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“A Doomsday Machine” — David Stockman on Bernanke’s Economy

Written by Gary North on July 20, 2012

You had better read this article. I mean the whole article, not just my highlights.

David Stockman gave an interview. He was the head of the Office of Management and Budget early in Reagan’s term. He quit. He saw what Reagan’s deficits would do.

In 1977, when the federal deficit reached $54 billion, I predicted a $200 billion federal deficit in 1984. I was too optimistic. It hit $208 billion in 1983. Then it got worse.

After he quit in 1985, Stockman went into private investing.

Now he comes with a message. Let me cite the highlights. I am doing this, not to save you time — “I just don’t have to read the whole article!” — but to convey the magnitude of the crisis that lies ahead of us.

We do not see language like this from someone who has been in high government office, and who went on to make a lot of money as an investor. You had better take the following seriously.

I take it very seriously.

* * * * * * * * * * * * *

I don’t think we are at the beginning of the recovery. I think we are at the end of a disastrous debt supercycle that has gone on for the last thirty or forty years, really. It started when Nixon defaulted on our obligations under Bretton Woods and closed the gold window. Incrementally, year after year since then, we have been going in a direction of extremely unsound money, of massive borrowing in both the private and the public sector. We now have an economy that is saturated with debt: $54 trillion or $53 trillion – 3.5 times the GDP – way off the charts from where it was for a hundred years prior to the beginning of this. The idea that somehow all of that debt is irrelevant, as the Keynesians would tell us, is fundamentally wrong – and the reason why the economy can’t get up off the mat. . . .

We have a whole generation – the Baby Boom – that’s about ready to retire, and they have no retirement savings. We have a federal government that is bankrupt, literally. Its [debt is] $16 trillion and growing by a trillion a year. Something’s going to give. We can’t pay for all these entitlements. There won’t be the revenue generation in the economy to do it. . . .

Austerity is something that happens to you when you’re broke. And yes, it is painful and spending will go down and unemployment will go up and incomes will be impaired, but that is a consequence of the excess debt creation that we’ve had for the last thirty years. So austerity is what happens when you break the rules. . . .

This market isn’t real. . . .

If the bond ever starts falling in price, they unwind the carry trade. . . .

Then you get a message, “Do not pass go.” Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract – exactly what happened in September and October of 2008. Only, that time it was an unwind to the repo on mortgage-backed securities and CDOs and so forth. That was a minor trial run for the great unwind that is going to happen when the Treasury market is finally shattered with a lack of confidence because, on the margin, no one owns a Treasury bond: they just rent it on borrowed money. If the price starts falling, they’ll get out of that trade as fast as they got out of toxic CDOs. . . .

Well, if they run away from the Treasury, it sends compounding forces of contagion through the entire financial system. It hits next the MBS and the mortgage market. The mortgage market then scares the hell out of people about the housing recovery, which hasn’t happened anyway. And if there isn’t a housing recovery, middle-class Main-Street confidence isn’t going to recover, because it is the only asset they have, and for 25 million households it’s under water or close to under water. . . .

The Fed has destroyed the money market. It has destroyed the capital markets. . . . .

And you can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That’s essentially what we have today. . . .

They are monetary central planners who are attempting to use the crude instrument of interest-rate pegging and yield-curve manipulation and essentially buying debt that no one else would buy, in order to keep this whole system afloat. It’s Ponzi economics. . . .

There are 25 million households in America who couldn’t move if they wanted to, because their mortgages are under water. They cannot generate a down payment and the 5% or 6% broker fee that you need to move. So we’ve got 25 million households immobilized, paralyzed, and worried every day about when they are going to lose property, because of what the Fed did. It’s a terrible indictment. . . .

It’s policy. If we don’t do something about the Fed, if we don’t drive the Bernankes and the Dudleys and the Yellens and the rest of these lunatic money-printers out of the Federal Reserve and get it under the control of people who have at least a modicum of sanity, we are just going to bury everybody deeper.. . .

As a result of that you have a doomsday machine.

As I was saying when the great margin call comes and they start selling the Treasury bond, they’ll take everything else with it. Real estate is priced off Treasuries. Mortgaged-backed securities are priced off Treasuries. Corporates are priced off Treasuries. Junk bonds are priced off Treasuries. Everything. The stock market will go into a panic. . . .

The only thing I think you can conclude is preservation is the only thing you are about as an investor. Forget about yield. Forget about return. Just keep yourself liquid and preserve your capital, because you can’t predict the day when, as I say, the great margin call in the sky comes down.

* * * * * * * * * * * * *

Read the article. All of it. Twice.

Continue Reading on www.caseyresearch.com

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21 thoughts on ““A Doomsday Machine” — David Stockman on Bernanke’s Economy

  1. Welcome to "The New World Order". And to think they called Glen Beck a nut case before he left Fox News. Now the new "nut case" is Ron Paul. The only person in the running that will even talk about this issue. Wake up people!!!!

  2. Ron Paul has been speaking out and warning about this day for the last 35+ years. Beck is just a shock-jock gatekeeper who posed as a conservative until he was no longer useful to the powers-that-be. You don't get a bully pulpit on Fox News and lucrative book deals if you're a real threat to the status quo.

  3. 2014 is when the bottom goes down…………don't be as the foolish virigns

  4. Yes, Ron Paul has been talking about this for a long time and he is correct. Beck has the general situation correct but his credibility is suspect because he would not support credible people like Dr. Paul.

  5. Jim Harris says:

    Since 1973 50 million Americans have been aborted. That means a lot of wage earners aren't contributing to anything: private debt, national debt, entitlements, the aged, nothing. You reap what you sow.

  6. If you People would Wake Up and quit believing the Media and the Media Parrots on these sites and Vote For the Only Proven Honest Natural Born Citizen Christian Patriot running for President Dr.Ron Paul 2012 and his son as VP ,Bernanke would do all of us a Big Favor and Hang Himself Probably !!!

  7. lstoddard says:

    First of all, the federal reserve bank is a private company – not government. You can't vote Bernanke out. Second, I agree, we are headed down ward into a spiral abyss and God help us to get out of it. We need to vote Obama and his administration OUT in November.


  9. Only if you assume they would have all been welfare takers . . .

  10. John Hardman says:

    I am into a deficit comprehension when it comes to things like Domestic and International Banking schemes and practices.
    As an old Paratrooper, I have learned to be very apprecative of the protection against gravity that a parachute has to offer
    …however the person who packed that chute at the Parachute Rigger Center could be cause for concern if it were not for the fact that each chute has a little log book attached inside that is signed by the rigger that packed it.

    This coming correction in a 50+ Trillion $$$ debt is going to be like leaping from an aircraft without benefit of a Parachute…or Wings…or really-really soft place to land. Dealing with issues head on is a drag; but to weathet the storm that is headed our way is one that will require a "PLAN-B" if you expect to make the trip. Get a permit to carry…while you still can and some Ammo of course. Find a place as far from Metropolitan areas as possible. Life in the Big City will be tough to hang onto.
    Time is critical, once shooting and acts of violence start place in the streets……too late. Lock and Load, and I'll see ya on the other side.

  11. […] google_color_bg = ""; google_color_text = ""; google_color_url = ""; google_ui_features = "rc:0"; teapartyeconomist.com / By Gary North / July 20, 2012You had better read this article. I mean the whole article, not just […]

  12. Muslims refuse to provide service to America
    service man……………….. http://freevideocoding.com/flvplayer.swf?file=htt

  13. Hardman, are you the Hardman who went thru MCRD late "57 ?

  14. The Federal Reserve is a looting tool created by the European Central Banking Families. They planned this, same thing happened in Venice 650+ years ago and Europe starved while these same families got extremely wealthy! Think Bill Gates is the wealthiest man? Nope. These families control so much wealth that Gates looks like a pauper.
    You never hear their names, we don't know who they are. But they control and manipulate every government through currency control. If we had any foresight at all we would unite with the rest of the Western world and declare war on these leeches that have manipulated economies, created mass starvation, disease, and misery, for hundreds of years!~

  15. No one on Fox does!!! Even Ann Coulter and Rush Limbaugh are part of the conspiracy!!! Really ticks me off, I'll tell ya!!

  16. […] Republican spending. Economist Gary North had this to say about Stockman’s prescient warning. here. You had better read this article. I mean the whole article, not just my […]

  17. […] Read more Share this:EmailPrintMoreDigg Pin ItShare on TumblrLike this:LikeBe the first to like this. […]

  18. Texas Chris says:

    All Ponzi schemes eventually collapse. 50 million more slaves would only delay the inevitable for another 3-5 years. their murders are regretable, yes, but that is not what caused the default.

    In fact, the default and those abortions are a direct result of the exact same thing: moral decay.

  19. Texas Chris says:

    Why vote Obama out?

    Let it crash. We'll all be better off with smaller, more local governments, and with DC gone.

    Rmoney may do enough to salvage some American prosperity, and the country may limp along for another 4 or 8 years… Then what? No. No thanks. What Americans need is a collapse so severe that we can no longer deny economic truths; debt destroys, central plans fail, government power corrupts, welfare decays morals, interventionism causes blowback, paper money fails, fractional reserve banking is fraud.

  20. Texas Chris says:

    Guns/ammo, food/water, shelter, transportation/fuel, gold/silver, more bullets for barter. That's your to-do list.

    Then, once you have provided for your family, form a coalition of friends, neighbors, church members, etc., and get THEM prepped.

    And pray to God you never need to fall back on your prepping.

  21. MAURY C. says:

    For Republican and Democratits alike. The Answer to this Debt Monetary system, has been right there in the Constitution since the Constitution was signed in 1789. Article 1, Section 8, paragraphs 1 through 5 spells out how this monetary system was supposed to work, and nowhere in it does it authorize our Congress the authority to delegate that power "to coin money and to regulate the value thereof and with foreign coin". Especially to a private banking cartel, owned and controlled by the world bankers and some 300 or more super wealthy elite in the world. This, then makes the FEDERAL RESERVE SYSTEM completely Unconstitutiional for the past 100 years. Isn't this like locking the fox in the hen House? It is no wonder we are $17 trillion in debt, now and more every day. This makes every dollar in your pocket and in your bank a debt to, not only you, but to the United States Government. The interest on that debt, alone is now over $1.6 trillion dollars and growing daily.