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Budget Battle Will Likely Lead to Crisis and Recession, Says John Mauldin

Fin - Daily Ticker - US

UPDATE: A White House meeting between President Obama, Speaker of the House John Boehner and Senate Majority Leader Harry Reid today failed to produce any budget compromise, making a government shutdown more likely.

Rep. Boehner refuses to accept anything less than the $61 billion in cuts outlined in the House budget bill. Democrats draw the line at $33 billion. The Speaker is, however, now offering a stop gap bill to cut spending immediately by as much as $12 billion to avert a shutdown.

"The sad thing is," says John Mauldin CEO of Millennium Advisors and author of Endgame, "it's 5 percent of what we have to cut." Mauldin, tells Henry Blodget in this interview, if they are to balance the budget, the government needs to raise taxes and cut $150 billion per year or $1.2 trillion over the next five or six years. "You can't cut it all at once, you cut it all at once you throw us into a depression," he warns.

To that point, House Budget Committee Chairman Paul Ryan, (R-WI), today unveiled a plan to plan to slash $6.2 trillion from the budget over the next ten years. Ryan is calling for a Medicare overhaul and reductions in Medicaid spending. Making massive spending cuts to entitlement programs will be a tough sell for politicians and a tough pill to swallow for Americans, but they may also prove unavoidable, notes Mauldin.

"We generally only accept change in the face of necessity and we only see necessity in the face of a crisis," says Mauldin. "The odds are we'll have to have a crisis" that might lead to a long-lasting recession.

Mauldin is hopeful lawmakers will eventually get it right and compromise after the 2012 election. If they don't, he warns, the bond market might force them to the bargaining table. If that happens you can expect 3-4 years of recession. "One way or another through our proactive work or because the markets force us to, we get through this crisis."