is oblivious to racking up debt (it reminds me of real estate in the subprime credit crisis). The only way out I see is a veto proof majority in the House and Senate before the big roll-over (a highly unlikely event) which may provide the markets some solace that the spending will be under control. Even if we can roll over the debt I think it will be for a shorter duration which will just kick the can down the road. Even if the Repubs get majorities in both chambers, Obama and crew show no signs of deviating from Keynesian orthodoxy so I think we will not seen restraint until at least 2013 and by then it may be too late to prevent and a partial default (extending maturities and lower debt interest rates). The US Gov't bond rally reminds of the housing bubble being based upon an assumption that every thinks is true (the US gov't cannot default) but in fact may not be true and has commonly been done throughout history to get out from under a debt pile and may be less painful than inflation. It would be interesting to see if Farifax is picking up US gov't CDSs which are only trading @ 40bp. Packer

The only problem with Krugman's argument is that it did happen in Argentina and many other countries. I think the key point which is valid is that the credit rating of a country and firms in the country can and do diverge and to think of them as distinct does have historical precedent versus the theoretical Krugman argument which may in most but not all cases be true. Packer

Naill Ferguson's suggestion is to buy blue-chip corporate bonds as a substitute for gov'ts. He was looking for some Tata bonds to buy at the DCF conference. I also think that safe high yielding utilities like Excelon will provide yield plus inflation protection via Nuclear power production. In addition, Seaspan and other income based trusts can provide interesting substitutes. I have a tendency to disagree with Hoisington because his thesis is based upon the gov't not defaulting (which historically there was a stigma attached to it) which I think will be more painful than a partial default in the developed world. When this occurs these high-quality alternatives will be in great demand. Packer

Given the state of the US gov't finances, I think you will see less investment in tresuries. Why would a rationale person lend money to the US gov't when you can lend to much more creditworthy borrowers and get multiples of the interest? The idea that the gov't is safer than some of the large corporations is based upon a fact that historically it has been conservatively finanaced and never approached a debt spiral tipping point of debt to GCP of 90%. I think this assumption has changed but the market has not caught on (much like the subprime crisis assumptions that housing prices will always go up). It will be interesting to see if Fairfax and others have purchased US CDS. US gov't CDSs anyone? I know TBT investors are down YTD so this may be similar to CDSs Fairfax purchased (first the pain then the gain). Packer

Unfortunately, it is not publicly available. You can see Niall's "Ascent of Money" on PBS though. Since he is a historian, his approach I think is quite an additional to the background of booms and busts. Another consideration for Japan is that when Japan was going through it the rest of the world was booming which I think had an effect on the recessions depth. I think giving all/most credit to spending is misplaced because if that was the case then historically we would have seen more spending successes which we have not. If the world was not booming, they may have fallen in a depression. We have not seen the end game of this spending which is probably going to wipe out the savings of the pensioners and citizens who paid for the spending via inflation/default. I think Jim Rogers has it right. You either pay for it now, with a severe recession and move on or stretch out the pain. I also question the logic of spending to spend. If you have what you think are positive NPV projects fine (but even there I think calculating your borrowing costs can be misleading as the cost today may be very different from when the projects are completed if the markets have lost faith or you are forced to partially default). High-speed rail outside the high-density corridors is an example. In Upstate NY, they are putting in a high-speed rail line that is uneconomical and will have to be subsidized the rest of its life. What sense does that make? I think the spend today mindset leads to wasting money that would never have been spent other than for a gov't subsidy. Do you like the idea that your money is being spent on a big white elephant where most of the technology is going to be purchased from other countries? Packer

But has there been one case where that "Exit" strategy has worked outside of post-war patriotism that has helped to reduce the debt? I think the viewpoint may in theory be valid but it has never in reality worked in the real world (as shown by history). This is where Niall Ferguson has a better argument because it is based upon history (reality) versus some theoretical case that has never worked before but has facilitated poor economic policy - spending, when you know that these same folks will not stop spending. If full employment is the test of when to stop spending, we will all default before that occurs. Packer

I watched Niall's CFA conf speech yesterday and it was incredible. The more I learn about history the more I realize things never change. Krugman is a political hack disguised as an economics professor - I see him on as more political pudit shows than commenting on economics. He and Koo seem to talk about this continued spending without considering the exit. Pretty ironic that Krugman would be against going into Iraq without an exit strategy but not his own economic ideas. History of exit strategies from too much gov't debt tells us there are three ways out: 1) default (which may actually happen - rescheduling of the debt with lower interest rates over a longer period of time ala Argentina) , 2) inflation (printing money - this may happen but with velocity falling due to savings this is currently being counteracted), 3) growth or some combo of above. Growth is a nice in theory answer but the odds are stacked against this option. There are 2 historical situations out of 100s were growth was either the driver for debt reduction or used with inflation. The first was after the Napolianic wars where the UK was able to grow its way out of its debts (this was due it dominance in industry and the merchants ran the country). The other time was the US (growth & inflation) after WWII. Again the US was the only country standing. Therefore, I think some combination of default and inflation will be the least painful answer. I just do not know how you force feed folks dollar (to cause inflation) when they are pulling back so much. Packer

You are correct but the US was able to grow because there were no competitors standing after the war. The US relied on both growth and inflation. The UK is an example of an inflation only situation (which is where I think most of the developing world is). I have no doubt the gov't creates jobs but at what cost? I think the best way to think about debt financed growth is borrowing growth from the future to get it today. (This is Grantham's idea not mine) The only problem is that as debt increases, the effectiveness declines. There is a great chart in the current Economist which shows the declining effects of a $ increase in debt on economic growth. In addition, I think looking at how the market prices your debt cannot be used to measure how much debt is too much as the debt spirals start out small and rise in a non-linear fashion. Also, in the Economist there is a chart that shows all the world's debt situation. It shows the the US and UK are not to far behind the PIGS. Historically, what has happened in the situation is the bondholders (who in most cases are foreigners) get hosed by restructuring of the debt.

I just watched Koo's speech at the CFA conference and had a question that maybe someone can answer. From what I hear he appears to be a tactician without an exit strategy. He said to continue gov't spending until the private sector returns with demand. This has never historically succeeded. This can be a long period of time and has not even occurred in Japan (at least yet). Is the end result that at some point the Japanese debt is going to have to be written-down and the bondholders will be the losers? What is the alternatives or exit strategies for the large amount of debt? If you look at history there is only one debt pile that has been gown out of and that was the post Napolianic debt of the UK. This was when the UK had a huge competitive and mercantile advantage over all others and was thus able to do this. All other times debt piles were either reduced via default or inflation. Niall Ferguson also had a really interesting historical perspectives which shows what has worked and not want might work. Packer

I think the difference is night and day when you compare a place like the US (bottom's up entrepenurial system) with opportunity for just about everyone and other parts of the world were basic needs are not being met. We have the luxury of not thinking about where are next meal is coming from or having to work (not just us but our whole family) all day just make enough to eat. In many places in the world this is the way it is and was the same way here 100 to 150 years ago. There are many organizations that provide hand ups (fresh water wells, AIDS and TB medicines and malaria nets - I mention these three provide the largest bang for the buck spent according to the Copenhagen consensus) at affordable prices for all folks. I think the key thing is to give no matter how much or little you have. Being the bargain hunter I am I have comparison shopped these items and found the best prices at Franklin Graham's organization (Samaritan's Purse). I think who you give through is not as important as giving as it can create an incredible networking effect for good. Packer

I guess if he considers the gov't milking BP dry or the liability growing to be larger than BPs ability to pay a black swan (it is not even mentioned as a consideration) he is correct. Only when the well stops flowing can we assess this liability. What happens if a hurricane blows the whole effort off the map? I think this 0 scenario needs to be considered but he apparently does not consider it. Too me it is too hard to assess. It is like picking up nickles in front of a steam roller with faulty breaks. You never know when it will stop. Packer