• Podcast

    David Stockman: The Undrainable Swamp & The Inevitable Recession

    What the future of the post "Peak Trump" era holds
    by Adam Taggart

    Tuesday, March 5, 2019, 8:10 PM

Love it or hate it, the potency of the Trump Administration is on the wane, soon to be stuck in the mire of the Swamp it has deepend instead of drained, while the economy falls into one hell of a recession — so claims former Regan-era Cabinet member and Congressman David Stockman.

In his new book Peak Trump, Stockman notes how the wide divergence between Trump the campaigner and Trump the president appears to be proving to be his undoing.

Rather than fight to dismantle the institutions he railed against as a candidate — most notably the Deep State and the Federal Reserve — Trump has embraced them.

Now, when this latest asset bubble bursts (and Stockman believes the markets saw their peak back in Fall 2018), Trump will 'own' that. Having chosen to tie his administration's success to the rising price of the S&P 500 since taking office, he won't be able to foist the blame of a market crash on his predecessors.

Similarly, the Deep State — especially the military industrial complex — is experiencing a bonanza under the Trump administration. As a result, the Swamp is deeper than it has ever been:

I learned a long time ago as Budget Director and even before that as a member of Congress that the real deep end of the Washington swamp is on the Pentagon side of the Potomac. What Trump has done is basically taking a defense budget at $600 billion that was already swollen with waste and extending it far beyond anything you need for a homeland defense.

I have a whole section in the book about how a homeland of defense wouldn’t cost $600 billion that he inherited or now the $700 billion that we have. $720 billion actually, that after two huge Trump increases. But you can do an honest, effective, and safe homeland defense for $250 billion. By putting all of these funds into the DOD and into an even larger intelligence budget which is already $75 billion and triggered in the entire Russian military budget for everything… He has actually fed the monster.

Remember, the walking around dollars that create the prosperity in Washington and all of the lobbies, NGOs, think tanks, and all the rest of it comes out of the DOD, National Security, State Department, Intelligence Community budget. It becomes a self-perpetuating lobby for its own, ultimately if you add everything up, $800 billion per year fleecing of the tax papers. Domestically, yeah. We have this huge amount of waste and the domestic budget as well. But most of it’s entitlements and so, it’s cash flowing out of all the places across America. Those entitlements need to be reformed.

But the impact on governance and what he rightly called the swamp, comes from the National Security side. The warfare state, not the welfare state. He’s obviously… It was a nice phrase but unfortunately he has embraced policies that go into the opposite direction and made the swamp even far deeper than it already was on the warfare state side of the equation.

Click the play button below to listen to Chris' interview with David Stockman (55m:51s).

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Chris Martenson: Welcome everyone to this Featured Voices podcast. I am your host, Chris Martenson and it is February 26th, 2019. Momentous changes are afoot. Economically and politically. So much is going to depend on the decisions that we make, both individually and collectively. So, it’s more important than ever that you pay close attention to what the political and monetary elites are up to. The so-called, deep state, is now exposed and instead of running for cover, it’s doubling down. Well, and that’s their style, of course.

Meanwhile, the central banks but especially the US Federal Reserve are back to pausing, easing, and jawboning, and printing even after a single month of stocks failing to go upwards. The weakest post-recession expansion in history is very long in the tooth and an abundance of data suggests a recession is right around the corner. Which would prove disastrous, is neither the fiscal or monetary authorities have any runway left to gain any altitude in this story.

Back with us today to discuss all of this and much more is Mr. David Stockman. Economic Policymaker, Politician, Speaker, and Financier. And I’m sure you know, Mr. Stockman served as the Director of the Office of Management and Budget in the Regan administration, and was the youngest cabinet member of the 20th century. He is the Author of the Great Deformation, which we discussed with him last time. Subtitled, the Corruption of Capitalism in America. I can’t wait to get some updates on that, given all that has happened since. That came out in April 2013 and it was really, just an amazingly, fact-filled, blunt, sometimes delightful and deservedly scathing examination of the various fiscal and policy blunders that have really degraded our future hopes and hopes for prosperity.

Well, he’s got a brand new book out titled, Peak Trump: The Undrainable Swamp and the Fantasy of MAGA. David, thank you so much for joining us again today. Welcome back to the program.

David Stockman: Very happy to be with you, Chris. Also, I appreciate you summarizing the current outlook so well. That’s essentially what I’ve addressed in Peak Trump. So, I think we’re ready to dive into some pretty important issues.

Chris Martenson: Well, I can’t wait because they are really super, just incredibly important right now. David, with the President embracing a financial bubble that you say is doomed for failure, he may be setting himself up for a legacy of being responsible for the next financial crisis. How do you see this playing out throughout the remainder of his term?

David Stockman: Well, I think that’s exactly right. As I say in the book, I think he made a tremendous rookie mistake by not recognizing where he was in the economic and credit and fed cycle when he was sworn into office. Essentially, pivoting from decrying the current circumstances. One big, fat, ugly bubble which he said over and over during the campaign through November 2016 and yet, within days of being inaugurated he was embracing the economy, embracing the stock market as a vindication of his policies that hadn’t even seen any kind of implementation at all.

Now, what I say in the book is it’s important to look at cycles. The inauguration was in month 90 of the third longest at that point, business cycle in history and by far the weakest. At that point, GDP was up only 13% from the peak, pre-crisis peak way back in the fall of 2007. By contrast, during the other two long cycles, the guns and butter cycle of the 60s and the tech boom of the 1990s, GDP was up 40 to 45% by month number 90 of a cycle. Even in those two cycles within months, both of them ended.

Now if you look at it rationally, Trump was elected for a 48 month term. Which means his first term would end in month 138. Number 138 of this current cycle. The key news flash about all of that is we’ve never been there before. In all of American history there’s never been a business cycle or expansion that lasted that long. What I say in the book is the US economy, facing all the headwinds around the world that we know about, unlike tailwinds that you know, impacted the economy in the late 1990s... Facing all these headwinds, the US economy had recession written all over its forehead and he should have been decisioned like Ronald Regan was in 1981, to blame the inherited mess on Jimmy Carter. Which he did over, and over, and over. So that you know, you would take the steps to address these huge bubbles. He should have tried to basically puncture that bubble and get the trauma of adjustment over.

But instead, he embraced it. The point I make is 800 points later, he denounced the Obama economy when the S&P 500 was 2,140 right before the election. At 2,940 which I call the peak and that’s where we get the title of the book, Peak Trump. On September 20 last fall, all of a sudden 800 points higher. The big, fat, ugly bubble had been a ringing endorsement of policies that were so wrong-headed that he had been attempting to implement for the first two years.

I called those policies Trump’s Four Wars on the American Economy. The first one is trade war, really a war on consumers that can’t possibly make America great again. The second one is his border war on immigrant labor, which we desperately need because the native board work force is now actually shrinking just as the baby boom surges into retirement. The third war is the political war on the fed, which is upside down. They were finally trying to strew up the courage to normalize after dithering and delaying and ducking for years, and years. Then the fourth war is really the war on national solvency. It’s incredible that in year 10 of a business expansion, already in its last days, the Trump and the republicans in Washington chose to massively increase the deficit to this year, the borrowing requirement will be in the order of 1.2 trillion, 6% of GDP, 10 years into a business expansion. Unheard of historically. Never really even contemplated before.

Yet, that’s exactly what they did at the very time the fed was finally beginning to pivot, to use that word. To QT from the long period of quantitative easing. That really meant they were dumping, for the first time in history really, bonds back into the market at a $600 billion annual rate that was the policy for this fiscal year. At the same time that the treasury, Uncle Sam is attempting to borrow 1.2 trillion. Now that means there’s 1.8 trillion of homeless bonds looking for a place to land in the bond pits of Wall Street as I call it, and they will land. But it’s a question always of price. It’s always a question of what yield clears the market and I can’t believe that a 2.7% yield barely above inflation is going to clear the market once it becomes obvious that these deficits, the Trump deficits aren’t going to go away and that when the recession hits we’re going to be borrowing somewhere in the range of 2 trillion on an annual basis. We’ll be totally in uncharted waters.

So, that’s kind of a summary of some of the factors that lead me to conclude that Peak Trump happened last fall. There’s a big fly downhill from here.

Chris Martenson: David, wonderful summary of that. Of those four wars... I’d love to get to all of them. We’ll get to the undrainable swamp in just a minute. First, let’s complete this idea though, picking on one of those wars. The war on the fed. It seems to me that Trump... And again, this is just my personal observation. I could be wrong about this. But one of the things I’ve noticed is that he seems to be almost day-trading the market. I will notice that one of the wars you talked about, which is the trade war, Trump has very conveniently timed tweaks that manage the come out pretty regularly talking about how great things are going with China.

Every time the so-called stock market... I need air quotes around that word "market", it doesn’t feel like a market anymore. Seems to respond. All the algorithms get excited and they chase it higher, hundreds of S&P points seem to be solely the result of Trump’s tweets at this point in time. Looking at that, is Trump’s war with the fed really about what the fed is up to? Does he understand truly where we are in the cycle or is he just looking for a higher stock market?

David Stockman: He’s just looking for a higher stock market and he’s exercising his historic view that is the view of a leveraged real-estate speculator in New York City who spend a lifetime borrowing money and riding essentially, the financial bubble, the real-estate department of that financial bubble that the fed has been creating since the 1980s. He calls himself a low interest man. He has no comprehension whatsoever, zero, nada, nothing of what monetary policy and central banking is all about.

The point I make in the book is that the number one, number two, number three problem that he inherited was central bank dominance of the financial system. The falsification of financial asset prices, the irrational and unjustified pursuit of 2.00% inflation year in and year out because that’s essentially inflated the cost structure, the prices and wages in the American economy. Made us increasingly less competitive against China and the whole supply chain that’s connected to it, and resulted in the massive offshoring of production and good jobs, manufacturing, and increasingly even services now that you have the India price to contend with as well as the China price for goods.

I think the whole mess we have stems from monetary central planning. Keynesian policy at the central bank. Unless you were willing to clean house at the fed as the starting point, there was never any hope of making America great again, of MAGA as he called it. That’s why also in the subtitle of my book I call it, The Fantasy of MAGA. You can’t make America great again with trade wars, border wars, and massive increases in the deficits and even easier money than we’ve already had. Those are totally the wrong solutions.

Chris Martenson: Before we get to those solutions, let’s go to the rest of that subtitle there. You’re referring to an undrainable swamp in here. Can you elaborate on that for us?

David Stockman: Well, I think it means a number of things but number one, I learned a long time ago as Budget Director and even before that as a member of Congress that the real deep end of the Washington swamp is on the Pentagon side of the Potomac. What Trump has done is basically taking a defense budget at $600 billion that was already swollen with waste and far beyond anything you need for a homeland defense.

I have a whole section in the book about how a homeland of defense wouldn’t cost $600 billion that he inherited or now the $700 billion that we have. $720 billion actually, that after two huge Trump increases. But you can do an honest, effective, and safe homeland defense for $250 billion. By putting all of these funds into the DOD and into an even larger intelligence budget which is already $75 billion and triggered in the entire Russian military budget for everything... He has actually fed the monster.

Remember, the walking around dollars that create the prosperity in Washington and all of the lobbies, NGOs, think tanks, and all the rest of it comes out of the DOD, National Security, State Department, Intelligence Community budget. It becomes a self-perpetuating lobby for its own, ultimately if you add everything up, $800 billion per year fleecing of the tax papers. Domestically, yeah. We have this huge amount of waste and the domestic budget as well. But most of it’s entitlements and so, it’s cash flowing out of all the places across America. Those entitlements need to be reformed.

But the impact on governance and what he rightly called the swamp, comes from the National Security side. The warfare state, not the welfare state. He’s obviously... It was a nice phrase but unfortunately he has embraced policies that go into the opposite direction and made the swamp even far deeper than it already was on the warfare state side of the equation.

Chris Martenson: Well, David I’d like to explore that with you because you’ve got this insider’s view of how DC really works. Let me confess right upfront to having a soft spot for anybody who is going to want to be a disruptor of the status quo in DC. Trump on the campaign trail seemed to have at least a role to play in that dimension. But after he installed Bolton, Elliott Abrams, Nikki Haley, other rank and file neocon hardliners, I had to ask myself exactly what’s going on here. David, it seems to me that these are loads, some boys and girls of the deep state and they indicate to me that either Trump was never really actually a disruptor or was just too far out of his league to play ball. How do you interpret his hires here?

David Stockman: Well, that’s really a good question and that’s part of my thesis about Peak Trump. He did have the right impulses and kind of a, incite and primitive formulation that our security was not... Our national security should not be promised on empire first around the world but on some kind of notion on America first. I respect the more sophisticated version of it that Robert Taft promulgated in the 1950s.

Naturally, the deep state was deeply alarmed. Was almost panicked by the prospect that someone was coming into the Oval Office that was questioning the fundamental fallacy of the indispensable nation and the global policemen and the empire that Washington had established all around the world. But the problem is, those primitive ideas which he articulated pretty well during the campaign... He said Iraq was a disaster, he was right about that. Libya was a disaster. We shouldn’t be in Syria. He rightly understood that we didn’t really have a fundamental reason for our quarrel with Russia, that Putin could be dealt with and that some _____ [00:18:34] should be sought.

He was right. He even said that NATO was obsolete and a greater truth has not been spoken on the presidential campaign trail because it was obsolete. The Soviet Union disappeared in 1991, the reason for NATO disappeared as well and it should have been dismantled. He was heading in the right direction but the neocon’s found... I use this word delicately, his soft underbelly. Which is perhaps ample of him, if you think about it. That is, his son in law Jared Kushner and that whole nexus of connection to _____ [00:19:19] and what I call the two branches of the war party: the Washington branch and the Israeli branch _____ [00:19:30] branch. That’s where all these people come from. Bolton, Pompeo, Nikki Haley, the whole... Abrams, for crying out loud.

Chris Martenson: I know.

David Stockman: It’s all part of that neocon war party and it’s two branches, as I’ve described. Without recognizing the clashing inconsistency between his own impulses which were well-expressed during the campaign and even have manifested themselves during this presidency. I thought his summit with Putin was brilliant at Helsinki last year. He practically got run out of Washington for treason when he got back home. He’s now on his way to Vietnam. I think that’s very fitting that he’s going to Hanoi, where we committed genocide four decades ago, to make peace with Korea where we never should have been 65 years ago.

But they’re going to undermine him. They’re going to try to erode and thwart, and disable almost anything that may come out of this next summit. When you think about it, he rightly wants to withdraw the 2,000 forces that were in Syria that never should have been there, Obama put them there. He’s not even been able to do that. Here you have the president of the United States with an impulse to say Syria with a GDP of $20 billion only, which is about eight hours of US GDP, no threat to us whatsoever, it totally ruined country as a result of our intervention along with the Saudis and the rest of them in this stupid battle against Assad, which was never our business.

So you have a ruined country that has never possibly threatened the United States and he can’t even get 2,000 forces out of there. They’re leaving a residual force as hostages, by the way, to the war party that wants to be able to tell Assad that you can’t have an alliance with the Iranians because we decree them to be bad actors. I think it’s just another case where the impulse has been turned on its head and now here we are... This blatant, bald faced intervention in the internal fares of Venezuela [ph] which is about the opposite of America first if you can think of any worse example. I mean, this is empire first instead of America first. Yet, he’s got that whole crowd around him, Pompeo especially I find exceedingly obnoxious and stupid, by the way.

Elliott Abrams, a blood thirsty neocon who I actually had to deal with way back in the 1980s when he was in the Regan administration. It’s almost inconceivable, that someone who started out with such good ideas has ended up surrounding himself with such bad advisors and essentially, allowed through their auspices, the deep state to take him hostage.

Chris Martenson: Well David, very well said, all of that. Of course, I think many people listening to this will share my own view which was... Here, let me flip it. Here’s what’s come out of this that’s good. It’s exposed that there’s no remaining party of peace in America. It exposed that the democrats are just as blood thirsty as the republicans. It shows how whatever has taken hold of DC just can’t possibly get enough more war. Venezuela exposes this as much as anything.

I don’t care if you think Maduro is a loathsome dictator or not. All you have to do is look at the last 8, 10, or 20 regime change efforts by the United States to understand that the common people are never helped by these efforts. They’re always harmed, deeply harmed. Libya is now an open slave market where it used to be the top performing brick in the world, if you put it on the brick scale. It’s been absolutely destroyed, so this party wants to destroy. Destroy as a country for interests that are difficult to articulate and I’ve asked a lot of people who are saying we have to go into Venezuela. What is the vital US interest on display, there or in Syria, Libya? What are we really doing there and why? What are our aims, our objectives? Nobody knows. What happened here? How did we get here and how do we get away from this?

David Stockman: You mean generically or in the Venezuela case? It’s a good case in point.

Chris Martenson: Yeah, let’s use it as a case in point.

David Stockman: The Washington establishment has got sort of, a hard wing and a soft wing. The hard wing wants to let the bombs, the missiles, that the drones fly. Then there’s this other group that basically says, well let’s first try economic warfare before we go to deadly military warfare but it’s the same thing. We’ve got sanctions. I go over this at quite length in the book. 30 different countries in the world and in addition to the sanctions on countries themselves, like we’re trying to do with the Iranians right now, deny oil markets to them everywhere in the world even though that’s their fundamental source of livelihood as a nation.

But we also put sanctions on individuals. Government officials, private businessmen, or cronies of Putin and all the rest of them. But here’s the thing. Hundreds of thousands of individuals from nations that we’ve targeted as bad actors who are now under sanctions. It’s the biggest exercise in economic warfare around the globe that has ever been witnessed in all of human history. I bring this up because that’s really what has caused the crisis on the margin in Venezuela. Obviously, socialism doesn’t work. They had a tremendous oil reserve, probably even as great as Saudi Arabia, although of much lower quality. The success of socialist governments there have blown it, so they made a pretty big mess but it wasn’t particularly our problem.

Then we stepped in a year ago and started to impose sanctions that dried out their ability to engage in trade and to import food and other vital items in the cost of living. Insight, the inflation that we’re now saying is the reason why we need to intervene for humanitarian purposes to help the people. I mean, how many times are they going to get away with pulling this kind of thing? It’s almost like the playbook that they get out and now you need heavier intervention. This is what’s being said in the last few days because the economic situation there is so terrible. I guess we never seem to learn.

Chris Martenson: Well, that seems to be the case here. I’m just glad it’s exposed at least finally to show that... Well, it hasn’t made a huge impact on a lot of the people I’ve talked to yet but hopefully it will soon. As far as I can tell, America doesn’t gain a lot from feeding this massive military and surveillance complex. It feels very expensive and it feels like it’s expensive at a bad time because as I opened with the amount of fiscal runway we’ve got left in this story is not a lot. We know a recession is coming. They always happen. The fed doesn’t seem to have a lot of runway left.

Turning to that idea, recently J. Powell, the Chairman of the Federal Reserve, he was said to have pivoted in response to some downward pressure on stock prices in December of 2018, just a couple months ago. What word would you use to describe J. Powell’s change in heart?

David Stockman: Well, I think maybe capitulated would be a more honest description of what he did. I mean how in 20 days, between the fed meeting I think on December 19th in which he said, shrinkage in the balance sheet was on automatic pilot and interest rate normalization was underway, in the train for 2019. Then by January 4th, everything was on pause, on hold, and what had been the obvious thing to do... This balance sheet was so bloated, 4.5 trillion.

People lose track of everything. We’ve got such a recency bias that I think it has been long forgotten that 4.5 trillion of a balance sheet was in aberration. It was only 900 billion on the eve of the Lehman bankruptcy in September 2008. I point out to people that it had taken 94 years to build the balance sheet of the fed from scratch to 900 billion. 94 years. The next 94 days, Bernanke [sp] had taken it to 2.2 trillion, up by 145%. Then they kept inventing new excuses to expand further with QE1, 2. The twist and all the other gimmicks they came up with.

But at 4.5 trillion, we had basically engaged in massive financial fraud because that uptick just between September 2008 and when the balance sheet peaked at 4.5 trillion, that 3.5 trillion gain was really... Involved the purchase of massive amounts of government bonds and GSE paper, that had funded real claims on labor, material, capital with credits that the fed conjured out of thin air.

The idea that you can create 3.5 trillion of buying power out of thin air in such a short period of time and not distort and warp the system that is drive bond prices higher and yields lower, then all of that cascades through the nexus of pricing and the financial markets... The idea that you could get away with that indefinitely is sort of, at the heart of the problem that we have today.

It’s interesting to note that in October 2011 I think, yeah I’m pretty sure it was October 2011, Bernanke had addressed... October 2012, excuse me. He had addressed exactly that problem. The massive inflation, the balance sheet then underway. Powell was on the fed by that point in time and Bernanke said very explicitly, no, no, no, we’re not monetizing the debt. Which has been a terrible financial sense, since _____ [00:32:14]. But this is an extraordinary circumstance, a temporary inflation, big inflation of the balance sheet. A loan to the financial system which will then be withdrawn and liquidated once we have obtained financial stability and the economy has been righted.

Well, that has been the alleged intention all along. When they finally got to October 2017, they began the shrinkage as promised. Although much delayed. At 10 billion a month. By October 2018, that had cranked up to 50 billion a month, 600 billion a year run rate. Within two months, exactly what you would think might happen, did happen. The financial markets began to reel under the impact of this huge cash drain that was going on. The day of reckoning was arriving. As I said a moment ago, 14 days for Powell to completely reverse course, capitulate, and prove that really what the fed is about is simply coddling and propping up the stock market, and the rest is just all window dressing. The constant talk about it’s Humphrey, Hawkins objectives and inflation, GDP growth, all the other economic metrics they look at.

This is all beside the point. They twist and turn, manipulate those to justify whatever they’re doing at the moment. What they’re doing at the moment clearly is trying to keep the stock bubble levitated as long as they possibly can. It’s obviously a losing battle. Sooner or later you reach the point in which the last sucker has bought the last share. Then the whole thing starts to unwind. I think that’s the phase we’re going to be in during the next two years.

Chris Martenson: So, you’re getting to the heart of my next question which is asking about, well what exactly are they so terrified of allowing financial assets to correct? Let me phrase it this way, David. How bad could that next recession or maybe I should say financial crisis, actually be? What’s on the table here?

David Stockman: Well, I think what’s on the table is a long slog at the bottom. In other words, there won’t be in the financial system, a V-shaped snapback like we had last time because last time the fed was at the... The funds rate was at 525 on the eve of the crisis and they were able to take it down to zero. The balance sheet is... We’ve been talking about, was 900 billion. In theory, the thing could be doubled and tripled.

But now they’re out of dry powder. They didn’t get around to normalizing. Even as we are now in month 116 of this expansion. We’re three months from the record of the 1990s, the 119 months that materialized under far more petitions circumstances. Where we stand today is on the precipice of the next stock market unwind, which the key point that I make in the book is that, that triggers the new form of recession. In other words, 40 years ago when the fed let things get out of hand and allowed credit in the business system and the household sector to expand too rapidly, housing market would get red hot or capital goods market would get over heated... It would step in, raise interest rates. That would curtail credit in the main street economy. The economy would start to wobble, the market would see that coming, and the stock market would go down in response to an emerging and latent recession.

Now today, I think it’s the opposite. What happens today is when these tremendous bubbles that are created by the fed finally fracture, it triggers in the C-Suites, corporate headquarters of American companies, a panic effort to keep the stock price up and their option packages whole by these sweeping restructuring plans that involve huge layoffs, inventory liquidation, writing off of allegedly bad assets, writing off of the enormous hundreds of billions of goodwill that’s created during the boom phase with all of this unproductive M&A activity that goes on.

The crash triggers the C-Suite liquidation, we’ve seen that twice now this decade. That brings about a recession that no one sees coming. That’s why I’m pretty confident that before we get to November 2020 there will have been another sequence just like 2008 and 2009. Except this time without any dry powder left, it’s very unlikely in my view that there will be a quick snapback in the financial market and that the stock averages will remain bumping along the bottom for years and years to come. Once it’s clear the fed can’t rescue the market quickly like it did after March 2009, I think you’re going to be in a totally different ballgame.

Finally, the credibility of the fed will come under withering assault and questioning. Which couldn’t happen soon enough as far as I’m concerned.

Chris Martenson: No, it’ll be long overdue. But David, let me take devil’s advocate for a second here. A lot of people, I know a lot of people, many of them very successful investors, have thrown in the towel on the idea that this reality or fundamentals are ever going to come back into vote. They think there’s nothing to prevent the fed from simply doing more this year, maybe next, year after that. Maybe the fed can expand their balance sheet by buying bonds again. Sure, maybe they buy stocks this time. Maybe even Beanie Babies if they think they have to. Are there really any limits on what the fed can do here?

David Stockman: You know, there aren’t any limits. They could buy the whole inventory of Beanie Babies that are lost out there in yard sales throughout America. But the point is, they said this was one time, extraordinary, a courageous as Bernanke called it, response to the allegedly unprecedented conditions of 2008 and after the Lehman collapse. That it would make the economy well again. Well, it didn’t.

If we have another recession, we have another stock market crash and they try the same routine, you might get a momentary rip in the daily trading but I think it’ll cause a profound loss of confidence in the whole central banking apparatus. The whole thing is based on confidence because after all, it defies every notion of economic rationality and just common sense. I mean, you can’t buy 3, 4, 5, 6 trillion dollars’ worth of paper that has funded real activity and is a claim on real economic resources by hitting the buy button at the central bank. It’s just not...

I mean if that were true, then why bother to stop where the central banks did? In other words, as I also lay out a little more in the book, the fed is only the leader of the gang in this whole thing. If you take all the central banks in the late to mid-1990s, balance sheet of the central banks was 2 trillion. By 2004 they had gotten that up to about 4 trillion. Today it’s 25 trillion. In less than two decades, the central banks combined around the world, manufactured 21 trillion worth of balance sheet, that is real assets they’ve bought with credits they conjured from thin air.

That is what’s created a massive disorder in pricing distortion in the global financial system. But if you believe that the fed can do it, then all the rest of them are going to do it as well because that’s why everybody else expanded their balance sheet. Otherwise they felt these companies, particularly the mercantilists exporters in East Asia, that their currencies would appreciate, their export industries would be harmed. So, they just joined the fed’s money printing parade through FX intervention and building up their balance sheets of dollars.

The point I’m getting at is that if they try to do it again, everybody else will. So the question is, do you really think that you could have a 40 trillion central bank balance sheet in the world or an 80 trillion central bank balance sheet in the world when the whole GDP of the world is only 80 trillion today? It’s not possible. It’s irrational. It’s magical thinking and when you ask the question, it’s hard to give a precise scenario of what will happen. But what will happen eventually can’t be good or the whole world has been wrong about what economies are about and how wealth is created for centuries and centuries. If this were all possible, everybody should stop working and the central banks should dump money from the sky every Thursday afternoon at 4:00, people pick up their money and have fun through the next week. This can’t work.

Chris Martenson: David, I’m glad you brought that up because that’s exactly what’s on offer and it’s my final question here. So, take that apart for us.

David Stockman: That’s the next step. I mean, that’s the next step. When you have adults out there with a straight face proposing, let’s not bother with QE because that puts the minted money, the fiat money or credit into Wall Street dealers who then sold the bonds and repurchase some stock, and there’s an indirect process of allegedly wealth execs that produced a boom on Wall Street but didn’t do a lot for Main Street. That’s pretty obvious.

I have one fact in the book that I’d just like to throw in here.

Chris Martenson: Please do.

David Stockman: Which I think is overwhelming and that is if you go back to the pre-crisis peak, late 2007 and look at the NASDAQ 100 which has been the leading edge of this bubble, the tech sector... And you actually adjust the index for inflation, in real terms it’s up 200%. I’m not talking about from the bottom in March 2009. I’m talking about the prior peak. It’s up 200%. Whereas industrial production is up 3%, labor hours consumed by the US economy from the prior peak are up only 6% and real household median income is up zero.

If Main Street is up zero to 6% and Wall Street in the same real terms is up 200%, there’s something fundamentally wrong. It was like a totally lopsided, bifurcated recovery that will be pretty obvious once the next recession sets in. Then you get these MMT people come along and say, well when the stake was, they pumped the money through Wall Street. Let’s just pass it out directly to every citizen or householder in America. That’s true helicopter money but they probably use FedEx to deliver it rather than actual helicopters.

This is insanity. Yet, almost every discussion I get into now, well what about MMT? It shows you how far financial literacy has been degraded or corrupted by a central, this kind of Keynesian central banking that has gotten worse and worse by the year, by the month, and practically by the day. We can see that right now where we have this new theory that our inflation targeting was slightly miscast because instead of 2% change per year we should be targeting the price level, the PCE deflator index level. So that if we fall short one year, we have the right to make it up the next year.

I mean, there’s not a shred of evidence that says 2% inflation is better than 5%, 0%, or negative 2. Yet, we’ve now reached the point where these are almost like medieval theologians counting angels on the head of a pin saying, we’ve got to go to price level targeting. Why? Because then they can print more money. That’s the essence of it. It’s totally irrational. Everything they’re talking about.

By the way, another thing I address in the book is part of this whole discussion, this thing called R Star. Now when people have to start talking in some obscure terms, something is up. But R Star, they can’t even call it the neutral rate of interest. That’s what it means. They’ve got to have some obscure symbol so that if you’re not part of the priesthood you don’t know what they’re talking about. But anyway, if the financial rate of interest is somehow half of what it used to be... The guy that Trump put on there, Clarida who was the Head of Economics at Colombia, Advisor to _____ [00:48:27] so he could see where he’s coming from has basically said recently, well we used to think R Star was 4% and now we think it’s 2%. Well, if R Star is 2%...

And of course, it’s totally a made up thing. It’s invisible. Theoretical, nothing budget that they made up. The only real interest rate is what supply and demand and the free market would produce, obviously. But if they’re now saying we need to have 2% inflation come hell or high water because that’s what price targeting, price level targeting is all about and we’re going to lower our money market amount to 2%, they’re basically saying money should be free forever. As far as I can see, a world without end, until time and memorial.

I mean this is what the alleged adults on the federal reserve are now saying.

Chris Martenson: Well David, it absolutely boggles my mind and I think the critical point you said a few minutes ago which is that, money is not a real thing. It’s a medium of exchange. It’s a claim on real things. So, there always has to be a balance between real stuff and then how you’re going to denote that and your markers, which we’ll call money for the moment. It seems to me like the MMT people have it upside down. They think that money is a source of wealth and as long as you have the money flowing out, you’ve got real wealth flowing out. But didn’t the Romans try this? Hasn’t everybody who has ever tried to clip a coin or print a few extra bills, isn’t this what Venezuela is trying to do? I fundamentally don’t grasp where they think the source of wealth actually originates from because it doesn’t come from money. That’s a claim on wealth. It’s not a real wealth.

David Stockman: Yeah. I mean if you unpeel the onion, what are they really saying? They’re saying you can print as much money as you want until you get too much inflation because you’ve over-taxed the capacity of labor, industry, to produce goods and services. But until you reach that point you can print all the money you want because they don’t see it as money. They see it as demand.

But the underlying assumption is that people are too damn stupid to know that they’re wealthy and they should be spending more money. So, therefore you need the central bank to make it clear. They hit the mule between the eyes with a two by four, by dumping money out of the sky. Well this is nonsense. I’m a _____ [00:51:14] law man. I believe production is a source of income. Income is a source of demand. If you haven’t produced it, you can’t swap it, trade it, exchange it, or buy it.

But people used to know that. I mean 100 years ago everybody knew that, from the lowest bank teller to whatever professors of economics we had at the time. Today they don’t even know it at the central bank and they’re in charge of the money. So what I guess I’m saying is it’s not surprising that MMT has come along because it’s just a slightly exaggerated, extended version of what the central bankers are doing today.

Chris Martenson: It sounds like a post-facto sort of, rationalization. Hey look, it has worked so far, let’s just keep doing that but let’s redirect it this way instead of that way. David, given all of this, how should individuals prepare themselves financially for what’s coming?

David Stockman: Well, I think you have to recognize that the stock market and the bond market are dangerous places because they have been totally distorted, falsified, bloated by central bank policies that can’t be sustained. There’s no easy answer to this except to recognize that in certain times of history, capital preservation is the number one, number two, and number three objective and you worry about capital appreciation later. But you’ve got to be prepared for the crisis. I think therefore, you stay liquid.

I do believe that as central banking fails, we get the next market crash, the next recession, the central bankers are going to be totally discredited because they said... Because people like me and others, and even the Washington politicians are going to say you said if we do all this, QEs and all the rest of it, interest rates on the floorboard, that it’s all going to work out for the best and here we are back in the soup again. So I think they’re going to be discredited and on the margin, the fast money traders are going to look for some asset that they think can weather the storm and that’s likely to be gold. I think gold is going to have a resurgence. I can’t say how much or how soon but gold is the one asset that central bankers can’t manipulate, create, or destroy. That is going to become a very valuable attribute and give it a premium value as central banking, Keynesian style central banking falls apart.

Chris Martenson: Well with a pro tip for sovereign nations who happen to be listening in, just don’t store your gold in London if you want to have access to it when you need it.

David Stockman: Right, exactly.

Chris Martenson: Seems like we should have learned that by now. Well everybody, we’ve been speaking with David Stockman, Author of Peak Trump: The Undrainable Swamp and the Fantasy of MAGA. We’ve barely touched on, just the tip of the iceberg of all the incredible information that’s in there. I have a ton of questions I didn’t even get to. But get the book. Read it, be prepared for what’s coming next. David, thank you so much for your time today.

David Stockman: Very good. We will continue the conversation because as I say in the book, we’re truly in unchartered waters and the only way you can navigate this is to basically shed the recency bias and all of the financial and monetary fantasy that has been conjured up in the last decade or so. Go back to the basics and recognize the fantasy land that we’re in, for what it is and then take prudent steps accordingly.

Chris Martenson: Absolutely. Very well said. Well thanks again for your time and we will continue this conversation.

David Stockman: Terrific.

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  • Tue, Mar 05, 2019 - 8:48pm



    Status: Silver Member

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    Posts: 393


    As Options start to close


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  • Thu, Mar 07, 2019 - 12:20pm



    Status: Bronze Member

    Joined: Nov 08 2010

    Posts: 259


    Good interview

    That was so much better than what we usually get out of the mainstream media. One of the MSMs biggest faults is that they always have people from one party criticize the other. Instead, here we have a dissenting Republican telling us what the current administration is doing wrong (or not doing at all). For Stockman, candidate Turmp made some good promises but didn't follow through with them once he got inaugurated. It made a lot of sense and seems a shame that I hadn't heard it elsewhere by this point.
    It got me thinking that Mr. Obama's best critics were also from his own party. (Like the ones who pointed out that Eric Holder should have held Wall Street accountable.) I've been hating the two major US parties ...but, after thinking about this interview, I have to consider that both parties actually do stand for some good things. The MS media gives us too much of a left vs. right "He said - She said" and I think it stirs up more partisanship than we need.  
    Maybe the nightly news has simply become infotainment with our so-called leaders talking at each other like the wrestlers of WWE.  The mainstream media aren't going to tackle issues of substance, just personalities clashing, because that is easy enough for people halfway paying attention to understand.

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  • Fri, Mar 08, 2019 - 6:56am

    Chris Martenson

    Chris Martenson

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    Joined: Jun 07 2007

    Posts: 6810


    Employment report was, uh, very "soft"

    Well, the concensus number for the February payrolls was 180,000, with whisper numbers a lot higher based off of the ludicrously strong December and January data.
    The actual number reported minutes ago by the BLS?
    As David Stockman says, when C-suite types encounter the end of a credit bubble they can reel in their plans with lightening speed.

    There isn't much to add here.  The unemployment rate can change one of two ways; (1) either more or fewer people have to be employed or (2) the pool of people looking for work goes up or down.  It's got both a numerator and a denominator. 
    Thus, with low employment gains *and* a declining rate of unemployment this means a bunch of people had to give up looking for work and therefore remove themselves from the equation.
    This next stat is one I am tracking closely - part-time employed for economic reasons - it fell sharply:

    As said, this may be a fluke of the government shutdown.  So back to track mode we go.
    Ultimately, I really don't trust these numbers even slightly.  They are usually window ressing for whatever policy needs bolstering most.  Looks to me like the Fed really wanted and needed air cover to stop raising rate, and maybe even set the psychological stage for considering a rate cut.
    That all may backfire because it may also suggest that the recession monster is barrelling in!

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  • Fri, Mar 08, 2019 - 11:44am



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    Powell+Yellen+Bernanke on 60 mins?

    Powell to appear on 60 Minutes with Yellen & Bernanke?   Going full on Dovish?  
    Back to more QE or what?

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  • Mon, Mar 11, 2019 - 12:54pm



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    Posts: 61


    fed policy

    it was interesting to hear all this hangwringing about the actions of the federal reserve, with no mention that the only way to keep unsustainable, growth based, ponzi system operating is by increasing deficits and manipulating the markets. 
    either that or allow the (inevitable) shitshow to collapse?
    rock, meet hard place.

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