David Stockman Interview On Stansberry Radio: How The Fed’s Money-Printing Deforms Washington And Wall Street

This week, David Stockman, former U.S. politician and businessman, joins Stansberry Radio to talk about his new book The Great Deformation: The Corruption of Capitalism in America, which Porter calls “The very best book I’ve read on these issues.”

Porter says “I don’t have to write my book anymore because David Stockman already did.” David gives Porter the best compliment of his life.

David tells Porter that one of the things he did to research this book was “to read a lot of your (Porter’s) commentary from day to day so maybe on some of the ideas, two minds were thinking alike.”

Get ready because it’s all revealed here…

When Porter asks David to share a time when he was most disgusted by the actions of his peers in Washington… you won’t want to miss his response.

You’ll hear him break down the fiscal collapse of America, the destructive role of the Federal Reserve, and where it all fell apart.

Here you will get a completely new perspective on the financial crisis… He understands the intersection of government and market better than anyone in the country, and has a unique analysis on the corruption of America.

Porter Stansberry:       David Stockman has had a fantastic career in politics and private equity.  He really understands the intersection of government and market better than anybody in the country, and he has a really unique view about how the corruption of America has evolved.  And I can’t wait to talk with him about all these things.

Aaron Brahbam:         I’m excited.  Have you seen his rant about GM, by the way, because if you haven’t, it’s right up your alley.  It’s exactly what you say.

Porter Stansberry:       It’s like we’re gonna be talking in the mirror at each other.

Aaron Brahbam:         That’s gonna be great.  I really look forward to that.

Porter Stansberry:       Because if GM had had a legitimate bankruptcy, none of these problems, none of these things would be an issue.

Aaron Brahbam:         Let’s go ahead and get David Stockman on the line.  Today’s guest is David Stockman.  David is the former director of the Office of Management and Budget under Ronald Reagan and author of the book The Great Deformation and runs his blog, David Stockman’s Counter Corner.  David, welcome to Stansberry Radio.

David Stockman:         Thank you.  Very happy to be with you.

Porter Stansberry:       David, I’m thrilled to have you on the show.  You’re about the only guy ever who’s willing to go on the record and to say what he believes who is a part of the gigantic concentric circles of power between Wall Street and Washington, D.C.  And for those of our listeners who may not be familiar with your resume, you at one time were the golden boy of politics.  You rose up in the Reagan administration.  You held prominent positions as a young man.  You went on to a very successful career in private equity working for Blackstone and then your own firm, and yet throughout your public and private life you have said and done things that go completely against the grain in both Washington and New York.  How do you explain that?

David Stockman:         Well, I don’t know.  Maybe it goes back to my roots.  I grew up on a farm in Michigan, and basically the watch word was, “Tell the truth and say what you really think.”  And somehow I incorporated that ethic.  I used it when I was a member of Congress at an early age. I got very lucky, was elected when I was 29.  One of the first issues – I was a congressman from southwestern Michigan—-I had to face in the late ’70s was whether to bail out Chrysler or not.  I was total free-enterprise-, free-market-oriented.  I knew it wasn’t right to pick out one big corporation that made huge mistakes and couldn’t sell its cars to bail it out. So I voted against it and I was vocally against it, and the whole delegation turned against me. Among the 19 Members in the delegation, eighteen of them were for it.  Lee Iacocca, CEO of Chrysler, declared me persona non grata in the state of Michigan.

But I learned a lesson from that at an early age, and that was if you are true to your principles and you speak forthrightly, the people will appreciate it and they will give you credit. In the next election in 1980 I got the largest margin I ever had, something like 70 percent of the vote.

So, I think part of the problem is our democracy today is run entirely by squeaky wheels, by the K Street lobbies, as I call them, and by politicians who over the years have become so housetrained in pacifying the squeaky wheels and placating the vested interests that we really don’t have any semblance of principle left.  It’s just one big scramble to see who can extract the most from the taxpayers of America and who can pile on more to our national debt.  It’s really outta control and it’s getting very late in the hour to turn this around.

Porter Stansberry:       I do wanna get to the subset of matters, and you’ve written the very best book I have read about these issues.  In fact, I tell people all the time I don’t have to write the book anymore, because David Stockman already did.  It’s all there.  But I wanted just one more –{adinserter 1}


Porter Stansberry:       My friend Doug Casey says that Americans are a bunch of whipped dogs and they just roll over and pee themselves every time their political masters bark at them.  And, of course, therefore they get the elected officials that they deserve.  And I just wondered.  You’ve written before The Triumph of Politics, and I just wondered is there any particular story – I mean, the Michigan delegation story’s a great one, but can you remember a time specifically where you were the most disgusted with the actions of your peers in Washington?

David Stockman:         Well, that would take us a couple hours.  There were many, many occasions, but I think the biggest episode happened in 1981 and 1982 when the Reagan revolution in domestic spending was attempted.  And at the end of the day, I wrote a book, The Triumph of Politics, back then, saying it failed.  And the reason I say it failed is that there was no rollback of the welfare state.  Big government as a share of GDP was higher when Reagan left office than when he entered.  And so, the problem was when push came to shove, Republican politicians, who’d been giving speeches for 20 years about the evils of the Great Society and the New Deal— and all of that was valid—- didn’t have the gumption, didn’t have the courage of their convictions, when it came time to vote on those first big spending cuts in 1981 and ’82 during the Reagan era.

So we got some of them through the first year, but in the next year and the year after they were rolled back one at a time in the middle of the night through every kind of sneaky accounting device that Congress could come up with.  And that was a huge disappointment, because it suddenly struck me that if the conservative party, so-called, was unwilling to take on big government and if the conservative party then became reconciled to the welfare state on the one side— and wanted more and more money for defense on the other side— which I think was a total mistake at that time—- we were in big trouble, because you basically had a Keynesian consensus.  The Democrats wanted to spend to keep the welfare state going.  Republicans were unwilling to take it on and roll it back and wanting to pile more warfare state spending on top of it.  We’ve been struggling for 30 years with that legacy, and that’s why we have a $17.5 trillion debt today, and it’s easily gonna be $20 trillion before we probably have another conversation at the rate it’s going.

Porter Stansberry:       There’s so many things about that that I’d love to sit here and talk with you for hours about.  I mean, the funny thing is it hasn’t changed at all since the 1980s, and so even when you had the so-called welfare reform under Bill Clinton, all they did was switch all those people onto food-stamp rolls and other kinds of assistance and the spending never stops.  So now I wanna get into your most recent book and I wanna get into where we are with these policies, because it seems to me that there is no political constituency for a balanced budget or for being responsible with taxpayers’ money.  In short, our creditors don’t get a vote, and neither, really, do the people who pay all the taxes.  So, how does this all end?  When does the day come when the creditors say, “We’re not lending you any more money?”

David Stockman:         Well, it’s a good question, but I think you have to add a piece to the picture, and that is the absolutely destructive role of the Federal Reserve after Greenspan became Chairman in 1987 – I call it our monetary politburo –

Porter Stansberry:       That’s good.

David Stockman:         – in undermining any remaining sense of fiscal discipline that still existed after the Reagan era. Once we got into the Greenspan-Bernanke-Yellin era—- constant massive expansion of the Fed’s balance sheet—- Washington embarked on a permanent course of monetizing the public debt.  That’s what they do, and this whole idea that we could sort of centrally manage the whole financial system in the economy by sitting in the Eccles Building and have 12 wisemen dialing the interest rates and monthly purchase rate for securities and so forth, that’s where it all fell apart. Suddenly the politicians realized they were financing this rapidly swelling national debt with free money that was being created by the Federal Reserve. They recognized that when interest rates are driven as they were down to under two percent on the ten-year note at the low point— that the carry cost of the debt was practically nothing, and so therefore kicking the can became the policy of choice.

And I spent time in Congress.  I was elected three times.  I’m not totally anti-politician, but I can tell you this. If you make it so easy to kick the can, if you allow a $17 trillion debt to be financed at $250 billion a year when it really should be $700 billion or $800 billion under normal interest rates, then politicians are gonna take the easy way out.  They’re not going to fall on the sword.  They’re not going to lay out the real painful choices to the public.  They’re not going to vote against the squeaky wheels and the powerful constituents when the Fed is printing the money and doing the job of financing the debt for them.

So I think that’s where the crisis comes. When the Fed finally reaches the point where the entire monetary system is threatened – and I think it would be if it had continued at $85 billion a month –  we come to the juncture where the Fed can no longer keep its big fat thumb in the market buying up the monthly and weekly issue of Treasury debt. At that point, we are  going to see the rubber meet the road, so to speak.  We’re gonna have the day of reckoning, because there isn’t demand out in the real marketplace among real investors for massive amounts of additional Treasury debt at these sub-economic interest rates.  And when interest rates normalize, Katy, bar the door, because the carry cost on the federal debt— which will by then be $20 trillion— will soar by half a trillion a year.  The politicians will finally panic, but I’m afraid by then it might be too late—- that we’ll be in a very serious bond-market crisis.

Porter Stansberry:       That’s exactly how I see it, too.  Big surprise.  I wonder.  Have you thought much at all about how the Fed’s policies have helped to create the wealth gap in America?

David Stockman:         Yeah.  I think they’re right at the heart of it.  In other words, you don’t make the overnight interest rate zero. Ever. The money-market rate I say is the most important price in the entire realm of capitalism, because the money-market rate is the cost of carry.  It’s the cost of speculation.  It is the mother’s milk of gamblers.  If it’s set by the private market and there’s too much gambling and too much demand for overnight money to fund speculative positions, interest rates soar.  Some gamblers lose their shirts.  They’re carried off on their shield and the market corrects itself and normalizes.

When the Fed, on the other hand, decides that it’s going to be the monetary politburo and peg the overnight rate—-which is the rate on speculative money— at zero, now for the seventh year running, you are inviting a massive flow of effort and resources and capital into pure speculative trading.  And that’s what we have today, and huge windfalls are being won, at least temporarily, but it is not helping the economy, obviously, and it’s creating the impression that capitalism is inherently a vehicle to favor the one percent, which isn’t true; it’s the Fed which is basically benefiting the one percent.

Porter Stansberry:       This is a rhetorical question but it’s also somewhat serious.  With interest rates at zero, what stops Blackstone from buying everything?

David Stockman:         Good question.  I think if you look around at the speculative buildups everywhere, junk bonds are at an all-time high level.  You look at something like CLOs –

Porter Stansberry:       PIK bonds.

David Stockman:         – collateralized loan obligations.  There’re many different measures you can look at, and all of them are at issue rates that are at the 2007 peaks, and we know how well that worked.

Porter Stansberry:       And so is now the spread between treasuries and corporates for the first time.

David Stockman:         And the spread today on the junk-bond index, the Merrill index, is barely five – or not the spread but the actual rate –

Porter Stansberry:       The nominal rate.  It’s insane.

David Stockman:         The rate.  So –

Porter Stansberry:       The default rate will be higher than that on those tranches.

David Stockman:         Exactly.  Right now there is a scramble for yield, which is caused by the Fed, since it has driven interest rates down through very rock-bottom levels, and so therefore there are money managers who get caught up in the scramble for yield, close their eyes and say, “Look, the default rate on junk bonds this month is one percent or less, so why should I worry?”

The problem is next time the economy corrects – and, after all, we haven’t abolished the business cycle – the default rate’ll go to 10 or 20 percent.  They’ll lose their shirts because they’re not even making enough for inflation and taxes at that point.

Porter Stansberry:       But by then they’ll have gotten their bonus and they’ll have retired and it’ll be the next guy in line’s problem.  So –

David Stockman:         You hit it right on the head, and all we have to do is look back at the last 20 years.  We’ve had four junk-bonds booms or bubbles, let’s say, and then busts since 1989, and the charts are almost the same for all four cycles.  You can see the yields fall.  The spreads fall.  The price of these bonds rise.  Everybody scrambles to buy them.  Then there’s an unexpected event like a recession or –

Porter Stansberry:       Which is expected, actually.

David Stockman:         Of course, ’cause the world is not problem-free.  I think if we look around the world today we would say it’s a pretty dangerous place, not only because of the wars going on and we’re partly responsible for that, I believe profoundly, but also because all the other central banks of the world are following the same outta control reckless money-creating policy, and so therefore the vulnerability of financial systems and the level of speculation and debt worldwide is at levels never before seen.  China is a massive house of cards waiting to collapse.  Japan is already in old-age bankruptcy and printing itself silly as it tries to struggle with the mess that’s been created over 20 years.

Europe is not out of the woods by any means.  In fact, the ECB’s “anything it takes” gambit solved nothing except to create a short-term speculative trade in peripheral country sovereign debt based on what the ECB says it might do but can’t really deliver on.  So, I would say we have a very fraught environment internationally.  We have a global economy that’s exceedingly unstable and sort of loaded with land mines of financial disorder, and it’s only a matter of time before these begin to manifest themselves, and in that light, why people would think there’s no risk out there is really beyond me.

Porter Stansberry:       That’s crazy.  I’ve just got one last question, and I really do appreciate so much your time on the podcast today.  What’s next for David Stockman?  How do we help you get your message out to more people?  Do you have a blog?  Are you doing speeches?  How can I help promote you and your ideas?

David Stockman:         Well, the main thing I’m doing right now is the blog.  I wrote the big book, got a lotta response.  I went on a book tour.  I can see that people are looking for an alternative to the daily dope they’re given by the mainstream media.  And so I did start a blog called David Stockman’s Counter Corner.  I post a couple things every day.  I had some comments this morning about the true meaning of the Q1, yesterday’s GDP shock.  It’s a lot worse even than the numbers look, and so I post on that every day.  Plus I look for other people who’re saying similar things about Wall Street and Washington and the financial mess we’re in, and I post them as well.  So, for the interim, that’s what I do.  I occasionally give speeches, of course, but mainly I think I’m providing through David Stockman’s Counter Corner a place where people can get the unvarnished view of where we really are.

Porter Stansberry:       Sounds great.  I’m happy to pass that along to all of our listeners, and I’ll of course put that in my newsletters.  David, thank you very much once again both for appearing here and also for writing such an incredible book.  It really is, as I see it, the most thorough and comprehensive analysis of the current situation economically, globally, and I think in time people will look back and see that book as the clearest and brightest warning that folks have been given to date.

David Stockman:         Well, thank you very much.  I’m happy to talk to you.