"The Cacophony Of Fed Confusion," David Stockman Warns Will Lead To "Economic Calamity"

Tyler Durden's picture

"We never should have painted ourselves so deep in this QE corner in the first place," chides David Stockman, "because the whole predicate [of Fed policy] is false." The author of The Great Deformation holds nothing back in this brief 3-minute primer of everything is wrong with the American economic system (and the CNBC anchors definitely did not want to hear). "We are already at peak debt and forcing more into the economy didn't work," and won't work as is merely funds Wall Street's latest carry trade to nowhere and fiscal irresponsibility in Washington. Simply put, "the private credit channel of monetary transmission is busted," so the Fed is exploiting the only channel it has left - "the bubble channel."

"There is a massive bubble inflating on Wall Street"

It's hump-day, grab a wine cooler and listen to 3 minutes of almost uninterrupted truthiness


And here is David on The Keynesian Endgame...

Even the tepid post-2008 recovery has not been what it was cracked up to be, especially with respect to the Wall Street presumption that the American consumer would once again function as the engine of GDP growth. It goes without saying, in fact, that the precarious plight of the Main Street consumer has been obfuscated by the manner in which the state’s unprecedented fiscal and monetary medications have distorted the incoming data and economic narrative.

These distortions implicate all rungs of the economic ladder, but are especially egregious with respect to the prosperous classes. In fact, a wealth-effects driven mini-boom in upper-end consumption has contributed immensely to the impression that average consumers are clawing their way back to pre-crisis spending habits. This is not remotely true.

Five years after the top of the second Greenspan bubble (2007), inflation-adjusted retail sales were still down by about 2 percent. This fact alone is unprecedented. By comparison, five years after the 1981 cycle top real retail sales (excluding restaurants) had risen by 20 percent. Likewise, by early 1996 real retail sales were 17 percent higher than they had been five years earlier. And with a fair amount of help from the great MEW (measurable economic welfare) raid, constant dollar retail sales in mid-2005 where 13 percent higher than they had been five years earlier at the top of the first Greenspan bubble.

So this cycle is very different, and even then the reported five years’ stagnation in real retail sales does not capture the full story of consumer impairment. The divergent performance of Wal-Mart’s domestic stores over the last five years compared to Whole Foods points to another crucial dimension; namely, that the averages are being materially inflated by the upbeat trends among the prosperous classes.

For all practical purposes Wal-Mart is a proxy for Main Street America, so it is not surprising that its sales have stagnated since the end of the Greenspan bubble. Thus, its domestic sales of $226 billion in fiscal 2007 had risen to an inflation-adjusted level of only $235 billion by fiscal 2012, implying real growth of less than 1 percent annually.

By contrast, Whole Foods most surely reflects the prosperous classes given that its customers have an average household income of $80,000, or more than twice the Wal-Mart average. During the same five years, its inflation-adjusted sales rose from $6.5 billion to $10.5 billion, or at a 10 percent annual real rate. Not surprisingly, Whole Foods’ stock price has doubled since the second Greenspan bubble, contributing to the Wall Street mantra about consumer resilience.

To be sure, the 10-to-1 growth difference between the two companies involves factors such as the healthy food fad, that go beyond where their respective customers reside on the income ladder. Yet this same sharply contrasting pattern is also evident in the official data on retail sales.

* * *

That the consumption party is highly skewed to the top is born out even more dramatically in the sales trends of publicly traded retailers. Their results make it crystal clear that Wall Street’s myopic view of the so-called consumer recovery is based on the Fed’s gifts to the prosperous classes, not any spending resurgence by the Main Street masses.

The latter do their shopping overwhelmingly at the six remaining discounters and mid-market department store chains—Wal-Mart, Target, Sears, J. C. Penney, Kohl’s, and Macy’s. This group posted $405 billion in sales in 2007, but by 2012 inflation-adjusted sales had declined by nearly 3 percent to $392 billion. The abrupt change of direction here is remarkable: during the twenty-five years ending in 2007 most of these chains had grown at double-digit rates year in and year out.

After a brief stumble in late 2008 and early 2009, sales at the luxury and high-end retailers continued to power upward, tracking almost perfectly the Bernanke Fed’s reflation of the stock market and risk assets. Accordingly, sales at Tiffany, Saks, Ralph Lauren, Coach, lululemon, Michael Kors, and Nordstrom grew by 30 percent after inflation during the five-year period.

The evident contrast between the two retailer groups, however, was not just in their merchandise price points. The more important comparison was in their girth: combined real sales of the luxury and high-end retailers in 2012 were just $33 billion, or 8 percent of the $393 billion turnover reported by the discounters and mid-market chains.

This tale of two retailer groups is laden with implications. It not only shows that the so-called recovery is tenuous and highly skewed to a small slice of the population at the top of the economic ladder, but also that statist economic intervention has now become wildly dysfunctional. Largely based on opulence at the top, Wall Street brays that economic recovery is under way even as the Main Street economy flounders. But when this wobbly foundation periodically reveals itself, Wall Street petulantly insists that the state unleash unlimited resources in the form of tax cuts, spending stimulus, and money printing to keep the simulacrum of recovery alive.

Accordingly, the central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities, as shown below, for speculative gain in the Wall Street casino.

At the same time, Keynesian economists of both parties urged prompt fiscal action, and the elected politicians obligingly piled on with budget-busting tax cuts and spending initiatives. The United States thus became fiscally ungovernable. Washington has been afraid to disturb a purported economic recovery that is not real or sustainable, and therefore has continued to borrow and spend to keep the macroeconomic “prints” inching upward. In the long run this will bury the nation in debt, but in the near term it has been sufficient to keep the stock averages rising and the harvest of speculative winnings flowing to the top 1 percent.

The breakdown of sound money has now finally generated a cruel endgame. The fiscal and central banking branches of the state have endlessly bludgeoned the free market, eviscerating its capacity to generate wealth and growth. This growing economic failure, in turn, generates political demands for state action to stimulate recovery and jobs.

But the machinery of the state has been hijacked by the various Keynesian doctrines of demand stimulus, tax cutting, and money printing. These are all variations of buy now and pay later—a dangerous maneuver when the state has run out of balance sheet runway in both its fiscal and monetary branches. Nevertheless, these futile stimulus actions are demanded and promoted by the crony capitalist lobbies which slipstream on whatever dispensations as can be mustered. At the end of the day, the state labors mightily, yet only produces recovery for the 1 percent.

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nightshiftsucks's picture

Bulshit it' all spent on money that people don't have,the GDP would'nt grow if the rules were enforced.

elwind45's picture

Youmade it(the money) so what the hell did you do with it?

GooseShtepping Moron's picture

The metaphor of “painting ourselves into a corner” is exactly the right one.

My own admittedly uneducated and nonprofessional opinion is that from the beginning QE was less about generating a Keynesian-style “wealth effect” economic recovery and more about keeping interest rates down so that the federal government could continue to service its debt. Not that the pump-priming wouldn’t have been welcomed, mind you; but the prospect of spiking treasury yields is more dangerous to national solvency in the long term than the bursting of speculative bubbles.

This is what makes tapering so difficult. If a “great rotation” out of stocks and into bonds ever happens it will suppress yields in the short term, but they will inevitably drift up again due to the absence of Fed purchasing. Then we’ll see the full effects of the inflation wrought by QE, and the consequent deleveraging will pretty much eliminate the raison d'être of most of the financial system. After this will come a most welcome deflation, but demographics will eliminate the prospect of future growth.

If we get a government with isolationist tendencies we may be able to enjoy the rest of our lives not really worrying about how poor we are. Any attempt at globalism, still less global leadership, under those circumstances however is sure to be catastrophic.

acetinker's picture

Brother or sister, there's a whole bunch of details and detours missing from your theory, but it is clear you've thought this through- and with enviable clarity.

Hard for me to imagine a rotation from stocks into bonds, though.  More likely is that the 'rotation' is actually a swirl down the drain and into the sewer.  Hard to recover from peak stupidity based on peak credit.

SDShack's picture

QE, or more accurately, monetizing the federal debt, was nothing but a scheme to defang the bond vigilantes to insure ZIRP forever. In such an environment, with unlimited printing of fiat, the Ponzi becomes self-sustaining. Learn to think like a sociopathic banker and you see the logic of their scheme. The Fed balance sheet has increased until the Fed controls about 1/3 of the bond market now. With their CB lackies around the world, they effectively are reaching the magic 51% control of the bond market. Already, while only controlling about 1/3 of the bond market, the entire bond market is corrupted. Imagine what it will be like when they reach 51%. It's game over then because the bond vigilantes won't be able to move the bond market. The Fed and world CB's learned from their mistakes in Europe. They will never allow the bond vigilantes to have so much power again. Just look at China... they unload what...$100B in bonds and they are bought by Belgium. What more proof do you need to understand where the Fed and world CB are going? They are engineering the system to control the bond market and perpetuate ZIPR and the Ponzi. It's the ONLY way the party continues. The taper is just a short term ruse because the deficit has decreased the last couple of years due to the sequester, debt ceiling and tax increases on the elites capital gains from the stock market. That worm is turning because the sequester and debt ceiling are dead, and the budget is going to explode as 0zer0care and all the other bribes kick in. The Fed realizes the only thing that is still keeping the party going is stocks, and that is only possible with ZIRP. Mark my words, when the deficit starts to increase again (and it will late this year because of 0zer0care and the loss of the sequester and debt ceiling), watch the Taper become the Un-Taper in lock step with the deficit increase. QE is nothing but monetizing the debt.

OpenThePodBayDoorHAL's picture

If you're taking a wheelbarrow of cash out of a bank and nobody stops you, what do you do: go back for more

Radical Marijuana's picture

Stockman is an interesting figure, for having been once relatively more mainstream, while recently has been driven to become slightly more radical. However, he does not come within a light year of putting in proper perspective what the Central Bank Fraud Kings are doing through QE.

Here is a link to a recent Bank of England paper which discusses their QE. Of course, it is mostly a whitewash job, but nevertheless it does state the basic FACTS:


Money creation in the modern economy

"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

Monetary policy acts as the ultimate limit on money creation. The Bank of England aims to make sure the amount of money creation in the economy is consistent with low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans.

In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the economy may still be too low to be consistent with the central bank’s monetary policy objectives. One possible response is to undertake a series of asset purchases, or ‘quantitative easing’ (QE). QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies. QE initially increases the amount of bank deposits those companies hold (in place of the assets they sell). Those companies will then wish to rebalance their portfolios of assets by buying higher-yielding assets, raising the price of those assets and stimulating spending in the economy. As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks. ..."

Way back in the 20th Century, Henry Ford is supposed to have remarked that most Americans did not know how banking really works, because, if they did, "there'd be a revolution before tomorrow morning". The overwhelming vast majority of people are too ignorant, if not too willfully stupid, to understand what that article actually means to them, their children, and their children's children. Furthermore, the established political processes are already so totally stacked in favour of the banksters that there are no practical ways to reform the monetary system.

Therefore, the established systems based on making "money" out of nothing, and destroying that "money" back to nothing, are going to continue to destroy the world, since those things are actually the result of the triumphant runaway frauds of the biggest gangsters, the banksters, who have captured control over governments, as well as social institutions such as schools and the mass media, by being able to dominate the funding of the political processes and social institutions. Since our society is controlled by legalized lies, backed by legalized violence, which have created conditions whereby civilization is dominated by attitudes which were necessary to enable fundamentally fraudulent financial accounting systems to be made and maintained, ALMOST EVERYTHING CIVILIZATION DOES IS BASED ON THOSE ATTITUDES OF EVIL DELIBERATE IGNORANCE.

Since ignorance is the source of suffering, evil deliberate ignorance is the source of the greatest suffering. The triumphant systems which were built on the basis of backing up dishonesty with violence have enabled runaway social polarization to manifest inside of the pyramid systems that were built on that foundation. MUCH MORE IMPORTANTLY, THE WAYS THAT EVIL DELIBERATE IGNORANCE DOMINATE EVERYTHING THAT OUR CIVILIZATION DOES MEANS THAT WE HAVE ALREADY ENTERED INTO VICIOUS SPIRALS OF DESTROYING LIFE IN THE NATURAL WORLD.

The longer term consequences of backing up the claims of private property with coercion are cutting the world up into privatized pieces, which, as a living whole, are being killed by those processes. The successes of the systems of lies backed by violence have driven society as a whole to become terminally sick and insane, since each incremental action based on carrying on attitudes of evil deliberate ignorance results in privatizing the profits, while socializing the greater losses. Overall, we have already crossed the event horizon into a social and environmental black hole.

There are no reasonable grounds to doubt that the ways that the monetary systems are based on frauds, which violate the basic laws of nature, are going to result in the destruction of much of the life in the natural world. However, other that wishing for some series of political miracles to cure the terminal social sickness and insanity of the established and entrenched social pyramid systems, there are no practical political ways to stop the runaway fascist plutocracy juggernaut from continuing to turn most of the world's people, and the natural world, into the road kill of that runaway system of legalized lies, backed by legalized violence.

teslaberry's picture

you must be stoned to think people will read a comment that long. 

i think you should post that on khan academy or something for people looking for an education. 

elwind45's picture

Your ability to produce income and a lot of it keeps the Fuck story fresh(even after nine years)! Foreign money likes America because if need be you people could pay five times more to service your debt? We could raise rates ten times and you would work 20 times harder to pay it off. Yields are low valuations are high yet you still believe in the great rotation? When its time you better hope your diving company keeps you dry? Ever see a point and figure chart of a plum being turned into a prune? Well you and everyone will be needing dollars and.not polished metals when it gets GOING....

elwind45's picture

Painted into corner is elite speak for move on tout est calme

ebworthen's picture

Kelly Evans:  "But David, why did the unemployment rate drop?"

Kelly, Kelly, Kelly; look at the labor force participation rate my dear - unemployment did not drop.


I Write Code's picture

So Stockman is saying the economy would be fine, well that is pretty much the same as it is now anyway, but the Dow would be 9,000 instead of 16,000. 

Maybe.  Probably.  Economically QE and ZIRP should have been tapered by half by the end of 2012, not continued through today.  But POLITICALLY you see, and to keep feeding crack and smack to the banksters and politicians, wellll my friends that's where we are today, the Obamanation is a junkie nation and the Fed is their prophet and supplier.  That is, the Obamanation 1% and for the other 99% we've got quantitative FOAD.

Shizzmoney's picture


At the end of the day, the state labors mightily, yet only produces recovery for the 1 percent.

Here, here comrade

chindit13's picture

If there is such a thing as a normal world, and if Janet Yellen were in it, she’d be either a grade school Hall Monitor or manning a toll booth on the New Jersey Turnpike, a bag of Cheetos in front of her as she takes motorists’ exit fees into either the corporate black hole of Delaware or the official armpit of the known Universe, located at the Jerome Ave Exit on the New York Thruway.

What she might have done in her first press conference, inadvertently perhaps, is usher in the return of free markets, at least in the US.  Leaving little to no doubt that she doesn’t have a clue what she is doing nor how to exit what should never have been entered, she may well have told the markets that they’ll be on their own going forward.  The Fed “Put” may have been removed, which could force markets to rediscover that quaint concept known as price discovery.

For the last few years, most every investment decision has been made based on perceptions of what the Fed might do.  With the Fed now admittedly confused, decisions going forward will have to be based on….get this….business prospects.  Failure might be an option again, too.

We’re still eff’d, because the damage has been done.  As a politician might say, make no mistake about that.  The silk purse to be made from this sow’s ear, however, is that we might have reached Peak Madness.  It's all over but the shooting.  We can now look at stock and worry less about flow.  We can see the size of the Fed’s balance sheet, the level of corporate and Federal debt, the aggregate consumer balance sheet…as well as such era-dependent peculiarities and high water marks like the average home price in the Hamptons and the winning bid levels on Francis Bacon or Willem de Kooning works of---for lack of a better term---art.  Their like shall not pass this way again.

We’re going to start the culling.  Personally, I wouldn’t be looking for inflation, neither hyper nor the more modest variety.  We already had that, in the form of home prices, Salesforce.com stock price, and ’63 Ferrari 250 GTOs.

Sure, Janet could cry Uncle Ben and re-open the spigots, but I suspect another central banker will beat her to the punch (e.g., India, Draghi, PBoC).  Eventually, of course, she will do the wrong thing, but for the next year or two the Fed, the dollar and the US economy, might be back page stories, trumped by what will be happening in the EU and the BRICs.


Elliptico's picture

Let 's weed them po folk out of the gene pool, eh?

highwaytoserfdom's picture

Nelson is right the guy was throw out of Regan after they drove the Budgets from 1 t to 1.8T...  He was thrown out because Tip Oneal and Republicans cut taxes without cutting government spending.    If I remember the guy was a congressman from divinity school....  had this  the habit of speaking truth.   Classic DNC/RNC cabal.. Nelson is quite right STFU you don't know Stockman's body of work...      Reagan, Lincoln. FDR, Truman, Wilson, Johnson, Clinton, Bush especially Poppy had very sadistic dark sides.      

Spend an hour or two and do yourselves a favor...http://mises.org/store/Economics-in-One-Lesson-P33.aspx

free on line....  

Notarocketscientist's picture

David - you are missing a piece of the puzzle.




Let me spell it out for you:


High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes =====  economic death spiral.


Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.


Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.


Of course they will fail - because the disease is expensive oil.  And there is no substitute


The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.


This moment will be known as the end of the industrial revolution by the few who survive.


This is not a Hollywood movie where the hero saves the day.  This is the reality we are facing.


GET IT NOW?  So stop your endless rants - I want MORE QE - I want more STIMULUS - I want MORE of everything and anything that delays the collapse of this.  Because when it comes most of us will be DEAD.  There will be NO reset. There will be no civilization. 


See from page 56 on if you are interested to know what collapse MEANS:  http://www.feasta.org/wp-content/uploads/2012/06/Trade-Off1.pdf


And anyone who is praying and hoping for the collapse to come asap - you are either ignorant or stupid. 



Nimby's picture

The disease is not expensive oil, the disease is an out-of-control government and the idiots that elect them. 

Why should future generations not yet born be burdened with the cost and pain of our malfeasance.  

The sooner it collapses, the more WE shoulder the pain we are responsible for.

That's the only moral outcome.

But I have significally more ammo than you, so I can see where you're coming from.  Hope you can suck a good dick. 

holdbuysell's picture

To all those CNBC talking heads, I present this from Upton Sinclair:

"It is difficult to get a man to understand something when his job depends on not understanding it."

John Law Lives's picture

Informative article.

fiftybagger's picture

"and the elected politicians obligingly piled on with budget-busting tax cuts and spending initiatives"

Bullcrap.  Stockman has always pushed his "tax increase" to "balance the budget" line, and that's why the phony media allows him a platform.  We don't need any tax increases, they'd just spend it anyway.  We need to REDUCE THE SIZE OF GOVERNMENT.  Take EVERYONE who works for the government and cut their wages IN HALF!  If that doesn't cause half of them to quit then FIRE HALF OF THEM.  Then take the ones that remain and halve them again.  Reduce the size of government by 75% and cut the cost of what remains in half again.  That is the only answer.  All the rest is just noise.

Silver For The People

Chuck Knoblauch's picture

Corporate profits would take a hit if you decreased government spending.

Facebook would go bankrupt.

Chuck Knoblauch's picture

Corporate profits would take a hit if you decreased government spending.

Facebook would go bankrupt.

Comte d'herblay's picture

I didn't think much of Stockman b 4, but now it's even worse.

If he really thinks the FED is 'confused' he's as dumb as a post or a stealth apologist for the FED, or trying to obfuscate, misdirect, and lead us away from the authentic mission of the FED 

The Jewish operated FED (Greenspan, Bernanke, and now Yellen) members are doing exactly what they are being bribed to do:  Printing money and giving it to mostly, the Jews on Wall Street.  So far they have 'printed' over several trillion dollars and still doing so, and are committed to doing so forever.

One wonders just how many (a quadrillion?) of the losses have been made up by this activity, and how much more they are being paid for boneheaded bets. 


RougeUnderwriter's picture

Book is a difficult read - jumps around various periods comparing economic activity a lot. Suggest the audio version in your daily communte. Stick very thoght provoking.