International Man: Recently, Fed Chairman Jerome Powell said the central bank’s money printing is designed to help average Americans, and not Wall Street.
What’s your take on this?
David Stockman: Yes, and if dogs could whistle, the world would be a chorus!
The truth is, in an economy encumbered with nearly $78 trillion of debt already—including $16.2 trillion on households, $16.8 trillion on business, $23 trillion on governments—the last thing we need is even lower interest rates and even bigger incentives to take on debt and leverage.
In fact, in a debt-saturated system, the Fed’s massive bond purchases never transmit anything outside the canyons of Wall Street. This money-printing madness only drives bond prices higher and cap rates lower—meaning relentless and systematic inflation of financial assets’ prices.
As a practical matter, of course, the bottom 90% don’t own enough stock or even inflated government and corporate bonds to shake a stick at. Instead, what meager savings they have accumulated languish in bank deposits, CDs or money market funds earning exactly what the Fed has decreed—nothing!
So, when Powell says he’s only trying to help the average American, you have to wonder whether he is just stupid or the greatest lying fraud yet to occupy the big chair at the Fed.
Then again, it doesn’t really matter why.
The Fed is now a completely rogue institution that is a clear and present danger to the future of prosperity and liberty in America. The tragedy is that the clueless speculators on Wall Street and politicians in Washington don’t even get the joke.
International Man: So far, the Fed has been able to successfully manipulate interest rates to historic lows.
What are some catalysts that could cause the Fed to lose control and interest rates to spike?
David Stockman: They are chasing their tail, faster and faster. The more they expand their balance sheet, thereby injecting into the bond pits a massive artificial bid for governments, corporates, munis, commercial paper and junk, the lower the yields go, and the demand for more debt becomes greater.
Needless to say, when incomes drastically shrink due to the folly of Lockdown Nation, debt should be liquidated, not massively increased. So, the Fed and its fellow-traveling global central banks are setting up our Humpty-Dumpty economy for a very great fall.
That is to say, what will cause the central banks to lose control is the greatest wave of debt defaults in recorded history. On that score, the Fed just issued its Flow of Funds data for Q1, and it leaves nothing to the imagination. Total public and private debt on the US economy now stands at $77.6 trillion, or 3.5X GDP, and we’ll be lucky to post at $21 trillion for the full year of 2020 GDP.
Recall that we supposedly got a wakeup call back in 2008, when the economy plunged into financial crisis and the worst recession since the 1930s; way too much debt was widely identified as the fall guy. But back then, total debt outstanding was just $52.6 trillion, meaning that during the last decade of purported recovery, the US economy actually took on $25 trillion of new debt—a 48% increase.
Moreover, big-spending politicians were not the only culprit. That’s because when the central banks drastically falsify interest rates to sub-economic levels, everyone is incentivized to borrow hand-over-fist. And, most often, it’s for unproductive purposes, such as more transfer payments in the government sector and more financial engineering among the C-suites.
On the eve of the Great Recession, for example, total business debt (corporate and non-corporate) stood at $10.1 trillion and has subsequently soared to $16.8 trillion. That $6.7 trillion gain represents fully 98% of the $6.85 trillion increase in nominal GDP during the same period.
This orgy of borrowing also means that business debt over the past 13 years has grown by 66.5%—far more than the 46.7% expansion of nominal GDP. Accordingly, the business debt burden on GDP has now gone off the charts, and at 78% of GDP, is more than double the pre-1970 level:
Business Debt as Percent of GDP:
Stated differently, chronic financial repression and clubbing of interest rates by the central bank have amounted to a slow-motion burial of the business sector in debt; debt that in recent decades has been overwhelmingly allocated to shrinking the equity base of business enterprises, thereby cycling wealth from the productive economy to the rent-capturing precincts of Wall Street.
Indeed, the Fed’s cheap credit never really leaves the canyons of Wall Street, where it fulsomely rewards carry-traders and risk asset speculators because zero cost money is always and everywhere the mother’s milk of leveraged speculation.
It also causes corporate C-suites to become maniacally obsessed with goosing their stock options via financial engineering gambits like stock buybacks, leveraged recaps and wildly over-priced M&A deals as a substitute for organic growth. Yet these maneuvers merely supplant equity and financial resilience with debt and financial fragility.
So when business bankruptcies soar to unprecedented levels in the month ahead as the economy reels from the folly of Lockdown Nation, the financial fragility part will become crystal clear.
But it also needs to be recalled that even as the interest rate clubbers at the Fed fostered a massive explosion of business debt after the 2008 financial crisis, it did not translate into any growth in productive investment at all.
In fact, real business CapEx minus current capital consumption (depreciation and amortization charged to current period production) is today barely a tad higher than it was 20 years ago on the eve of the dotcom bust.
In short, the Fed has fostered a zombie economy, and it is the collapse of the zombies that will eventually take it down.
International Man: The Fed has printed more money in recent months than it has for its entire history. The government is spending as if trillion is the new billion.
What is going on here?
David Stockman: Here’s an eye-opener to put this madness in perspective. Annual federal outlays posted at $3.896 trillion in 2014 and were the product of 225 years of relentless expansion by the Leviathan on the Potomac.
But it now appears quite certain that the annual deficit in FY 2020 will actually be larger than the total spending level that took more than two centuries to achieve.
That’s right. Owing to the mushrooming coast-to-coast soup lines hastily erected by Washington in response to the collapse of jobs, incomes and business cash flows brought on by Lockdown Nation and the evaporation of tax revenues, Uncle Sam will borrow more this year than the total spending just six years ago.
Stated differently, back in the day, we struggled to keep total federal spending during 1981 under $700 billion. By contrast, the Donald has borrowed nearly 4X that in the last 90 days!
So, yes, perhaps Trump’s one truthful boast is that he is indeed the king of debt.
Needless to say, there is nothing remotely rational, plausible or sustainable about an FY 2020 budget that’s going to end up with revenue south of $3 trillion and spending north of $7 trillion.
That’s not even banana republic league profligacy; it’s just sheer stupidity and madness, bespeaking a bipartisan duopoly in Washington that has had its collective brains turned into sawdust by the relentless, egregious money pumping of the central banks.
For want of doubt, just consider what has happened since March 11 on the eve of the Lockdown Nation’s commencement.
The public float of federal debt has soared from $17.85 trillion to $20.24 trillion, gaining $2.39 trillion;
The Fed’s balance sheet has exploded from $4.31 trillion to $7.17 trillion, gaining $2.86 trillion.
The Fed has, therefore, effectively monetized 119% of the gain in the publicly traded Treasury debt.
Of course, you can’t blame the Donald alone for this insanity; he’s been enabled by two of the greatest crackpots to hold high economic policy positions in American history—Treasury Secretary Mnuchin and Fed Chairman Jay Powell.
As it has happened, we have closely observed every combination of Fed chairman and US treasury secretary since 1970, when we headed off for our first job in the Imperial City, eager to better the world and our own prospects, too.
So, we can say without reservation that the current duo is the worst combo of spineless, principle-free empty suits to plague the nation during the last half-century. And it’s not a close call—even against a ship of fools, which include John B. Connally, G. William Miller, Ben Bernanke, Hank Paulson Jr., Timothy Geithner and Janet Yellen, among considerable others.
After all, if the Treasury Secretary and Fed Chairman are utterly clueless about the grave dangers of the fiscal and monetary bacchanalia now rampant in the imperial city, how in the world will it stop except in some fiery collapse?
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