Our political system is not geared to cutting spending. Politicians want to play Santa Claus and have for about 100 years. The veterans know no other game than increasing spending as a means to buy votes to get re-elected. That calculus is shattered. We are out of money.

Now these politicians must play Grinch, a role they do not know and do not want to learn. It goes against everything they know. Unless they adopt this role quickly, we will suffer and economic and political collapse.

In my opinion, they will be unable to act in a manner forceful enough to avoid the economic collapse.

From this week’s John Mauldin’s newsletter comes this interesting take on the subject based on a panel discussion which included Richard Gephart, David Walker and Mauldin:

A Bubble in Complacency

Thursday put me in an introspective mood. It was the annual Tiger 21 conference, and the room held about 150 or so very-high-net-worth participants. The lunch session was Greta van Sustern interviewing Newt Gingrich. And yes, from what I heard he is going to run. I am glad about that, because he will raise the intellectual heft of the debate. I am nothing if not a political realist, having been involved in a lot of campaigns. I know the issues surrounding Newt. But far more important is that we have an honest national conversation that is a few notches above what we got in 2008. We so need more than sound bites and posturing. We need actual plans. There are several people I hope will run on the GOP side, as I think they bring something to the discussion. I will interject a few comments from Newt below.

As noted above, I did not have any real idea where we were going with the panel. Clearly, Leader Gephardt was a pro-union, card-carrying Democrat, but he was very obviously concerned about the direction of the country and is very up on the issues. You don’t run for president twice without having some personal “mojo.” (And for the record, let me say that I really liked him. We three got together in the bar with some good wine after our presentation, waiting for the cars to take us to the airport, we and really got along. How in hell did Kerry beat him?) David Walker has been running around the country for three years telling people that we are on an unsustainable path. I have a book coming out in a month talking about the next and coming crisis (some of which has been the subject matter of this letter).

There was surprising agreement among us (surprising to me, at least). The gist of it is this (and if you have been paying attention this is no surprise):

We (the US) are on an unsustainable path. As Walker noted, cutting the budget (spending) by a few hundred billion dollars does not get us to sustainability. Going back to the 2007 budget level would be helpful but not sufficient.

Did you see the CBO (the more or less independent Congressional Budget Office) estimates of the deficit that came out this week? The CBO said the fiscal 2011 deficit will hit $1.48 trillion, up from last August’s $1.07 trillion estimate. Other estimates, not forced to use unrealistic assumptions, are much higher.

And the real world? It is a whole lot uglier. From my friend Bill King at The King Report:

“The following tables from the US Treasury for January 21, 2011 (Friday) and January 22, 2010 (Saturday) show the public debt of the US Treasury has increased from $17.422 trillion to $20.713 trillion, a surge of almost $3.3 trillion in one year. So, the official budget deficit doesn’t tell the real US debt story. Please note that the current US ‘Public Debt Issues’ is 44.75% higher than the $14.3 trillion debt limit because it includes bailouts, Fannie Mae, Freddie Mac, student loans and other off-balance sheet funding.

The simple answer is that no possible resolution of the fiscal deficit that gets us to sustainability (which logic defines as below-nominal GDP, although surpluses would be nice) can be done without real cuts to Medicare entitlements or increased taxes or some combination.

Yes, there is a lot of waste in the medical system. Gingrich pointed out that American Express has about 0.3% fraud and Medicare had 13%. That is a hundred billion or so. American Express runs a real-time system and Medicare is still on paper. He listed other things that can be done. But back to our plot line of controlling the fiscal deficit.

We located the problem. There is about 30% of the electorate that is mad at Obama and the Democrats for not getting a single-payer, full health-care program. They want nothing less than that.

Then there is the 30% or so that are mad about increased taxes, runaway spending, and budget deficits. They will likely punish any Republican who even utters the word “increase” in the same sentence with taxes, unless they are talking about those bad tax-and-spend Democrats.

Right now, neither side seems willing to compromise. Obama has punted on coming up with any real solutions. Offering to freeze spending at today’s level is a joke. It is like one of my kids (and this has happened, kind of) getting my credit card, spending a ridiculous amount of money, and then saying, “Ok, Dad, if you’ll give me the card again I promise I won’t spend more than that!”

But the GOP is saying they want to cut spending around the edges of the budget without dealing with the real elephants in the room, Social Security and Medicare. They have some plans that get us closer, but none that David or I could see that gets us there.

What happens if someone talks about real adjustments to the entitlement programs, or tax increases? Look at what happened to the Deficit Commission and their reports. They were dead on arrival. I thought they had some interesting ideas.

It is hard to get to a real compromise with that level of conversation. But what the three of us on the panel did agree on is that if a compromise is not reached, the end result looks like Greece.

My points were that much of Europe is getting ready to give us a real crisis, sooner rather than later. Great Britain is headed for what looks like a recession and further problems. Japan, as I am wont to say, is a bug in search of a windshield. We are going to get some great real-time lessons on what happens when you don’t deal with a problem in time. The longer you wait, the worse the results will be when you are forced to deal with the issues.

The lack of compromise is going to run head on into a bond market that will force one, or raise rates until there is truly a crisis of biblical proportions. If you think high rates were bad in the ’70s (and they were, trust me!), think what they would be like in a deflationary environment.

For that is what would happen. We would fall into a severe recession, and recessions are by definition deflationary. And depending on how late we are in getting our act together, it could be worse than a recession. We could drag the whole world down.

Leader Gephardt spoke to the fact that it will take politicians essentially violating what they feel are their core views, for the good (and survival) of the nation. He thinks that there are enough leaders who get it now that a compromise is possible, although he noted that Obama is going to have to back off on some of his main issues. Newt said flat out that he did not think a compromise was possible, as he did not think Obama would reverse. Let’s call Walker a skeptical optimist. Me, I think it is 2013 before we get the real changes. I just see a bubble in complacency. The market is going up, so all must be right with the world.

If we don’t get those real changes, we will need to start thinking the unthinkable.

Can we last until 2013? Most likely, as we are going to see some cosmetic changes and that should encourage the bond market. But as our leaders watch the problems of the rest of the developed world increase then, depending on what they do, they could cut us a much shorter leash. We are approaching the Endgame. I worry that we could go much beyond that point without serious volatility and market upheaval.

Mr. Mauldin’s newsletter is free and can be subscribed to here: www.JohnMauldin.com.