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The Rules of Economics, Part 1


A look at some of the more important rules, and the consequences for individuals, companies, and countries that break them.

Editor's Note: This is Part 1 of a two-part series in which John Mauldin provides readers with a preview to a final chapter in his forthcoming book, The End Game, co-authored by Jonathan Tepper. It is excerpted from his weekly newsletter, Thoughts From the Frontline, which can be found here. Click here to read Part 2.

I'm desperately trying to finish the first draft of my book and am one chapter away from having that draft. But this will be part of what will probably be the fourth or fifth chapter, where we look at the rules of economics.

I'm writing this book with co-author Jonathan Tepper of Variant Perception (who's based in London), a young and very gifted Rhodes scholar with a talent for economic analysis and writing. We each write the first draft of a chapter and then go back and forth until the chapter has been much improved. Alas, gentle reader, you'll only get my first draft and will have to wait for the book to get the new, improved version.

Let's Look at the Rules

There are rules in sports. Three strikes and you're out. You have to make 10 yards in four downs to get another first down. You can't touch the soccer ball with your hands.

Baseball is a confusing game for most non-Americans. There are so many rules and subtleties. I confess to not understanding the rules in soccer, although I'm getting better. And forget about understanding hockey.

There are rules in economics as well, they're just not as well-known. And breaking these rules has consequences for individuals, companies, and countries. Sadly, there's no independent referee who can blow a whistle and stop the game, assess a penalty, and make you obey the rules. There is, however, a market that can decide not to buy your currency or your bonds if you don't play by the rules.

We're going to look at some of the more important rules. But, gentle reader, don't panic. These rules are fairly easy to understand if we take out the academic jargon often associated with them. And if you "get it" then it is much easier to understand the consequences of what happens when a nation violates the rules, both from a policy perspective and a personal-investing point of view.

Also sadly, there isn't necessarily an immediate penalty for a violation. A country can rock along for a very long time before that Bang! comes along and the flag finally gets thrown. But in the fullness of time, if a country doesn't correct its misbehavior, the end will be full of weeping and wailing and gnashing of teeth. And a lot of finger pointing – it's always the other side's fault.

Note that the rules are the same for everyone and every country. These are basically accounting rules known as identity equations. They're like E=MC2 or F=MV (force is equal to mass times velocity). They're just true. If they're not, then a thousand years of accounting is wrong. You may not like what they say, or not like the consequences, but you have to deal with the real world, take it or leave it.

In 1976, as a very young entrepreneur (no one would hire me, so I had to work for myself), I had launched my first business, and my best friend did my taxes. I thought I'd sent the IRS more than enough to cover me. Then he came to me with a tax bill that was more money than I'd ever seen in one place. I guess the concept that I had to pay the employer's side of Social Security had escaped my attention in my quest to simply survive, along with all sorts of alternative minimum taxes and other things I'd never heard of. Reality can be a real bitch.
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No positions in stocks mentioned.

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