RIP - The Truman Show of Bubble Finance, 1987-2014

Tyler Durden's picture

Seth Klarman recently remarked:

"All the Trumans – the economists, fund managers, traders, market pundits –know at some level that the environment in which they operate is not what it seems on the surface…. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end."

Klarman is here referring to the waning days of this third and greatest financial bubble of this century. But David Stockman's take is that the crack-up boom now nearing its dénouement marks not merely the season finale of still another Fed-induced cycle of financial asset inflation, but, in fact, portends the demise of an entire era of bubble finance.


Submitted by David Stockman of Contra Corner blog,

Part 1. Willard M. Romney and The Truman Show of Bubble Finance.


The above caption was Chapter 27 of my year-ago book entitled The Great Deformation: The Corruption of Capitalism In America”. So I was glad to see this illuminating metaphor given some traction last week by Seth Klarman. The latter is proprietor of the $27 billion Baupost Fund and can fairly be described as one of the greatest hedge fund managers ever. He is also so eminently sensible that he recently returned several billions to his investors—owing to a dearth of reasonable investment opportunities.

Seth pulled no punches explaining why he is not drinking the Cool-Aid:

All the Trumans – the economists, fund managers, traders, market pundits –know at some level that the environment in which they operate is not what it seems on the surface…. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.

Klarman is here referring to the waning days of this third and greatest financial bubble of this century. But my take is that the crack-up boom now nearing its dénouement marks not merely the season finale of still another Fed-induced cycle of financial asset inflation, but, in fact, portends the demise of an entire era of bubble finance.

The latter has had a long gestation—arguably reaching back 100 years. The Great War of 1914-1918 did supplant the stern financial discipline of the market-driven international gold standard with the backstops, bailouts and moral hazards of central bank managed money; the 1930s did install activist state management of national economies almost everywhere, with its systemic bias toward ever higher public and private debt ratios against current income; the “guns and butter” fiscal excesses of Lyndon Johnson did unhorse the William McChesney Martin style of sound money rectitude at the Fed and planted a torpedo in the side of the imperfect but serviceable Bretton Woods system of global monetary order; and Richard Nixon did finish it off with his perfidious doings at Camp David in August 1971.

Indeed, the days of honest capital markets were numbered by Tricky Dick’s proclamation that the richest nation on the planet would default on its obligation to pay its international debts in gold. On the surface, this body blow to global financial stability and discipline was done simply for the sake of avoiding a recession before November 1972—even if a decade-long boom of war spending and external borrowing had made a day of economic reckoning unavoidable.

But the real significance was that Nixon’s Camp David perfidy officially installed Milton Friedman’s Folly at the heart of the financial system. The presumption now was that a 12-member monetary politburo in the Eccles building could perfectly manage the money supply and thereby eliminate the business cycle, optimize the growth of GDP, jobs and living standards and enable market capitalism to prosper all the better.

Arthur Burns soon demonstrated that even flinty conservatives could not resist the temptation to “improve” short-run macroeconomic performance by gunning the Fed’s now unshackled printing presses–especially under the duress of ruthless bullies like Richard Nixon. To be sure, the resulting Great Inflation of the 1970s sharply reduced real economic growth, destroyed savings and habits of thrift and unleashed a global tide of inflationary speculation in oil and commodities.

So these untoward developments should have been a flashing red warning sign. Contrary to professor Friedman’s fathomless political naiveté, Washington was not about to populate the Fed’s open market committee with monetary eunuchs who would spend their days playing scrabble and reading books reviews— breaking only occasionally to adjust the monetary dials and thereby keep M1 on the professor’s stipulated eternal path of 3% growth.

Ironically, however, rather than discrediting statist economic management, the opening failures of fiat central banking spurred even more misbegotten projects and interventions. The 1970s bipartisan folly of wage and price controls, the massive Nixon-Ford-Carter boondoggles and regulatory interventions designed to achieve “energy independence” and endless tax and spending schemes to revive economic growth and spur jobs creation were its legacy.

Even Paul Volcker’s resolute and decisive actions to crush double-digit CPI inflation were soon badly misinterpreted by both Washington and Wall Street. Volcker’s heroic stand had been a desperate necessity occasioned by the wholly unnecessary  post-Camp David Fed, but it eventually became a totem to the cult of central banking.

In fact, the outbreak of runaway inflation, which saw the CPI rise by 200 percent between 1967 and 1981, had been a shocking departure from all prior peacetime experience. Under the sound money regime of William McChesney Martin prior to that, annual inflation had been corseted in a 1-2 percent annual range, and couldn’t have broken out beyond that under a disciplined monetary regime like Bretton Woods.

So after Volcker, central bankers could take fulsome credit for “taming” CPI inflation when, in fact, they barely returned it to the pre-Camp David status quo ante.  Alan Greenspan was the great pretender on this score.  Under what became celebrated as his Maestro Act, he claimed to be deftly managing a booming stock market, robust economic growth and disinflation all at the same time.

In fact, CPI inflation during Greenspan’s 19-year reign averaged 2.7% annually—a rate of gain that was the worst peacetime record of any Fed Chairman before Camp David and which, in any event, would have destroyed nearly 60% of laboring man’s savings over a 30-year working lifetime.

In truth, even the modest CPI disinflation that did occur on the Greenspan watch was a bastard step-child of relentless, unprecedented monetary inflation. During the 19-years after 1987 the Fed’s balance sheet rose more than three-fold—from $275 billion to nearly $900 billion. Yet after it had been unhinged by Burns and the hapless William Miller and had saturated the domestic banking system with massively excessive reserves, the Fed’s balance sheet need to barely grow at all in order to preserve Volcker’s victories.

By the 1990s, however, the global economy had become populated by exactly the kind of currency-pegging mercantilist exporters that Friedman’s floating money inexorably spawned. The good libertarian professor actually dreamed that the “free market” would determine exchange rates when self-evidently his unanchored money gave rise to ”dirty floats” everywhere and increasingly aggressive statist management and manipulation of national monies—especially among the export economies of East Asia and the hydrocarbon economies of the Persian Gulf.

In short, the Maestro’s profligate outpouring of dollar liabilities did not cause CPI inflation domestically because the American economy is not a closed-system, nor does it conform to the implicit Keynesian model of the GDP as a giant economic bathtub. Instead, the outpouring of Greenspan’s printing press dollars streamed into the global economy where a convoy of currency-pegging EM central banks–led by the Peoples Printing Press of China—bought them up hand-over-fist and sequestered them in their official reserve stashes, thereby flooding their own economies with even more prodigious outpourings of RMB, won, ringgit, rupiah, Taiwan dollars and riyal.

The resulting vast and sustained, albeit artificial, stimulus to domestic demand did cause the rice paddies to be drained of cheap labor; did generate a massive expansion of export factories in east Asia; did fuel stupendous booms in alumina, copper, nickel, iron and coal mining in North China, Australia, Brazil, Russia, much of Africa and even Appalachia; and did ignite a ship-building frenzy—especially in giant dry-bulk carriers—- in the great yards of China and Korea. In all, it was a powerful but unsustainable disinflationary force.

During the quarter century after Greenspan’s panicked bailout of Wall Street in the October 1987 stock market crash, the global monetary and investment boom triggered by the mad money printers in the Eccles Building kept labor inflation flat on its back and price gains for manufactured goods in world trade at virtually zero year-in and year-out. But that did not reflect central banking virtuosity; it was an unprecedented one-time monetary boom that sucked all available under-utilized labor into the world economy and facilitated monumental investment booms from Shanghai to Dubai, Istanbul and Belo Horizonte.

Meanwhile, the inflation of financial assets has proceeded at a staggering pace—-partially reflecting the growth of hothouse economies worldwide and partially the expansion of valuation multiples to historic extremes.  Overall, the Fed’s balance sheet has grown from $300 billion in 1987 to $4.3 trillion at present—a gain of 14X. Likewise, the NASDAQ index is up 11X since the Greenspan era of bubble finance incepted and the S&P is up 8X.

By contrast, Greenspan inherited a nominal GDP of $5 trillion. Despite a 120 percent increase in consumer prices since then, it is only $17 trillion today—a gain of just 3.4X.  More pertinently, real GDP is up just 0.97X despite a substantial increase in the working age population. And today’s real median household income of $51,000 is essentially unchanged since Greenspan swearing-in ceremony—-an occasion when, unlike his first oath-taking as CEA chairman, he was visibly not accompanied by Ayn Rand.

In short, the Fed has become a serial bubble machine leading a convoy of global central banks engaged in the same untoward craft. Self-evidently, 25 years of this have fully corrupted money markets and capital markets; there is no longer anything that passes for honest price discovery–only an endless high velocity churning of financial assets in response to the word clouds and liquidity injections emanating from the central bank.

And the chart pattern is now also abundantly clear: with each new bubble cycle, the Wall Street gamblers buy the dips relentlessly, indefatigably  and insouciantly until the inflation becomes so extreme that a random event or black swan finally unnerves the last bid in the casino. Then the house of cards comes crashing down. Yet the gamblers on the Truman Show never seem to see it coming because as Seth Klarman observes life in the bubble is too resplendent and the mood too euphoric.

But there is also a larger factor at work. There is no policy debate or challenge to the bubble machine in the Eccles Building because both party’s have embraced the doctrines of bubble finance. For the GOP this is especially convenient because it enables Republican politicians to bloviate endlessly against an abstraction called Big Government, while embracing the rank statism of massive monetary inflation and endless bailouts and puts for the Wall Street gamblers who fund their continuing grasp on political power in the beltway.

In the case of progressive Democrats, the betrayal is even more insidious. Hooked on the non-sensical Keynesian doctrine that borrowing is good and saving is bad, the so-called progressives have been a sucker for the Fed’s regime of lower interest rates, forever longer. That this regime leads to financial repression and preposterously low  “cap rates” throughout financial markets seems to escape their grasp entirely; and that rock-bottom cap rates cause drastic over-valuation of financial assets and massive windfalls to the capital owning speculative classes—does not even remotely register.

By the 2012 election this bipartisan farce had reached an extreme. Obama ran against the 1% even though the Fed, now packed with money printers he had appointed, showered the upper strata with the greatest unearned windfall in recorded history. Worse still, his opponent was a certified member of the 1%—yet didn’t have a clue as to how he got there.

While Klarman is correct that there are many Trumans in the great show of bubble finance now nearing its apotheosis, Mitt Romney was surely Jim Carrey himself. He claimed that a lifetime of LBO gambling had taught him the secrets of economic growth and endowed him the wherewithal to be a “job creator”.

Worse still, his leading economic advisor had claimed that the Fed’s disastrous housing bubble had been a splendid exercise in prosperity management and that Bernanke had done a virtuoso job bailing out the Wall Street gamblers after their toxic waste factories collapsed in the dying days of the housing disaster.

In my chapter on the Truman Show, I had further developed the notion that Romney’s candidacy marked the final defeat for any traditional notions of sound money and financial rectitude. Below is some excerpts from the Great Deformation that demonstrate that it is not only Klarman’s economists, fund managers, traders and market pundits who are in the Truman Show of bubble finance, but the entirety of the political system, too.

Had the Gipper been asked in 2012 about stopping the reign of the mad money printers, he might have replied:  if not us, whom? If not now, when?  As shown below, Romney did not even understand the question.

Excerpts from chapter 27 of the Great Deformation: The Corruption of Capitalism in America here

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Soul Glow's picture

The banks must be more leveraged than ever before, handing out cash to boomers for their titles for their homes.  But it is smart banking!  Taking the assets and leveraging them 10 times over - by use of standard banking practices - and then taking 1/10 of those cash reserves and paying back the boomers.  Imagine that, the banks taking 10 times your money only to pay you back 1/10th of said asset.  RIP Baby Boomers.

Baby boomers turn to reverse mortgages:

TruthInSunshine's picture

There is now more extreme levels of leveraged debt in the global system than at any time in history, far surpassing the levels preceding the 2008 crisis, while asset classes are overpriced by such extreme levels that they meet or exceed, depending on the particular asset class and specific asset, the extreme pricing of 1999 and 2007, respectively.

This is why Klarman & Stockman are correct in at least their fiundmanetal assertion that when this sucker pops, it will wipe out whatever remaining trust/confidence the sheeple have in "markets" for a long time, in much the same way the follow-on collapse of the 1929 collapse (with the follow on collapse happening in 1932-1933) did.

This is why the CBs are going to extraordinary lengths to keep it all elevated, even to the point, of doing real, structural and long-term damage to the real economy.

The problem the CBs will have is stemming the flood when the damn breaks (when the smart money truly does decide to cash their chips in, which they arguably have already been doing, redeeming much of those assets via the CBs) precisely because of the enormous amount of leveraged debt that is inherent to this bubble.

LetThemEatRand's picture

Long cockroaches.  They tend to buy and hold.

BlackChicken's picture


I think the cockroaches are running the asylum.

The end of this system was planned long ago, and the system that replaces it is all set. The same criminals will be running it with a new name and fancy advertising.

DoChenRollingBearing's picture

Before long we may be eating cockroaches...

marathonman's picture

Read an article (probably from Drudge) that in China they were growing cockroaches, frying them twice, and selling them to Chinese consumers as miracle cure 'nutraceuticals.'  I thought it was fascinating enough to put on Facebook.  My friends thought they would rather die that eat the 'miracle cure'.  Maybe.  Or maybe not.

mumbo_jumbo's picture

"it will wipe out whatever remaining trust/confidence the sheeple have in 'markets'"


more than likely not, if the sheep haven't learned anything from the nonstop crashes and bailouts since 1987 then what difference does another one make?  I'll bet most jump right back in because the markets just keep coming back....that's the lesson so far. the market will NEVER be allowed to correct to fair value.


asteroids's picture

Profligate spending/debt and zero interest rates are setting up for a disaster. Debt is a monster that, when it wakes up, will devour everything.. It will destroy the baby boomers everywhere exactly at the worst possible moment reducing that generation to eating cat food.

agent default's picture

When you have a central banks printing at will and setting interest rates and doing "forward guidance" and, and, and... What sort of capitalism is the article talking about? This is central planing that would put Stalin's five year plans to shame.

NOTaREALmerican's picture

Hey,  lets have a show of hands of all the OldFart "Conservatives" who loved uncle Milton (yeah, der ain't no such ting as a free lunch, why don't dem goddamn lazy bastards get a job?)    And,  golly,  listening to the Maestro gave the "Libertarians" free-market orgasms (yeah, da banks don't need no regulatin' from the goddamn government, dey know what der doin' - goddamn bankercrats tink dey know everyting).

atomicwasted's picture


The very point is that there central banking isn't a free market.  Libertarians have called for the end of the Federal Reserve for a long time.  Why on earth would you think a private/public partnership that sets interest rates, prints money and purports to control the economy would give any Libertarian a "free-market orgasm"?

Flux's picture

Well, after narrowly averting WW3 with Ukraine, bubbles popping just don't have the same impact anymore.


derek_vineyard's picture

bubble did very well today....its all that keeps O in power

Duke Dog's picture

I severely dislike David Stockman. I was a so called Replican back in the early 80's until I heard the bullshit he was spewing. I've been independent as much as possible since then - what a piece of shit now trying to sell books and dig out of the hole he helped dig. Fuck Him!

Charles Wilson's picture

Duke Dog:

Stockman's Problem is that he consistently equivocates on Monetarism.

"Does it work or not?"

He criticizes Friedman, at times viciously, then calls Volcker a "Hero" for using Monetarist Principles to end the Inflation of the early 80s.  He CANNOT have it both ways.  He comes very close to being a Proper Advocate of JB Say but cannot close the deal.  He is at the threshold of Wanniski but for some reason does not see the end of that line of argument.

He is a Puzzle and it detracts from what should be straighforward.  "Are you a Capitalist or not?  Or are you a Quasi-Capitalist who merely criticizes the LEVEL of intervention?  Do you offer critique of the Welfare State or do you believe that some level of Political Control from the Central Commitee is always necessary?"  Etc.  Inquiring minds would RILLY like to know...



falak pema's picture

Portends the end of a whole era of bubble finance...Reaganomics and Thatcherism encapsulated in one phrase.

From fiat fabrication under Dear Henry/RN and petrodollars feeding the welfare state spiralling into dire inflation; aka debt dissemination to recycle arab wealth into the blood of first world economy --w/o gold back up and moral hazard being recognised--  we went to "no holds barred" WS paper--stocks to junk bonds-- idolatry under RR/MG. 

And then into arrogant NWO outsourcing using slave labour arb. model to make the asymmetry structural to the point of no return, and the third world a ravaged playing ground for Oligarchs. 

Now its a one way street to deflation and then ... armageddon, if we disregard the Oppenheimer toy's legacy. 

This Putin-USA stand off is the match-stick that alights the fuse to the tinder box of Pandora, releasing the toxic djins spreading the rancor between Oligarchs, as despotic thieves fall out...There is no big question of IDeology that divides two worlds, there is just greed gone viral. 

Ali Baba and the forty thieves of Baghdad fame. 

The amazing thing is that six years down into this spiral we have NOBODY in POWER who admits to the truth about this greatest heist of capitalism into its mirror opposite as previously proclaimed by its greatest critic. 

When civilization morphs it does so all the way to the wall; and it sacrifices the likes of Snowden to "betraying" their country in order to preserve the truth of simple man. 

Spartacus the first honest man and Ali Baba his son of the casbah. 

nightshiftsucks's picture

So what's the alternative ? They will print until the end.

Hohum's picture

Stockman may be right, but it is amusing to read that he thinks the USA will keep chugging along if the right policies are implemented.

Nick Jihad's picture

"Everyone has a plan, until they get punched in the face." - M. Tyson

W74's picture

So basically my entire life has been Truman Show?

What the hell did I save for?

kito's picture

"In my chapter on the Truman Show, I had further developed the notion that Romney’s candidacy marked the final defeat for any traditional notions of sound money and financial rectitude"


are you fucking kidding me???!!!! are we back to the red team is better than the blue team delusion now?

romney who wouldve absolutely continued to prop up the debt ridden nation state through different channels of spending. more wouldve been allocated to defense spending. two legs, left and right, same torso

Ned Zeppelin's picture

Stockman's latest book The Great Deformation should be required reading for ZHers.

Notarocketscientist's picture

seth klarman is a right wing cocksucker - see this

AdvancingTime's picture

The entitlement societies that have developed over the last several decades were created on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Our current entitlement societies were built on the assumption that those advantages would continue.

Both Europe and US moved forward thinking that ever greater prosperity and promises would be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth. Now reality has raised its ugly head and it is becoming apparent that this is unsustainable. More on this subject in the article below.