David Stockman: Blame The Fed!

Tyler Durden's picture

Submitted by Chris Martenson

David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart.

How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence.

I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the "T-bill standard" or the "federal debt standard." And the other central banks of the emerging mercantilist Asian economies -- Japan, Korea, and now, especially, the People’s Printing Press of China -- have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But because all the bonds on the margin were being absorbed by the central banks, we got away for twenty or twenty five years with “deficits without tears.”

And he's just getting started. The only thing more impressive than Stockman's CV of insider roles in public economics and private finance is his talent for colorful metaphor.


On The Fed

As far as I’m concerned, Bernanke is the monetary Darth Vader. He has destroyed the bond market. Because fundamentally, in a healthy capitalist system, the interest rate in the money market and in the longer-term capital market is the price of money and the price of capital. And if the pricing system isn’t working, if it’s been totally crushed, disabled, manipulated, rigged, medicated, everything that the Fed has done with QE1, QE2, zero interest rates, Operation Twist - all the rest of this insanity - then we’ve destroyed the ability of the capital market to function and we’re giving false signals in every direction.    

On The Economy

We effectively had, over the last thirty years, a national LBO - a leveraged buyout of the whole economy. And this is important because if you look at the difference between our historic leverage ratio [1.6 times debt to GDP], which seemed to be compatible with a stable and usually growing economy, notwithstanding periods, obviously, of boom and bust. But at 1.6 times, we would have about $22 trillion of debt -- public and private -- on the US economy today. We actually have $52 at 3.6 times. So the extra two turns have put on the economy -- households, business, government, we can go through the different sectors -- roughly $30 trillion in debt that’s being lugged around by the US economy as it struggles to stay even, to say nothing of recovery today. And until that massive over-leveraging is worked down and reduced and liquidated, which will take years and years in a painful process, we’re not going to get back on track as an economy.

On Our Political Leadership

It’s hard enough for politicians to face the music, to dispense bad news, to make hard choices, allocate pain to constituencies whether it’s spending cut or tax increase. But when the Fed destroys the bond market, which is the benchmark for the whole capital market, and tells the Congress that you can borrow money for two years at eighteen basis points, which is -- as far as Washington’s concerned -- that’s a rounding error. It’s the same as free. 

When you’re giving that kind of signal, then there is no incentive, there’s no motivation for people to walk the plank and face down this monster of a fiscal deficit and imbalance that we have.

Washington thinks you can kick the can down the road, the debt is more or less free, and we’ll get around to solving the problem. But today, let’s not make any tough choices. That’s where we are.     

On the Banks 

The banking system has been saved on the back of the savers of the United States. We have totally destroyed any incentive for thrift, for deferred gratification. The Fed has become more Keynesian than Keynes.

Now, the fact is, if you were going to bail out the banking system with this kind of transfer -- I calculate it at $300 or $400 billion a year -- the suppression of interest rates on depositors, on the $7 trillion or so of deposit base that we have, is at least $300 or $400 billion a year. And that’s the same thing as taxing the public by $300 or $400 billion and redistributing it to banks based on the distribution of their deposit base. That wouldn’t get one vote. Okay, in other words, what I’m saying is if it were done in a proper way as a fiscal transfer put before the democracy to review and vote up or down, it would be voted down overwhelmingly. It would be shouted down. It would not even see the light of day out of committee, to say nothing of the floor of the House or Senate.

On Peak Oil

I think that is being totally ignored. It is another one of the headwinds or constraints that we’re facing along with the demographic time bomb of this huge generation retiring. And if you look at all of these, there’s no reason to expect much economic growth for the next ten or twenty years, even if you had a healthy monetary and fiscal situation. But given the situation that we’ve described and given the massive excess private leverage that was built up in the thirty-year debt spree, we have sort of added insult to injury. We have maybe an inevitable question of the rising real cost of the BTU being added to the demographic question being added to the totally distorted world labor market that the central banks have produced, which is another whole topic. But when you put all those together, the headwinds are truly frightening

On Gold

Gold is becoming the de facto money. We’re going to be back to a gold standard, one way or another, through the back door in only a matter of time, simply because the central banks are dominated by the ritual incantation of dying Keynesian theory. And therefore, I would say that’s what someone needs to do to protect themselves.

The above are small samples from this wide-ranging and deeply penetrating interview between Chris and David. Among other territory, the two get into David's view of the stock, bond, and commodity markets, and what action concerned individuals should be considering at this time.

Click here to listen to Chris' interview with David Stockman (runtime 47m:17s):

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Or click here to read the full transcript. 

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sgt_doom's picture

Yup, and that's bothersome when one considers that Stockman's biography (please, nobody actually write it!) could be titled:

From Voodoo Economics to the Economics of Voodoo

Stockmans sentence on the national economy being victim to a leveraged buyout over the past thirty years should be obvious to one and all by this time; one could infer it from reading Prof. Hudson over the past forty years, and Catherine Austin Fitts over the past ten.

Indeed:  amassing tremendous debt against the federal government by way of "defense spending" and peddling securitized debt over the past 13 plus years.

And then putting that debt on the citizenry, and demanding the austerity from the citizenry.

Now, they've essentially sold off chunks of America, while taking out all those loans against it.

Only after a Greenspan, or Paulson (Hank), or Rubin (Robert), etc., is found deceased from torture or waterboarding (Cheney-defined non-torture) will there ever be the possibility of change.

redpill's picture

People should listen to the full audio. It's worth the time. Then sit down and ask yourself if you truly understood these issues. Then ask yourself how many of your friends and family understand this issue. How would they change their behavior, decisions, or voting patterns if they did? They have to want to understand, of course. But sending them a link to that audio with an encouraging word couldn't hurt. Because things can't get better until people finally wake up.

... crumbs's picture

..." Because things can't get better until people finally wake up."


then what happens ?


anarchy ?


... doubt it - coz there's a game n'hi-def  on at 2 and pizzapizzapizza's trip-bling up

3  for 1  !




jekyll island's picture

It may actually be worse than Stockman indicates.  We really don't know how much off balance sheet "loans" that will never be paid back have been provided by The Fed to European banks, MENA, UN, IMB and just about any insider with connections who asked.  I have heard whisper numbers as high as $16 trillion, no way to substantiate. 

redpill's picture

"I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float."

It finished closing in 1971.  It started closing in 1913.

Diogenes's picture

Nixon "decided" to close the gold window the way a fat person who has lost his job, has no money and no food "decides" to go on a diet.

America's gold stash was nearly spent. The French in particular were cashing in their dollars for gold as fast as they could. At the rate gold was flowing out of the country Fort Knox would have been empty in 2 to 3 more years.

loveyajimbo's picture

Good point.  Since they refuse an audit, I believe the gold, aside from coin melt... is LONG gone.  Which was the last slim hope for our dollar... Can you say: "Currency collapse"??

Jack Burton's picture

Indeed. Nixon had NO choice or every last ounce of gold would have been gone. Whatever one thinks of Nixon, there was absolutely no choice at all.

BigJim's picture

Sure, he had a choice. He could have revalued the $/oz to a realistic level.

But then the US would have had to live within its means. Whereas, the US has spent like a drunken sailor for 40 years.

He made the absolute right decision from a short/medium-termist, selfish point of view, the 'in the long run, we're all dead' point of view.

Sadly... the end of the 'long run' draws nigh.

Silverdes's picture

It's ok folks, it's only temporary...


"Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States."


See...Nixon wasn't lying after all. I bet that by this time next year, the gold window is back open!

StychoKiller's picture

All right, get Nixon's moldy corpse outa the ground and make Him sign the recision order! :>D

whstlblwr's picture

@Edward Fiatski, excellent article? or for achieving goal first responder. No way you read it.

Anyway, guess Fed webbots going crazy now LOL.

redpill's picture

Good point, let me slip this in.


Hey Bernanke, how's my dick taste you son of a bitch!



SheepDog-One's picture

David Stockman Im sure just got put on the DHS terrorist watch list for his 'Incindiary and un-american anti FED rhetoric'.

redpill's picture

I'm sure he'll have fun during his next trip through the TSA line.

duckhook's picture

Nah. he has been saying this for a long time

TruthInSunshine's picture

Stockman's brilliant and refreshingly/brutally honest.

For those of you who may have missed his spot on rant on the Dylan Ratigan show (yes, it actually was allowed to air on Tokyo Rose Hopium Channel (aka proxy for government & banksters bubble-vision that is Main Stream Media), here he is:

David Stockman: Ben Bernanke is either entirely incompetent and an abject failure of an economist and monetary policy maker or a bagman for the globalist Banksters - YouTube
HoofHearted's picture

He can join all of us at ZH. Soon we won't be able to fly on their airlines...

Don Birnam's picture

The problem with Stockman is that his solution relies rather substantially upon tax increases to attenuate the deficit -- which ( indeed, any tax increase ) is nothing more than a bailout of Government; once again, saddled upon the backs of [ largely ] the middle class. Let no one be fooled: Stockman is but another Beltway Insider, cut from the same bolt as Pete Peterson.



Archimedes's picture

Saw him on CNBS. Great clip. god! Does anybody else just want to kick Michelle Caruso Cabrera in the face! I hate that chick!

SheepDog-One's picture

Definitely...but I'd hate to ruin a good shoe.

Jayda1850's picture

also saw him on cnbs this morning. Had him on for 3 minutes, but in that 3 mins he completely refuted everything their three hour guest had been saying all morning.

Temporalist's picture

But whose video clips do you think they'll replay?

Vergeltung's picture

I'd rather horse around with her bOObs, to be honest.


DavidDavid's picture

Michelle CC is one angry little twit.  That woman has major "daddy" issues.  Trust me, she was ignored by her father as a child.  She hates men.  It all goes back to the childhood.

Ned Zeppelin's picture

Only after banging her like a screen door in a hurricane. 

TruthInSunshine's picture

Michelle CABOOSA Carrera would make a great bull-dyke dominatrix, and Geithner would gladly pay he prevailing rate to be humiliated, just after Michelle CABOOSA Cabrera digested a full meal of black beans, guacomole, chalupas and salsa,

stacking12321's picture

while i have a divergent opinion regarding fiscal policy, i feel we should try and maintain a high level intellectual discussion here on ZH.

oh, and here's a bikini pic of her:


CClarity's picture

Stockman has been consistent with this mantra for a while now.  He is the most credible of the previous Treasury, Fed, CEA folk of the past 30 years in my opinion.  He's not defensive, takes some responsibility and is trying to look forward for reconfigured solutions while providing a reasoned explanation of the past.  I sure wish there were more public figures doing this.  

But since there aren't, it is incumbant on the non-public figures to take control.  ZH is a good organizing place for this.

slewie the pi-rat's picture

he's generally a fairly straight shooter but also is able to develop his own audience's need for him.  this "interview" seems very highly developed, but i just read what was above-the-line here and didn't go to the video for all the light-hearted comedic nuance

we don't try to control too much of the agenda and dialogue here, just what happens on zH, as we dumpster-dive for something Real...

d.s.  seems to appreciate that the low interest rates "imposed" on the nation is to facilitate, even render possible, financing for the incredible goobermint of the USA, which needs to S-T-O-P but just can't! 

as far as the "leveraged buy-out" goes, of course!  this is exactly what the role of fiat in the NWO amounts to, but i think it goes much faster than that as "bad money forces out (buys out) the good".  that is why mark-to-market is essential;  we end up with zombie shells sucking equity outa everybody with all the "market" deals based on new paper and "growth scenario's" and then "passing thru"  the profits and socializing/leaving in 'the market' any losses/"little legal or coroprate problems"

so, yes, the uber-elite seems to own a shitload of everything, asset-wise, quite "legally" too, but not the "liabilities" which are left for the people to suffer, without quite enough means of production left here to support them, employment-wise, either!

so, we watch very carefully as they and their pols and lawyers and regulators and accountants and lobbyists and copy-writers and producers re-adjust the rules, again, preparing the sheeple to "lower future expectaions" as they chuckle at their own magnificence ...


Dirt Rat's picture

Stockman is quite adept at evaluating and responding to his audience. He presented a paper to the newly-elected Reagan and his transition team called "Avoiding an Economic Dunkirk." That old WWII buff, Ronnie, was charmed and that's how Stockman got the OMB gig. Plus, in his paper he succinctly and colorfully explained what was going on in the financial markets at the time and why.

slewie the pi-rat's picture

well, at least he wasn't involved in charming the contras or the iranians or selling drugs to finance covert black ops like those guys in the white house!

i'm sure the budget wasn't involved or they woulda used it!  L0L!!!  i'm sure he's been asked what he didn't know and when he didn't know it.  hasn't he? 

Sir Edge's picture

Cool Beans...

Zero Hedge Quoted On 12pm EST Strategy Stession on CNBS by a CDS Analyst...


Dr. Engali's picture

I wonder when everything is said and done what we will end up with?

Shell Game's picture

END, Demolish, Obliterate, Disintegrate the Fed!   sniff that social media, attachwatch MF'ers..

monopoly's picture

Will roll this over the weekend. Can relax, and listen to the truth. Thanks Tyler.

poydras's picture

The politicians and the CBs would be wise to listen to Stockman.  He has nailed it!

kito's picture

tyler, what strong underlying business is buffett referring to when discussing his optimism in BAC??



Everybodys All American's picture

More bailout money to the croney Uncle Booofeettt.

PulauHantu29's picture

How many physical dollars are floating (or stashed) trhoughout the world...must be trillions flooding various ocuntries like Ukraine, and thru Africa.....

How can any country back up or "guarantee" these quadrillions of outstanding paper IOU's I wonder?