We are coming to a critical inflection point, perhaps the most critical point that we have had in 70 years for the US and to a great extent the global economy. The choices we make (or that Congress and the Fed make for us) will affect not just our investment portfolios but business and our jobs for a very long time. Last week I talked about the three paths we face as a nation. I want to go back to that theme and expand upon it. You need to clearly understand what the risks are so that you can interpret the actions and data that will be coming at us in the next few quarters. I am feeling a little tired today, so I am going to take the liberty to reproduce Bill Gross's latest comments as well, which are somewhat in line with my own.

A Different Perspective on Health Care

But before we jump into the letter, I want to acknowledge the very large response I got from readers about the cut and paste I did about the differences between the national health care systems of Canada and Great Britain the health care system of the US. To say that I touched a raw nerve is an understatement. I should also admit that I learned a great deal from some very cogent and thoughtful letters. I often write about the problems with using selective statistics in gauging the economy. I have learned that you can do the same with health care statistics.

There are many letters I could quote, but let me give you a counter for the statistics from last week from Raoul Pal of Spain. And of course, there are other statistics that can be brought in to make almost any case you want. But I found these to be very thought-provoking.

"Using the Economists World in Figures I think there is a very interesting and maybe appalling story to tell. In its simplest terms a healthcare system is there to extend the longevity of live of the population. It is the single best and simplest way to judge it because we can all find examples of where one country is better than another but the longevity stats don't lie. When we use that framework the picture is incredibly different. The US has many of the best doctors and medical care in the world but it doesn't work for the population as a whole and therein lies the problem.

"According to the Economist the total US spend on healthcare is 15.4% of GDP including both state and private . With that it gets 2.6 doctors per 1,000 people, 3.3 hospital beds and its people live to an average age of 78.2

"UK - spends 8.1% of GDP, gets 2.3 doctors, 4.2 hospital beds and live to an average age of 79.4. So for roughly half the cost their citizens overall get about the same benefit in terms of longevity of life.

"Canada - spends 9.8% of GDP on healthcare, gets 2.1 doctors, 3.6 hospital beds and live until they are 80.6 yrs

"Now if we look at the more social model in Europe the results become even more surprising:

"France - spends 10.5%, 3.4 docs, 7.5 beds and live until they are 80.6

"Spain - spends 8.1% , 3.3 docs , 3.8 beds and live until they are 81

"As a whole Europe spends 9.6% of GDP on healthcare, has 3.9 doctors per 1,000 people, 6.6 hospital beds and live until they are 81.15 years old.

"The list goes on. The truth is that in many cases as is pointed out the healthcare system is better in the US than in some other countries BUT US citizens must therefore get ill more often than any other country in the West in order to achieve the truly appalling statistic that they are the 41 longest living nation on earth with France, Spain, Norway, Switzerland, Italy, Austria, Andorra, Holland, Greece and Sweden all featuring in the top 20 longest living nations and the UK and Germany at 22.

"This is the big failure of the US system. It is unforgivable. You may get a better chance of recovering from certain diseases but as a whole you will die younger in the US than most developed countries. ... Something is severely broken."

I had many letters from all over the world on this issue both pro and con. And some very lively discussions with health professionals. One pointed out to me that the uninsured in the US when they need a doctor often go to an emergency room for what should be a $50 office visit and end up with a $5,000 bill, which does not get paid and runs up insurance costs for those who do have it. As Dr. Mike Roizen points out in his many books, simply eating right, exercising and other common sense things would cut out much of our health care costs. When one-third of children in elementary schools are overweight, we need to get a grip on what we are doing to the next generation.

In the US, many of us are worried about government rationed health care. Others are worried that they have no access to health care at all. It is a very complicated issue. Let's hope that whatever Congress does really does help. And that the coming revolution in new medicines and procedures gets here as soon as it can for all of us. And now to this week's main story.

The New, New Normal

Last week I outlined three possible paths for the economy based upon the political choices we make about the budget deficits.

First, there is the benign path, where we more or less roll back the Bush tax cuts, and do not increase spending for new programs. The fiscal deficit falls into a manageable range. We repeat the Clinton years where spending is help below increase in revenue so that over time the budget gets balanced. While a large tax increase would have negative consequences for the overall economy, it is far better than the other two paths strictly from the perspective of growing the economy as much as possible. This path also has a very small probability.

The second path is that the Obama budget is passed, the Bush tax cuts go away and we have a decade of projected trillion dollar deficits. By the way, those deficits assume 3% growth rates, low unemployment, low interest rates and very large health care savings, and a withdrawal from Iraq and Afghanistan. The deficits are likely to be MUCH larger then the CBO forecasts. This on top of exploding entitlement expenditures in the middle of the next decade, which are underscored in the opinion of more conservative analysts (including me).

The third path is the same as above expect that large new taxes are passed in order to bring the deficit to a manageable size relative to the growth of GDP. This means that a tax increase over and above those projected by the Obama administration of around $700 billion a year (about 5% of GDP!). Deficits would still be in the $3-400 billion range, but from a funding perspective, it could be done.

The second path is one that will end in heart ache. I do not think that the world or even US investors can buy multiple trillions of dollars of debt for more than a few years without rates rising significantly. That, as Gross points out, will affect both businesses and mortgage borrowers. It is a disastrous train wreck.

The third path is the more likely. I think (hope?) there are enough economically conservative Democratic that will realize the problems of trillion dollar deficits. But they do want a fully nationalized health care, and thus they will pass enough in taxes to pay for it. If they are going to do it, this is their one chance, as Republicans are likely to do better in the 2010 elections and get enough votes to push back any real tax increases other than letting the Bush tax cuts expire.

As outlined last week, it will be a combination of a VAT and taxes on health benefits. There is no other real source for the massive amounts of money needed. It will be a disguised tax on the middle class.

I do not believe they will want to wait until 2010 and an election year. Passing such a huge tax increase is very problematical from the standpoint of a growing economy. It will almost surely put us back into a recession. But it will not be a train wreck. As investors and businesses, we can survive and figure out how to deal with the realities of the new, new normal economy. It will be one in which growth is lower than what we are used to and unemployment is higher. Think Europe.

It will be difficult to ever go back. Perhaps new technologies and industries can develop and help get us back on a path to higher growth later in the next decade. We did survive the 70s, after all.

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. Contact John at John@FrontlineThoughts.com.

Disclaimer
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.