Do you know John Mauldin? More than 1 million readers of his weekly e-letter, "Thoughts From the Frontline," do. And thanks to his second-place showing in last month's Fool Awards 2007 contest, where he came within a whisker of upsetting Warren Buffett in the race to be named "investor of the year," tens of thousands of Fools know John Mauldin, too.

Fool contributor Rich Smith had the opportunity to speak with the president of Millennium Wave Advisors. Let's listen in as John waxes poetic on dollar devaluation, the subprime crisis, the 2008 presidential race, and much, much more.

Rich Smith : John, the last time we spoke, in the summer of 2006, you warned us to expect a recession in 2007. In your 2008 forecast edition of "Thoughts From the Frontline," you said that recession has arrived. And it's not just you. Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) both agree, and Goldman Sachs (NYSE: GS) is predicting we'll see one this year. Happy to be proved right?

John Mauldin: "Happy" isn't quite the word I would use. But there's no doubt in my mind we are in a recession. Just the other day, you heard AT&T (NYSE: T) warning that its customers are paying their phone bills late. Phone bills! That's an essential service, and consumers are cutting back on that? This isn't just a slowdown in discretionary spending. This is people cutting back on their day-to-day expenses. So yes, I'd say we're in a recession now.

That said, recessions are a necessary, unavoidable mechanism. To hearken back to Alan Greenspan, they are a rational response to irrational exuberance.

Basically, we here in the U.S. must restructure the savings cycle. The reason we have a trade deficit isn't oil. It isn't China playing with its currency. It isn't even a strong dollar -- hardly! The reason we have a trade deficit is because Americans just don't save enough. At the risk of oversimplifying the solution, if we saved more, and bought less, then the trade deficit would go away.

Ideally, the recession is going to give us a push in this direction. And it's important to remember that, barring a major policy misstep, recession will not become a permanent feature of the economy. While we cannot fix the housing and credit bubbles in a quarter, we will get them fixed. I don't think the recession will last more than a year.

Smith: In the past, you placed great reliance on the "yield curve" as a predictor of recession. Does it have any predictive value about emergence from recessions?

Mauldin: No. An inverted yield curve can forecast a recession, but I've seen no research that says the yield curve has any predictive value about emergence from a recession.

Political musings
Smith: You say policy missteps could worsen the recession. What kinds of missteps?

Mauldin: There are any number of mistakes we could make. Unfortunately, several of our candidates for president seem intent on incorporating them into their campaign platforms. On the Democratic side, the idea of repealing the Bush tax cuts in the middle of a recession is lunacy, sheer lunacy. I mean, add a $1.9 trillion tax hike to the housing crisis, the subprime-mortgage debacle, and record-high oil prices? The high price of oil acts as a significant tax on consumers already, and raising taxes at a time like this would delay the economy's recovery by a another year or two.

On the Republican side, I'm encouraged to see McCain doing well, but I'm not a Huckabee fan. The man's an economic disaster and completely unelectable -- the only man that Obama could beat. I'm not a fair-tax fan, either. People would evade it. It is nice in theory, but its practicality is bad. I am a major fan of the flat tax. We should follow the lead of all the ex-Communist countries that are rapidly adopting a flat tax.

Gold bugs, beware!
Smith:  So is now the time to buy gold and head for the hills? The gold bugs seem to have been pretty prescient here.

Mauldin: Well, sure, but you have to remember that they say the same thing every year. The gold folks have been right the last four years, but they were wrong the previous 16. The way I look at it, gold is a form of currency. The dollar is weak right now, and so relative to the weak dollar, gold is rising. Long-term, I think it will hit $1,000, but I can't say when.

Smith: What about other currencies?

Mauldin: I've made some predictions on the fiat currencies as well. For instance, it wasn't so long ago that I was up in Canada telling people that the loonie would reach parity with the dollar. A couple of years back, I would say that, and people just couldn't believe it. The Canadians would just giggle -- but no one's giggling now. They like the extra buying power, but this is really hurting their exports. Similarly with the euro. I said it would hit $1.50 back when it was at $0.88 to the dollar, and people thought I was crazy -- but I it did crest pretty close to $1.50.

As for the dollar, I think we'll find the long-term bottom sometime this year, and I wouldn't be surprised to see the dollar gain 10% against the euro in 2008. Sometime within the next decade, the euro will be back down to parity with the dollar.

The sick man is Europe
Mauldin: Ultimately, the reason is that Europe is simply economically weaker than the U.S., and the euro is a flawed currency. What do I mean by that? There are really two Europes: The one Donald Rumsfeld called "Old Europe" -- France, Germany, Italy, and so on, and "New Europe," Eastern Europe. I'm bullish on the Eastern countries, and really, on emerging markets in general, but rather bearish on the West.

The reason is that Europe has made monstrous commitments to its pensions, social programs, and so on. They already have high taxes. They're going to have to radically restructure their budgets in order to pay for all this stuff, or reduce their obligations. If they try to pay for it, then the drain on spending and the anti-growth taxes are going to put enormous pressure on European growth. That's going to pressure the euro in turn.

Smith: Back up a moment. You say "emerging markets in general." What else do you like, aside from Eastern Europe?

Our bumpy world
Mauldin: Really, everything. Within the next 10 years, you're going to see cheap, ubiquitous, fast broadband Internet capacity in every major city around the world. When I say "fast," I'm talking 50 to 100 megabits per second. This is going to change the nature of business and entrepreneurship and give those guys the ability to participate in the world economy and compete across borders.

Smith: So you're a "world is flat" guy?

Mauldin: Well, the world is actually still pretty bumpy -- but it's getting ready to get hit by a sledgehammer. The "wireless mesh" technologies I'm talking about are going to give you fast, wireless broadband access for about 2% of the cost of running fiber to the home. And the change is coming fast. They're going to roll out twice as fast as cell phones did.

This is going to be a completely disruptive event in the corporate world, displacing firms like AT&T, because the speeds will be radically better. You're going to be able to watch a movie from Netflix (Nasdaq: NFLX) at the click of a button.

Smith: Let's talk a bit about dollar devaluation. If dollars are worth less today than yesterday, it stands to reason you'd need more of them to buy a commodity like oil. What has me stumped is why we're experiencing falling prices for real estate when this, like oil, is a hard asset. Why aren't real estate prices rising as the dollar falls?

Mauldin: The difference hinges on supply and demand. Oil rises in price for two reasons. One, as you say, the value of the dollar is falling. But there's also increasing demand supporting the price of oil. If we had a surplus of oil in the world, the price per barrel would decline to probably $60 or $70. It's the fact that supply and demand are roughly balanced, combined with dollar devaluation, that accounts for $100 oil.

Housing is a little different. Remember that during the boom from 1996 to 2006, we built 2 million homes in excess of long-term demand, so demand and supply are out of balance. In essence, we have a housing glut that works to pull down prices despite the weakening dollar.

Incidentally, this speaks to the insanity of the idea of trying to deport illegal aliens in America. Forget all the other considerations for a moment. Sending back 12 million immigrants would add another 3 or 4 million apartments to the housing supply.

You want to see a housing crash? Try tripling the number of surplus houses on the market. If we do that, we'll turn what should have been a transitory recession into an out-and-out depression ...

Read Part 2 of Rich's interview with John Mauldin!

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Fool contributor Rich Smith does not own shares of any companies mentioned in this article. The Motley Fool has a disclosure policy.