Until Your Liver Fails
Monday, May 14, 2012 at 6:00AM David Stockman was a former congressman and head of the budget office under Reagan. He got "taken to the woodshed" when he said that the Reagan budget deficits were not sustainable. Here is what the US economy has been doing since Stockman got in trouble for suggesting that debt is bad.
This chart is from Felix Salmon. Here is what he had to say about the implications of the chart.
From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP. In 1970, GDP was $1 trillion while the credit market was $1.6 trillion: a ratio of 1.6 to 1. By 2000, when GDP reached $10 trillion, the credit market had grown to $28.1 trillion: a ratio of 2.8 to 1. And by mid-2008, when GDP was $14.4 trillion, the credit market was $53.6 trillion. That’s a ratio of 3.7 to 1.
In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt.
Stockman saw the problem clearly in the 80's. I came on board a little later. That is why I supported Perot in 1992 even though I disagreed with him on many issues. I felt that the debt crisis was the only thing that mattered.
Clinton had the dotcom bubble (caused by excess money chasing investments). So that meant he was able to reduce the deficit. (He did not have a surplus. This was an accounting gimmick. The amount of debt that the government owed went up every year Clinton was president.)
As is always the case the bubble popped, and this led to Bush trying to "push on a string" and by tax cuts and money-printing increase the economy. It worked, but it was temporary—the debt level just kept getting higher and higher. This excess money went into real estate and caused the current crisis.
Stockman's view has not changed. While it would have been relatively easy and painless if we had worked on these issues earlier, we have waited too long and now it will be difficult. If we wait until the latest bubble—government debt—pops, it will be devastating.
David Stockman was recently interviewed for the Gold Report.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
I have been predicting that we have 3 to 7 years before investors no longer want government bonds. Stockman agrees:
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years’ worth of lies and by the time they are done eating, there will be a lot of mayhem.
As I mentioned last week we are headed for an interesting 2013. Interesting enough than my prediction of 3 to 7 years may be optimistic. Former Senator Simpson, co-chair of the deficit reduction committee, thinks it will happen next year.
Stockman does not know but suggests 2013 will be a difficult year:
TGR: Let's talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
A majority vote in congress—good luck with that!
But yet the call from the establishment is still more debt. It is like the drunk who feels bad every morning with a hangover. As soon as he is up he starts drinking again. Can he continue this for some time? Absolutely. But sooner or later his liver will fail. Then he is dead. We can see the signs of liver failure in the economy. Will the next president stop drinking? Not even if it is a President Romney.
Are you ready for the coming crisis? Most people are not. David Stockman concludes the interview with this happy thought:
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People's financial circumstances are so bad that they think they will be working two years after they are dead!
Reader Comments (2)
Tell me how not voting (or voting for some candidate who gets 1% of the total tally) has worked out for those who took their footballs and went home.
If the football game is fixed there is no reason to play.