Former U.S. Budget Director, David Stockman, architect of President Reagan's economic turnaround known as 'Morning in America', warns of the looming collapse of free market prosperity and the destruction of American wealth.
Tracy McCullough: Hello. My name is Tracy McCullough. I want to thank you for joining us for this urgent broadcast detailing a looming financial crisis that will bring an end to America's free market system. This crisis engineered by our own government's destruction of capitalism will directly impact every person in ways they never saw coming. It doesn't matter where you live, who you know, or how much money you have. Once this crisis hits, your life will forever change. Nobody is safe.
........ With us today is David Stockman, President Ronald Reagan's budget director from 1981 to 1985. David is also a former US congressman, Wall Street veteran, and famed Washington insider. His bestselling book, The Great Deformation: Corruption of Capitalism in America, is a searing indictment against Washington's interventionist, and many would say, illegal response to America's recent financial catastrophes.
David, thank you for joining us.
David Stockman: Well thank you. We're going to be talking about some vital topics today, and I really look forward to the conversation.
Tracy McCullough: We're also joined by Harry Dent, renowned economist and author of The Demographic Cliff. Harry's meticulous research led to his early predictions of Japan's lost decade, the stock market crash of 2008, his early 2014 forecast, the plummeting oil and gold prices, and the surprising US dollar rally. Harry, thank you for joining us as well.
Harry Dent: Good to be here. Great time to have this discussion.
Tracy McCullough: Both David and Harry have worked tirelessly to spread the word of the dangers of the massive government expansion and its ceaseless intrusion and intervention into the free market economy that's destroying our great nation. And David was recently the keynote speaker at Harry's Irrational Economic Summit. David and Harry warned that Washington and its central bank cohort, the Federal Reserve, have lulled Americans into this false sense of financial security. But Americans have been led to believe that the state is able to provide its citizens with permanent prosperity, a caution that the decades of borrowing money, racking up an unsustainable $18 trillion debt is stealing prosperity from future generations.
Unfortunately, this reckless behavior is about to destroy America and hurl us into a frightening world of deep shortages, falling prices, collapsing profit margins, lost jobs, a stock market selloff, and a great depression so devastating that it will make the last great one seem like Boomtown. As things stand now, it's hard to believe that just over 30 years ago, Ronald Reagan won a landslide victory with his famous political ad proclaiming, "It's morning again in America." The ad showed a strong economy with more people working than ever before and a future we could look forward to with confidence.
But in our broadcast today, we'll examine the forces that have taken our once strong free market economy and turned it into a sick, feeble, debt ridden dystopia that's reached its limits and is incapable of stopping the incoming collapse in stark contrast to President Reagan's good morning. Today, we're facing an economic sundown in America. And more importantly for you, we'll discuss the safe money strategies you can implement now to insulate your wealth during these calamitous times. In fact, towards the end of this presentation, we'll even provide a step-by-step blueprint you can easily access that will show you exactly what to do.
We call it The Sundown Action Plan, and it's yours, free. Let's get started. David, your book,The Great Deformation, has been denounced on all sides of the political spectrum. Right and left, Keynesian and supply siders, neocons, tax cons, lobbyists hate it. Wall Street hates it, yet it quickly became a New York Times bestseller. What truths are you telling us that have so many Washington Insiders outraged?
David Stockman: Well, I'm tempted to say that I told the whole truth and nothing but the truth, and that was inconvenient, but what I really mean is that the fundamental themes challenge frontally the status quo in Washington, at the fed, and on Wall Street. People don't want to hear the reality and the truth that we're facing. But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say the fed is out of control. Its balance sheet is exploded. It's printing money like never before.
Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets. I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt. I'm an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it's 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades.
So people don't want to hear the warning. They don't want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must, or somebody was buying the book, and someone – people wanted to hear a different perspective.
Tracy McCullough: For years now, Americans have accepted the fed's massive printing of paper money and the huge amounts of stimulus and bailouts. It's like a new normal, something we're told has to be done to prevent a financial crisis. Any time there's even a mention of cutting back on quantitative easing, the stock market sinks like a stone. Trillions of dollars have been printed in the past few years. So with such widespread public acceptance, what will ever make the fed stop printing money in the future? Will we ever return to a sound money principle?
David Stockman: Well it's obvious that Wall Street is addicted to cheap money and unlimited flow of new liquidity into the markets. Traders can then borrow money on an overnight basis for five basis points, which is nothing. Buy anything with a yield like a ten-year or five-year bond or speculate in stocks that they think might be going up or even get fancier and go into derivatives or commodity futures or whatever. And then capture the profit or the spread between the cheap money that the fed is putting into the overnight market and the yield or profit they're making on the asset, and they're leveraging way up.
You know, 90 percent, 95 percent in many cases. So obviously, the whole financial market is dependent on this, but it comes at a cost. It is destroying savers in America. If you worked a lifetime and saved $100,000.00, you're making $400.00 a year in interest from a lifetime of savings. I think there will be a revolt sooner or later of the American public against this disastrous crushing of the saver in order to essentially accommodate Wall Street's appetite for liquidity.
Harry Dent: Yeah, I agree. I mean the funny thing is that we had the greatest debt bubble in history. We had a financial bubble, and when it all burst in 2008, what did they do? They recreated the bubble. They're trying to cure credit crisis with more debt. They're trying to recreate a bubble that only favored Wall Street and the top one percent. It's really the top .1 percent. One out of 1,000 families get most of the gains. Unlike with this three and a half trillion in fed stimulus, QE, what if they had sent a check for $30,000.00 to every household? That's what they could have done with that money. Don't you think that would have helped income and equality?
Don't you think that would have helped the country? They're saving the banks and the financial systems that became this gambling casino David is talking about. They're saving – special interests are driving this. They're the big lobbyists. They brought in the foxes to look over the henhouse. Goldman Sachs, I hate to say it, but that's what they brought in to cure the situation. Crazy.
Tracy McCullough: So tell me, how did the fed gain the control where they could control the interest rate over six years? I know it's in an effort to stimulate the economy, but how are they allowed to do this?
Harry Dent: Well they started doing it in 1987. It's Keynesian economics. The government is supposed to push down interest rates, spend money when the private sector is not to offset. Well that'd be fine if they didn't run deficits since the 1970s and trade deficits on top of that and create this giant bubble. But this is the only way they can deal with it. This is what economists think you should do. Leading economists like Paul Krugman thinks you should just keep interest rates low forever if necessary. Print money forever if necessary. This is insanity. The economy can never rebalance the debt or the financial bubbles or the imbalances or the inequality in incomes or any of this or excess capacity if we don't let the economy go down, deleverage.
What they're doing is preventing deleveraging. As David said, you keep the interest rates low. Well people can speculate. Banks aren't making money on loans anymore. They're speculating, and the fed has made that the only way to go. Investors, the only place to go is stocks. You can't go into bonds anymore.
Tracy McCullough: What do you think about that, David?
David Stockman: Well you know, the problem is the fed, I've described, is a rogue institution. It's operating beyond any of the legislative intent or statutory authority that's been given to them over the years. They have essentially become a national monetary planning agency that has decided they can drive the daily, weekly, monthly movement of the economy by manipulating interest rates and the yield curve by putting a put under the stock prices by essentially trying to drive the entire 18 trillion or 17 trillion US economy from Wall Street. That is fundamentally at variance with the requisites of a healthy capitalist economy. You need an honest financial market. Not a manipulated one.
You need price discovery by people that have their money at risk, not the central bank.
Harry Dent: Actually, it's a centrally planned economy, isn't it?
David Stockman: Right, exactly.
Tracy McCullough: It appears Washington and the feds simply defy, even break, the sound money rules, thereby corrupting the natural business cycle. Nowhere is this more evident than the bailout schemes that have swept through Washington. David, you claim these bailouts are illegal, but they keep happening. From trillions spent in bailouts to AIG and Wall Street, to billing out the audio industry, and in essence bailing out the green energy industries with massive subsidies. So why haven't all these bailouts helped the economy?
Harry Dent: Well you know, a lot of politicians say the stimulus hasn't worked. Look, we would have been and seen a Great Depression. We were – this was unraveling. Financial institutions from AIG to General Motors and banks were failing. This was exactly what happened in the early '30s. So what the quantitative easing and the zero interest rates did was put liquidity in the market, put – this money went straight in the financial institutions. Like I say, it didn't go to the average household. Didn't go to write down their mortgage or anything to help them. It went to save the financial institutions.
So in that sense, it worked. Did it work as good that we're growing as well s we did in the best part of the 1990s or 2000s? No, but we're growing at two to three percent. Two percent on average, which is a big difference from a Great Depression. So it has worked and it will not bring us to escape velocity. There's no way we can have sustainable growth with demographic trends pointing strongly down and worse with the debt loads we talked about. Eight times GDP, there's no way an economy can go at normal speed with that sort of debt. So it won't work long-term, but it has made a difference. The problem is it's only shifted the can down the road.
It's like taking more drugs to keep coming down from a high, which means you're going to crash harder later. So I think the next downturn, which we're seeing for 2015, '16 or so, is going to see a worse crash and a deeper crisis than we saw in 2008 and '09.
David Stockman: Well the problem with the fed stimulus is there's nothing magic about money printing and zero interest rates. The only way it can work is if it induces households and businesses to borrow more and spend or invest. What they fail to recognize is that after 30 years of doing this since the 1970s, they have brought the households of America, the overwhelming 90 percent of American households to a position of peak debt. They have so much mortgage debt, credit card debt, student loan debt for their kids or that they guaranteed. And other forms of debt, auto paper that they can't borrow anymore. So if you offer the average American household zero or cheap money, they can't borrow because they're up to their ears in debt already.
So therefore, there's been no stimulation to mainstream. Instead, all the cheap money has stayed in the canyons of Wall Street where the speculators can access it day after day or week after week, use that cheap money to buy things that might produce a return or a yield, and pocket the difference. That's called arbitrage. Therefore, the mechanism of easy money is no longer working because we're at peak debt, and the fed is simply creating a bigger and bigger bubble in Wall Street.