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‘France will blaze its own path to economic chaos’

John Mauldin seems rather subdued as he takes another spoonful of his morning oatmeal. But it is not because the notably bearish global investment adviser is gloomier than usual about prospects for the world's biggest economies. Or because he's depressed over the surging U.S. stock market, which is making a hash so far of the dire predictions of the end-is-nigh crowd.

It turns out that Mr. Mauldin's carefully budgeted sleep time was disrupted by a fire alarm that went off at 4 a.m. at his downtown Toronto hotel and kept shrieking for 90 minutes. But it takes more than a burst steam pipe to derail the globe-trotting Texan, who has just completed a European trip that took him to five countries, before heading to New York and Washington after his brief Toronto stopover. Before our breakfast, the prolific writer dashes off a note for his wide and avid digital audience. And he still manages a full schedule of media appearances and assorted meetings with money managers, friends, partners and investors, where he expounds on such favourite themes as unsustainable public debt, high taxes ("The first time someone mentions income tax in Texas, we start looking for tall trees and long ropes") and the coming end of the investing world as we have known it.

Mr. Mauldin also has plenty to say about Japan, which he has famously dismissed as "a bug in search of a windshield." Now, he says, this could be the year that "Japan at last begins its descent into that dark night, from the twilight that has been its economy for 20 years." He's backing his conviction with a huge, longer-term short bet – amounting to 20 per cent of his pension funds – against the yen and the Tokyo stock market.

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As for Europe, he has joined other crisis-watchers in warning that France, with its mounting fiscal and economic woes, now poses the biggest threat to the euro zone. "France is going to be a basket-case within two years," he declares between sips of coffee. "France is the new Greece. The markets will start recognizing it later this year or next year, because people are going to say: 'Wait a minute, they're not getting serious about their budgets. They're going to miss one budget [target] after another. They're going to keep promising, just like Greece was promising."

The upshot will be more rating cuts and a jump in French interest rates. "France will blaze its own path to economic chaos," Mr. Mauldin argues. "[French President François] Hollande seems to have a good mental map for that journey and a good head start."

Indeed, French employment minister Michel Sapin helped make Mr. Mauldin's case last week when he blurted out in a radio interview that the country is "totally bankrupt." For that reason, he said in a remark plainly aimed at the ruling party's tax-and-spend advocates, "we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective."

The same fate could befall the United States, if the politicians don't come up with a credible plan to tackle the budget deficit. "If we keep promising to do something and never really do it, markets will decide that we are not serious."

All systems eventually have to be made sustainable, which requires wrenching changes, he tells me. "At some point, there's that day when you have to rationalize things. Canada had that moment [in the 1990s]. It wasn't fun. It took you not just a few years but a long time [to turn things around]. You were the joke [among developed countries]. Now, of course, Canada is the poster child for what to do and your central banker is being called in to rescue England. When's the last time a country said: 'We need a good central banker. Let's go to Canada'?"

On the subject of Greece, Mr. Mauldin once opined that the Greeks had a choice of two disasters: staying in the euro zone or leaving. "They've chosen the longer, slower disaster, which is staying in the euro. Trying to go to the drachma now would be worse."

He has just spent four days in Athens doing his usual field work, talking to everybody from politicians and central bank officials to small business operators and people on the street. Most seemed resigned to Greece's fate. And even demonstrators displayed little of the passion he has witnessed from angry crowds in places like Argentina. "They've made their choice [to stick with the euro and swallow the bitter medicine]. They have no other option, other than to negotiate as best they can with the troika to stave off as much of the austerity measures as long as possible."

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On a more positive note, he leaves investors with a theme to guide them over the coming decades of accelerating change, which he says we should embrace. Put simply, it means focusing on the goods, services and technologies that will continue to meet basic human needs – food, clothing, housing, social networks, communications, biotech, nanotech and energy and other technologies that foster increasing abundance at lower costs.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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