David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart.
How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence.
I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved — or morphed — a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the “T-bill standard” or the “federal debt standard.” And the other central banks of the emerging mercantilist Asian economies — Japan, Korea, and now, especially, the People’s Printing Press of China — have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But because all the bonds on the margin were being absorbed by the central banks, we got away for 20 or 20 five years with “deficits without tears.”
And he’s just getting started. The only thing more impressive than Stockman’s CV of insider roles in public economics and private finance is his talent for colourful metaphor.
On The Fed
As far as I’m concerned, Bernanke is the monetary Darth Vader. He has destroyed the bond market. Because fundamentally, in a healthy capitalist system, the interest rate in the money market and in the longer-term capital market is the price of money and the price of capital. And if the pricing system isn’t working, if it’s been totally crushed, disabled, manipulated, rigged, medicated, everything that the Fed has done with QE1, QE2, zero interest rates, Operation Twist – all the rest of this insanity – then we’ve destroyed the ability of the capital market to function and we’re giving false signals in every direction.
On The Economy
We effectively had, over the last 30 years, a national LBO – a leveraged buyout of the whole economy. And this is important because if you look at the difference between our historic leverage ratio [1.6 times debt to GDP], which seemed to be compatible with a stable and usually growing economy, notwithstanding periods, obviously, of boom and bust. But at 1.6 times, we would have about $22 trillion of debt — public and private — on the US economy today. We actually have $52 at 3.6 times. So the extra two turns have put on the economy — households, business, government, we can go through the different sectors — roughly $30 trillion in debt that’s being lugged around by the US economy as it struggles to stay even, to say nothing of recovery today. And until that massive over-leveraging is worked down and reduced and liquidated, which will take years and years in a painful process, we’re not going to get back on track as an economy.
On Our Political Leadership
It’s hard enough for politicians to face the music, to dispense bad news, to make hard choices, allocate pain to constituencies whether it’s spending cut or tax increase. But when the Fed destroys the bond market, which is the benchmark for the whole capital market, and tells the Congress that you can borrow money for two years at eighteen basis points, which is — as far as Washington’s concerned — that’s a rounding error. It’s the same as free.
When you’re giving that kind of signal, then there is no incentive, there’s no motivation for people to walk the plank and face down this monster of a fiscal deficit and imbalance that we have.
Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are.
On the Banks
The banking system has been saved on the back of the savers of the United States. We have totally destroyed any incentive for thrift, for deferred gratification. The Fed has become more Keynesian than Keynes.
Now, the fact is, if you were going to bail out the banking system with this kind of transfer — I calculate it at $300 or $400 billion a year — the suppression of interest rates on depositors, on the $7 trillion or so of deposit base that we have, is at least $300 or $400 billion a year. And that’s the same thing as taxing the public by $300 or $400 billion and redistributing it to banks based on the distribution of their deposit base. That wouldn’t get one vote. OK, in other words, what I’m saying is if it were done in a proper way as a fiscal transfer put before the democracy to review and vote up or down, it would be voted down overwhelmingly. It would be shouted down. It would not even see the light of day out of committee, to say nothing of the floor of the House or Senate.
On Peak Oil
I think that is being totally ignored. It is another one of the headwinds or constraints that we’re facing along with the demographic time bomb of this huge generation retiring. And if you look at all of these, there’s no reason to expect much economic growth for the next 10 or 20 years, even if you had a healthy monetary and fiscal situation. But given the situation that we’ve described and given the massive excess private leverage that was built up in the 30-year debt spree, we have sort of added insult to injury. We have maybe an inevitable question of the rising real cost of the BTU being added to the demographic question being added to the totally distorted world labour market that the central banks have produced, which is another whole topic. But when you put all those together, the headwinds are truly frightening.
Gold is becoming the de facto money. We’re going to be back to a gold standard, one way or another, through the back door in only a matter of time, simply because the central banks are dominated by the ritual incantation of dying Keynesian theory. And therefore, I would say that’s what someone needs to do to protect themselves.
The above are small samples from this wide-ranging and deeply penetrating interview between Chris and David. Among other territory, the two get into David’s view of the stock, bond, and commodity markets, and what action concerned individuals should be considering at this time.
Click here to listen to Chris’ interview with David Stockman (runtime 47m:17s):
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