David Stockman: The Global Economy Has Entered The Crack-Up Phase

Few people understand the global economy and its (mis)management better than David Stockman -- former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier.

David is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by the following 4 developments:

  • Increasingly desperate moves by the world's central banks
  • Increased market volatility and losses
  • Deflation in industrial and commodity prices
  • Decreasing demand due to Peak Debt

As the crack-up phase gains momentum, he predicts an increasing number of "financial breaks" that will add to the unpredictability and instability of the environment for investors. Even 'dancing close to the door' sounds excessively risky at this point.

We’re in the crack-up phase. I think there are four big characteristics of that which are going to shape the way the economy and the markets unfold as we go forward.

You’re going to see increasing desperation and extreme central bank financial repression because they have gotten themselves painted so deep into the corner that they're lost and desperate. Almost week by week, we have another central bank – this week, it was Sweden – lowering their money market rates into negative territory. The Swiss Bank is already there, the Denmark Bank is there, the ECB is there on the deposit rate, the Bank of Japan’s there. All of the central banks of the world now are desperately driving interest rates into negative territory. I believe that they’re lost; they're in a race to the bottom whether they acknowledge it or not. The central bank of China can’t sit still much longer when the reminbi has appreciated something like 30% against the Japanese yet because of the massive bubble of monetary expansion that’s being created there. So that’s the first thing going on. Central banks out of control in a race to the bottom, sliding by the seat of their pants, making up really incoherent theories as they go. 

The second thing is increasing market disorder and volatility. In the last three months, the stock market has behaved like a drunken sailor. But it’s really just a bunch of robots and day traders that have traded chart points until somebody can figure out what is happening directionally in the world. It has nothing to do with information or incoming data about the real world. We have today the 10-year German bond trading at 29.5 basis points. Well, the German economy’s been reasonably strong, fueling the Chinese boom. That export boom is over. The Chinese economy is faltering. Germany is going to have its own problems. But clearly, 29 basis points on a 10-year is irrational, even in the case of Germany, to say nothing of the 160 available today on the 10-year for Spain and Italy. Both of those countries are in deep, deep fiscal decline. There is no obvious way for them to dig out of the debt trap that they’re in. It’s going to get worse over time. There’s huge risk in those bonds, especially because there’s no guarantee that the EU will remain intact or the euro will survive. Why in the world would anybody in their right mind be owning Italian debt at 160 other than the fact that they’re front-running the massive purchases that Draghi has promised and the Germans have acquiesced to over the next year or two. But that only kicks the can down the road. One of these days, the central banks are going to falter and the market is going to reset violently to prices that reflect the true risk on all this sovereign debt and the pretty cloudy outlook that’s ahead for the world market.

We now have something like four trillion worth of sovereign debt spread over Japanese issues, the major European countries that are trading at negative yields. Obviously, that is one, irrational and second, completely unsustainable. And yet, it’s another characteristic of what I call these disorderly markets. Investment is now coming home to roost. It will be driving a huge deflation of commodity and industrial prices worldwide. You can see that in iron ore, now barely holding $60 from a peak of $200. Obviously, it’s seen in the whole oil patch. Look at the Baltic Dry Index. That is a measure, one, of faltering demand for shipments and, two, massive overbuilding of bulk carrier capacity as a result of this central bank driven boom that we’ve had in the last 10 to 20 years. So that is going to be ripping through the financial system, the global economy, in ways that we’ve never before experienced. And so therefore, in ways that are hard to predict what all, you know, the ramifications and cascading effects will be. But clearly, it’s something that we haven’t seen in modern times or ever before – the degree of over investment, excess capacity, and everything from iron ore mines to dry vault carriers, aluminum plants, steel mills, and on down the line.

And then, finally, clearly, demand has run smack up against peak debt -- I think that’s the right word for it. We had a tremendous study come out in the last week or so from McKinsey, who do a pretty good job of trying to calculate, track and total up the amount of credit outstanding, public and private, in the world. We’re now at the $200 Trillion threshold. That’s up from only about $140 Trillion at the time of the crisis. So we’ve had a $60 Trillion expansion worldwide of debt just since 2008. During that same period, though, the GDP of the world saw a little more than $15 trillion from $55 or mid-$50s, roughly, to $70 Trillion. So we’ve generated, because of central bank money printing and all of this unprecedented monetary stimulus, we’ve generated something like $60 Trillion of new debt in the world and have barely gotten $15-17 Trillion of new GDP for all of that effort. And I think that is a measure of why the fundamental era is changing. That the boom is over and the crackup is under way when you see that kind of minimal yield from the vast amount of new debt that has been generated.

Now I’d only wrap this up by calling attention to the fact that within that global total of $200 Trillion, the numbers from China are even more startling. At the time of the crisis, let’s go back to 2000, China had $2 Trillion of credit outstanding. It’s now $28 Trillion. So we’ve had just massive 14X growth in 14 years. There’s nothing like that in recorded history, nor is there any plausible reason to believe that an economy, which is basically under a command-and-control system that is run from the top down to the party cadres, could possibly create $26 Trillion in new debt in that period of time without massive inefficiencies in waste and mistakes everywhere within the systems, especially since they have no markets. They have no feedback mechanisms. It all comes cascading down from the top and everybody lies to the next party above them. And I think the system is irrationally out of control.

In any event, my point was that at the time of the 2008 crisis, China had allegedly – if you believe their numbers, which no one really should – but as reported, they had $5 Trillion worth of GDP. It’s now $10. So they’ve gained $5 Trillion of GDP. Their debt at the time of the crisis was $7 Trillion, now it’s $28. So the debt is up more than $20 Trillion while the GDP is up just $5 Trillion. These are extreme unsustainable deformations, if I can use that word, that just scream out, “Danger ahead. Mayhem has happened.” And the unwinding of this and the resolution of this is not going to be pretty.

Click the play button below to listen to Chris' interview with David Stockman (54m:29s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/david-stockman-the-global-economy-has-entered-the-crack-up-phase/

This was a very sobering podcast.  The first third or so was the standard review of the current state of the economy, etc.  The middle third, where Stockman goes into detail about the four steps and you see how closely current events are linked to them, was disturbing.  I thoroughly enjoyed the last section where Chris and Stockman talked about the situation in Europe, specifically in Greece.  I have been following, from a distance, the emergence of Greek's "Golden Dawn" party for a couple of years.  Not exactly a nice group of people, and it is alarming some of their ideas even see the light of day.  Very good, detailed podcast.

It is amazing how long these Ponzi scheme things can go on when you have a printing press for money unlike Bernie Madoff who eventually came to an end. At these low rates it is like free money so until rates start to climb it is cheap to run up debts like Japan has. If rates returned to the norms all of it would fall apart and the US would have interest payments resembling the military budget. Printing money does not reduce rates anymore but actually raises them as people buy bonds in a stronger currency to avoid destruction of their money. Janet Yellen seems to recognize this and QE may be over for a while in the USA which will restore some kind of normal behavior by investors who fled the dollar into many unproductive investments like oil, gold and commodities etc which are now unnecessary with a stable dollar. So many distortions by investors trying to preserve capital instead of investing in productive assets?

I have been reading about Central Banks buying gold. Does anyone think they could be doing that to at some point reset PM prices to back to some degree the public debt we have? Sounds to simple to me but it sure sounds like they are using paper money to accumulate hard assets. You know they aren't going to take the right way out.
I'm getting to the point of thinking us small people don't have a chance.


Chris, I did want to say thank you. With this guys credentials it is hard for people to dismiss what he says. The more credible people you have talking, the easier it is to convince others of what is coming.

I remember about a year ago when you guys were contemplating a new direction for PP and sweating the move.  As far as I  can tell, you've exceeded expectations in content and credibility.  It appears you've also made inroads on expanding your base too although likely not as far along as needed.  I recommend PP to all of my colleagues, friends and family.
Keep it coming!

My favorite comment: Keynesians don't have balance sheets.  (A balance sheet is where you keep track of what you own, and who you owe - assets & liabilities).
An econo-geeky joke, but sure to make me laugh.

I also really enjoyed the stats that Stockman pulled from the recent McKinsey report: 57 trillion in new debt resulting in 15 trillion in new GDP.


Debt writedowns are incredibly deflationary.  Someone - a holder of some asset, obligation (pension, insurance policy, etc), or deposit - must take a loss if a writedown occurs.

If debts are (roughly) 2x sustainable levels, then that means a 50% loss on all financial assets (bonds, deposits, pensions, etc) in real terms.  It also may mean a 50% loss on all assets that have been supported by debt money.

Makes you want to pull cash out of the bank, doesn't it?

…this is Chris Martenson at his very best and is why I still pay to be on this site. One of the very best Podcasts in years. Thank you. This is you at your core and following David too just made this magic to me.

Here's an idea.  Let interest rates rise to 1 or 2 % above inflation, real inflation that is.  Then retired people like myself would definitely spend some of that money back into the economy, instead of buying junk bonds.
If I were receiving the $60,000 or $70,000 in annual interest that my retirement plan was based on and that I was lead to believe I could safely expect, my spending pattern would be entirely different.  No doubt about it.

I am sorry if that would result in massive interest payments on accumulated debt.  But, hey, I didn't carelessly accumulate debt.  I saved money, so that I could lend it to have an income in retirement.

I feel like I'm in a poker game where the dealer can set the rules to win after the last cards are drawn.  Guess who wins every hand.

StopTheLie.com News update 02-16-2015 Wall Street Pays Bankers to Work in Government Source: NewRepublic.com --These payments are routine at major banks, several of which have explicit policies, found in filings with the SEC, outlining automatic awards for executives who rotate into government. Goldman Sachs offers “a lump sum cash payment” for government service, for example. –“It fuels the revolving door between banks and the government,” said Michael Smallberg, an investigator for the Project On Government Oversight (POGO), whose 2013 report detailed these types of compensation agreements. The average executive branch salary is substantially less than these millions in awards, so the bonuses effectively supplement the lower pay, raising questions about who the government officials actually work for. Read full article at: http://www.newrepublic.com/article/120967/wall-street-pays-bankers-work-government-and-wants-it-secret

“I strongly support and continue to press for greater congressional oversight of the Fed’s regulatory and supervisory responsibilities, and I believe the Fed’s balance sheet should be regularly audited – which the law already requires,” Ms. Warren said in an emailed statement. “But I oppose the current version of this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy.”

--  Sen. Warren
So what's wrong with this?  Sounds like more sanity from someone towing a very different line.

Debt snow what's the difference…https://www.bostonherald.com/news_opinion/local_coverage/2015/02/boston_getting_soaked_on_snow_melter_rentals

US Constitution–Article I, Section 8 gives the US Congress the authority to coin money and regulate the value of money, etc.  One of the original 'arguments' for the Fed's creation   in 1914 was to give Congress a non-political way to fulfill its Section 8 responsibility.  What resulted was the equivalent of giving the fox responsibility to feed the chickens. It would behoove us to force Congress to take back that responsibility and exercise more direct control.  After the Founders experience with the Continental fiat money issue going to zero value I bet they were deliberate when they used the word 'coin' and not 'print'. 
What the present arrangement allows is for the Congress to spend way more than is available and then leave the Fed to backfill with money creation. This is an abdication of responsibility by Congress but a money maker for Wall Street's banks.  We are supposed to feed the chickens directly by taxation of ourselves and tariff, not by debasement of our money. If you elect chickens they act like chickens.

Economic debt has no absolute value, it only can have relative value between participants in an economy.  Assets created with debt are no different in utility than those paid for with cash.  Energetically everything is paid for the moment it is created, the labor, resources and energy are expended in the act of creation, no debt is possible.  If all the necessary ingredients are not present then creation cannot occur.
What is entirely possible is to create malinvestment because our economic thinking is not in alignment with ecological structures. What is entirely possible is to create real and destructive debt by degrading the environment and reducing the current productive capacity of the planet. What is entirely possible is reducing future real productive capacity by squandering non-renewable resources now.  What is also entirely possible, the crowning achievement of our current hubris, is techno-fantasy thinking, that claims that real debt, ecological and resource degradation is pure fantasy, and our only real problem is economic debt.

Even if we claim to hate the banking system, we are still playing within the deluded mental construct that ignores the real threats to our current and future viability.  Can we bring economic incentives in alignment with reality, rather than this fantasy system that is bent on self destruction?  We have to climb outside the economic box into the ecological box otherwise our brilliance will be wasted on this abstract game we call the economy.

Makes you want to pull cash out of the bank, doesn't it?
I am too aristocratic (thick) to take an interest in money Dave, but  in some mysterious way my unconscious mind is is ahead of the curve.


Gold is the money of Kings, silver is the money of aristocrats, barter is the money of peasants and debt is the money of slaves.
Gold rhymes with guillotine in my ears.

Though you can bite it to check its purity, neither gold nor silver are edible.  If a peasant has food or firewood, a barter trade is much more likely to go down well than a precious metals purchase.  Besides–better deals are made (without force being applied) when both parties are standing on the same ground.  Precious metals are great for insurance and boogying away without having to take the kitchen sink, but on a day to day basis I vote to keep your king (and aristocrat) cards close to your chest and join the peasants.
An anecdotal comment to close my reaction to your great quote on gold, silver, barter, and debt.  When my family and I were visiting Abe Lincoln's birthplace, the comment was made that the Lincoln's immediate neighbors were looked down on in the community because they had once borrowed money.  Now the whole system runs on slavery, uh, I mean debt.

David is saying that

increase in world GDP per year = 0.25 x increase in world debt per year

Lets assume his figures are correct,  and I have no reason to disbelieve the figures.This implies an underlaying depreciation of currencies of 25% per year. Inflation of this magnitude is clearly not happening.  I suspect the majority of this new money is not circulating round the economy but is instead being parked in bank accounts, bonds and equity markets. ie. the velocity of this new money is very low.

The next logical step is negative interest rates so as to make people stop hoarding money.   Unpopular and incomprehensible to the general public, I know. It's how our money creation and destruction has evolved to work. Money needs to circulate so debts can be repaid.

Before anyone says that debts cannot be repaid. That is nonsense. Money is created as debt so its out there in circulation waiting to repay the debt.


On the one hand, there are people living in honest-to-God cages in Hong Kong but ghost cities with room for millions, sitting empty in mainland China. Something has to give.  What a crazy-ass place. Nuttier than North America, by a long shot. 

Not that I am a Communist, but Karl Marx, predicted concentration of capital in fewer and fewer hands, in the over ripe banana stage of capitalism. He called Crony Capitalism, "class war."  
I wonder if Mr. Stockman could comment on the role that automation is playing, too, in concentrating capital and if there are any top down solutions, he would endorse. Do we have to figure it all out ourselves?  And why aren't any banksters in jail, preferably on lavatory duty?

A barter system is untenable, inefficient.  Barter is great way to augment easier to manage stores of value, like precious metals or fiat currency that is intelligently managed.  But alone, it won't work.  If you advocate for this kind of system, in a world of 7 billion people, you are consigning most people to a slow death by starvation, thirst, disease.