For the United States, John Mauldin says that we must open the borders to allow more people to immigrate. Unfortunately, the policy conflict between opening the borders and maintaining a war against terrorism is glaringly obvious.

More immigration can create more revenue for Social Security and Medicare. Obviously, the U.S. Government is allowing immigrants to enter the U.S.  However, it seems a deceptive way to make amends for the unsustainable promises made by our leaders.

Link: A Conversation with John – Thoughts from the Frontline Weekly Newsletter – John Mauldin

Demographic changes are predictable: we know how many people are going to be here in forty years because they’re already born. We know how many forty-year-olds we’ll have in forty years because they’re already born. So, we can see these changes coming at us.

If you’re Japan, you’re walking into a demographic nightmare. Russia is a demographic train wreck. And it’s not going to be but a few decades, in the grand scheme of things, until Iran will have more people than Russia. That’s got to be fit into your equations. You’ve got to look at these large, broad changes that are happening.

In the US, we’re going to be running into the freight train of Medicare and Social Security. There’s just not any way to get around it. We’re going to have to make tough generational decisions about how to handle that. And how we handle it is going to have enormous implications for our economy. If we handle it the way it’s likely to be handled – which is by raising taxes – then we have said we’re making a decision, conscious or not, that we’re going to become Europe. That means high residual unemployment and difficult, slower growth of individual opportunities.

There are other large changes when you talk about the demographic issues. Europe would have to take massive numbers of immigrants in order to support their system. They’re just not prepared for that. Neither is Japan. The US is blessed with a world population that wants to come here and are not very culturally different from us – especially the Hispanic populations. We’re going to need those immigrants. I think that one of the most economically suicidal things we’re doing today is trying to figure out how to close the borders. We need to be doing the opposite. We need to figure out how to open the borders. It needs to be a more rational policy than we have now. Again, you have to put those things into the financial equations.

Link: The Elements of Deflation - John Mauldin’s Thoughts from the Frontline

Deflation is a major economic game changer…. We face the deflation of the Depression era, and central bankers of the world are united in opposition….  If we don’t have a problem with inflation in the future, we are going to have far worse problems to deal with.

Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. That is, if the central bank prints too much money, inflation will ensue. And that is true, up to a point. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal. The pieces of the puzzle can change shape. When the elements of deflation combine in the right order, the central bank can print a boatload of money without bringing about inflation. And we may now be watching that combination come about.

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For instance, inflation always seems to be accompanied by higher wages. That makes sense, as workers want more to justify their labor if prices are rising. But today we have wages dropping over time. Yes, even though wages went up this month by 0.3%, it was all due to a one-time increase in the minimum wage. Without that government mandate wages would have been flat or falling. Look for wages to fall over the rest of the year.

There are no pricing pressures on wages. Throughout the last decade, the number of strikes involving a thousand or more workers averaged about 22 (but averaged over 300 annually from the time they started tracking this item). We are on target this year for 2, an amazing 62-year low. Indeed, we have the opposite happening. Workers are seeing jobs lost, wages being slashed, hours being cut back, and a loss of benefits, as businesses react with cost cuts to the lack of demand.

While it is technically possible to have inflation with rising unemployment and falling wages, it would take a great deal of monetization to achieve….

Want to know where wages are rising? Think federal government workers. The gap between civilian and government workers was less than $13,000 nine years ago, but now is almost $30,000. Inflation has been 24%, but government wages are up 55%. According to a recent release from Rasmussen Reports, a government job remains “the top employment choice in today’s economic environment.”

States, counties, and cities are having to make deep cuts, in both jobs and programs. Today’s Wall Street Journal talks about the cuts in state after state. States cannot print money like the US can, so at some point they have to either raise taxes or cut spending to balance their budgets. Raising taxes just makes it less profitable for businesses to remain in your state. There is a very high correlation with high state taxes and unemployment.

…income taxes are falling. Sales tax receipts are down. At some point voters are going to demand that their federal government show some of the same restraint that households, cities, and counties are being forced into. My bet is that next year raises for government workers, even those in unions, will come under attack. They won’t be cut, but watch as political backlash builds.

Here’s the kicker. Expect to see a big push for another large stimulus package next spring (and maybe sooner), as the effects of the current one wear off. The government wants to bring back demand by getting consumers to spend again. And you can count on unemployment benefits being extended. A tax holiday on Social Security taxes below a certain income? In the short run they can do it, but at a long-run cost.

It is going to be hard for a Democratic administration to not push for another large stimulus. Classic Keynesian thinking wants both for the government to run large deficits and for the central bank to print more money. Remember, last year I said that the Fed would print a lot more money than they are talking about in the current plans. They are going to have the cover to do so, because deflation is going to be seen as the problem.

…I have had a lot of questions on gold recently. “Isn’t gold telling us that inflation is coming back?” The answer is no. Since the early ’80s the correlation between gold and inflation has dropped to zero. Gold has had very little to say in the last 30 years about inflation.

But what it may be saying is that paper currencies are a problem. Gold is going up not only in dollar terms, but in euros, pounds, yen, and more. My view is that gold should be seen as a neutral currency. The dollar is the worst currency in the world, except for all the others. Is it possible the Fed will not respond and print more money next year? Sure. And the dollar could rise as deflation kicks in. The only time we saw the purchasing power of the dollar rise in a sustained manner was during deflation, in the last century.

The race is not always to the swiftest or the fight to the strongest, but that’s the way to bet. And right now, my bet is the Fed will print money to fight a double-dip recession and deflation. And gold would be one way to play that bet.