David Stockman: Blame the Fed!

David Stockman, former U.S. 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 twenty or twenty-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 colorful 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 thirty 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, not withstanding periods, obviously, of boom and bust. But at 1.6 times, we would have about $22 trillion of debt -- public and private -- on the U.S. 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 U.S. 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. Okay, 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 ten or twenty 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 thirty-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 labor market that the central banks have produced, which is another whole topic. But when you put all those together, the headwinds are truly frightening

On Gold

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 the play button below to listen to Chris' interview with David Stockman (runtime 47m:17s):


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Or click here to read the full transcript.

Mr. Stockman is the founding partner of Heartland Industrial Partners. He was formerly a senior managing director of The Blackstone Group. Prior to joining Blackstone, Mr. Stockman was a managing director at Salomon Brothers, Inc.

He served as the director of the Office of Management and Budget in the Reagan administration and was the youngest Cabinet member of the twentieth century. From 1976 to 1981, Mr. Stockman represented Michigan in the House of Representatives.

He is also the author of the book "Triumph of Politics: The Inside Story of the Reagan Revolution".


Our series of podcast interviews with notable minds includes:


This is a companion discussion topic for the original entry at https://peakprosperity.com/david-stockman-blame-the-fed-2/

Hard to believe this guy was ever in government.  He must have felt like the only adult in a daycare center.

I remember Stockman well from his Reagan days.  I thought of him then as the devil incarnate, as the architect of "trickle down" economics, just another project to enrich the rich.  He seems to have learned something and left the Republican party behind since then.  

Mr. Martenson.

I have always liked David Stockman. He appears to be in touch, As for your interview, best one yet, First Class. You appear to have lost weight, but you are obviously still growing. Keep up the good work.


From en.wikipedia.org/wiki/David_Stockman#Office_of_Management_and_Budget
After Stockman’s first year at OMB and after "being taken to the woodshed by the president" due to his candor with Atlantic Monthly’s William Greider, Stockman became inspired with the projected trend of increasingly large federal deficits and the rapidly expanding national debt. On 1 August 1985, he resigned OMB and later wrote a memoir of his experience in the Reagan Administration titled The Triumph of Politics: Why the Reagan Revolution Failed (ISBN 0060155604), in which he specifically criticized the failure of congressional Republicans to endorse a reduction of government spending as necessary offsets to the large tax decreases, in order to avoid the creation of large deficits and an increasing national debt.

kugs cheese
I should have clarified that most of what I’ve heard from Stockman in recent years I agree with, and Chris’s interview was great.  But, since I trace much of our economic disaster to the Nixon and Reagan administrations, I’m a little hesitant to trust someone who was once so disastrously wrong.

I haven’t read his book, but I long ago concluded the Reagan revolution won.  He got what he wanted.  Vastly increased military spending and the deficits be damned.  Spending and borrowing got its start under that administration.  The spin that it was the Congressional Republicans who betrayed Reagan seems a little revisionist.


Mr. Stockman,
Thank you for participating in this interview with Chris.  I found it very interesting.

You mentioned that you were willing to talk further about dismantling the war machine.  I hope Chris will invite you back for that discussion.  It would be most interesting.

Many thanks … dons

Awesome interview with somebody who was once as “insider” as it gets. Thanks!

the interview was going great–historical  til it got political.then it lost credibility , well facts got lost as opinion overshadowed them.opinion becoming current election  garble
neither side has the answer so let’s let the pendulum swing a few more times and kickthe can down the road sort of idea–it keeps the public interested and distracted

leave politics out please…as you have mostly done…politics are a red flag to me as i see them as a very big part of the great lie that has been stringing us along since 1929 or earlier. leverage anyone?

the idea of the 2 party system is the 2 parent system…good cop bad cop…good parent bad parent…it separates the public into 3 groups…for and against and independent…with for and against flipping as needed.

ok that is fine…it means that if the public can be divided into 3 groups , there can never be a majority to revolt. or agree to anything, and always an excuse or alibi.or whatever you want as you need it…liars flexibilty

those of you on ss think of this…more was given to you…entitlement under bush2 with prescription drug benefit and more were killed under obama than bush in wars against arabs…just 2 quick examples that the opposite happens under the left and right administrations…checkit  out

but no, this is about the financial system and a couple of other systerm as we knewn them are gone and it’s time for us to move and and evolve…not argue.


we need to unite as intelligent people , not divide

we are going to need everything we can all pool to get thru this

politics are a red flag



Darth Witch Doctor!

Mr Stockman is obviously intelligent and articulate.
He is comfortable discussing economics, but I am more a physical reality guy. When asked to discuss exponential depletion of natural resources my understanding of his response was to emphasise the need to let a free market fix the problem.

Without a miracle breakthrough such as Rossi’s nuclear device to enable us to obtain ever lower grade resources with plenty of energy to remove the "other stuff"," the market" is just another useless meme, a broken and illigitimate model of reality.

And then there are the results of my favourite model. "Limits to Growth. The 2000 update."

Doubling of the resource base causes pollution to go asymptotic and a higher peak in population and a steeper dropoff on the downside.

Mr Stockman is right. There is no free lunch.

Your questions were very sharp and Stockman’s answers were like knock-out punches on what the Status Quo really is.
I cannot believe the military industrial complex would want to pass an increased budget after all the debt ceiling fiasco we just went through.

Paralysis and ‘twilight zone’ are the right words to describe this.


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 ten or twenty years
Why do people, even those "in the know" keep saying this?  What makes any of them think there will be growth any time for the next one or two hundred years when population will crash and fewer people will be consuming ever fewer goods?

You really need to index back to LBJ.   Getting into Vietnam in a big way, from wikipedia "It was Johnson who began America’s direct involvement in the ground war in Vietnam. By 1968, over 550,000 American soldiers were inside Vietnam; in 1967 and 1968 they were being killed at the rate of over 1,000 a month."

The war machine was locked in place after this, this was the sign.   All presidents since then have been in sense a puppet only.   Just look at how a naive Obama back-tracked on his campaign platform.

All we have are the free markets to signal where resources should go; nothing is better, cetainly not Putin.   Things become easier to understand once one accepts man is an animal in nature.

The free market for resources is highly distorted by many factors. First and foremost, resource companies (mining, oil, and so on) pay nothing for the environmental damage done by the production or use of their products. If every gallon of gas, plastic bottle, brick, or DVD player’s price included the cost of repairing the environmental damage done by it’s production pricing of everything would be entirely different. Wind turbines would probably be a far better deal than gasoline when costed out over 10 years. Imagine for example if BP had to pay to bring the ocean back to pristine condition after it’s recent oil spill and add that cost to every gallon of gas - that alone would bring the cost of gasoline to god knows what. Imagine if the Japanese nuclear power company had to pay for all of the damage they did in full. Nuclear power in Japan would have a cost that would be so high that it would be unfeasible to continue. Instead, because corporations never wind up paying for the damage they do (they hire lawyers, and pay off politicians instead), the free market is completely distorted. Things that have a high cost (such as the Fukushima reactor, or offshore drilling) produce products at a very low cost, whilst things that actually have a much lower total cost have are unaffordable.This type of distortion of the free market mean that political influence drives pricing, and drives what in the long run are far cheaper products out of the market.

Good first post tjlupton.
Welcome to CM

[quote=tjlupton]This type of distortion of the free market mean that political influence drives pricing, and drives what in the long run are far cheaper products out of the market.
Is there an implicit assumption that in a free market, libertarian society - the people running private corporations and the government are totally incorruptible?
Because only with such an assumption I can see that such a society can peacefully co-exist with the earth. And this assumption that people are incorruptible is so flawed.

tjlupton,Welcome to CM.com. Baptism by fire is the most sincere welcome mat around here.

The free market for resources is highly distorted by many factors. First and foremost, resource companies (mining, oil, and so on) pay nothing for the environmental damage done by the production or use of their products. If every gallon of gas, plastic bottle, brick, or DVD player’s price included the cost of repairing the environmental damage done by it’s production pricing of everything would be entirely different. [/quote]
Should the producer of the product be responsible for its entire consumption journey? Where does my responsibility begin and end?

There are shortcomings with wind and photovoltaic as well. Are you willing to only use electricity when the wind blows or the sun shines? If not, you’ll have to invest in backup systems and/or batteries. Backup systems such as hydroelectric or gas/oil/coal fired generators need quite a bit of time to ramp up or down. Given the fickle nature of wind and clouds, excess energy needs to be generated to insure sufficient supply. Eventhough the wind/solar generators get paid for what they produce (at a subsidized rate,) only a fraction actually gets consumed.

I’m not excusing BP’s actions regarding the massive spill. From my understanding, it was negligence and shortcutting that were major contributors to the events that lead up to the disaster. Should we punish all producers because of the potential damage they could cause? Should we bankrupt BP by requiring them to return the Gulf to pristine conditions? Was it really pristine before the accident?
You can’t build anything that will not eventually fail. The trick is to factor in the likelihood of catastrophic events over the project’s life and then build accordingly. That is exceedingly difficult. It is easy to play Monday morning quarterback and say that a higher engineering standard should have been followed. It is much harder to convince users to pay additional costs before the catastrophe to build to this elevated standard. Either way, the locals pay.

I won’t argue that BP or TEPCO paid all the costs associated with the disasters. They did pay some of the costs, as have the locals who benefitted from the economic activity generated by these facilities. Was the cost fairly distributed according to benefit received - highly unlikely.

I challenge you to tell me the entire cost of anything. (I know that I can’t.) There are too many interdependent variables to determine what is the "cheapest" product, let alone the best one. It is up to you and me to decide which products are the best for ourselves. If you don’t approve of BP or TEPCO, do your best to avoid supporting them.