The interview Porter Stansberry has been waiting years to do…

I think if we look around the world today we would say it’s a pretty dangerous place… the vulnerability of financial systems and the level of speculation and debt is at levels never before seen.” – David Stockman

Welcome back to the Stansberry Radio Interview Series.

Every Saturday, the Stansberry Radio Network brings you the most valuable ideas from the most intriguing guests from all of our shows.

This week we’re sharing highlights from Porter Stansberry’s interview with David Stockman.

David is the former director of the Office of Management and Budget under Ronald Reagan and author of The Great Deformation. He also runs a blog called David Stockman’s Counter Corner.

Porter calls The Great Deformation “the most thorough and comprehensive analysis of the current situation economically, globally, and I think in time people will look back and see that book as the clearest and brightest warning that folks have been given to date.”

David has had a fantastic career in politics and private equity. He understands the intersection of government and markets better than anybody in the country. To learn his unique view on how the corruption of America has evolved, read on…

Regards,

David Newman
Senior Producer
Stansberry Radio Network

 

Originally aired on the Stansberry Radio Network, June 26, 2014

Porter Stansberry: David, welcome to Stansberry Radio.

David Stockman: Thank you Porter, I’m very happy to be with you.

Stansberry: David, I’m thrilled to have you on the show. You’re about the only guy ever who’s willing to go on the record to say who he believes is a part of the gigantic concentric circles of power between Wall Street and Washington, D.C. And for those listeners who may not be familiar with your resume, you at one time were the golden boy of politics. You rose up in the Reagan administration. You held prominent positions as a young man. You went on to a very successful career in private equity working for Blackstone and then your own firm, and yet throughout your public and private life, you have said and done things that go completely against the grain in both Washington and New York. How do you explain that?

Stockman: Well, I don’t know. Maybe it goes back to my roots. I grew up on a farm in Michigan, and basically the watch word was, “Tell the truth and say what you really think.” And somehow I incorporated that ethic. I used it when I was a member of Congress at an early age. I got very lucky, I was elected when I was 29. I was a congressman from southwestern Michigan and one of the first issues I had to face in the late ’70s was whether to bail out Chrysler or not.

I was total free enterprise, free-market-oriented. I knew it wasn’t right to pick out one big corporation that made huge mistakes and couldn’t sell its cars to bail it out, so I voted against it and I was vocally against it. The whole delegation turned against me. Out of 19 members, the other 18 of them were for it. Lee Iacocca declared me persona non grata in the state of Michigan.

But I learned a lesson from that at an early age… If you are true to your principles and you speak forthrightly, the people will appreciate it and they will give you credit, because the next election in 1980 I got the largest margin I ever had, something like 70 percent of the vote.

I think part of the problem is our democracy today is run entirely by squeaky wheels, by the “K Street” lobbies, as I call them, and by politicians who over the years have become so housetrained in pacifying the squeaky wheels and placating the vested interests that we really don’t have any semblance of principle left. It’s just one big sort of scramble to see who can extract the most from the taxpayers of America and who can pile on more to our national debt. It’s really outta control and it’s getting very late in the hour to turn this around.

Stansberry: I do want to get to the subset of matters, and you’ve written the very best book I have read about these issues. In fact, I tell people all the time I don’t have to write the book anymore, because David Stockman already did. It’s all there.

Stockman: Well, I want you to know that over that [writing] period, one of the things I did was read a lot of your commentary from day to day, so maybe on some of the ideas, two minds were thinking alike…

Stansberry: That’s very nice. That’s pretty much the best compliment I’ve ever been given, because you’re truly one of my intellectual heroes. So that’s very flattering.

Stockman: Thank you.

Stansberry: So now I want to get into The Great Deformation: The Corruption of Capitalism in America. It seems to me that there is no political constituency for a balanced budget or for being responsible with taxpayers’ money. In short, our creditors don’t get a vote, and neither, really, do the people who pay all the taxes. So, how does this all end? When does the day come when the creditors say, “We’re not lending you any more money?”

Stockman: Well, it’s a good question, but I think you have to add a piece to the picture, and that is the absolutely destructive role of the Federal Reserve – I call it our “monetary politburo.”

Stansberry: That’s good.

Stockman: It’s undermining any remaining sense of fiscal discipline that still existed after the Reagan era and when Greenspan took office. Once we got into the Greenspan-Bernanke-Yellin era, [we’ve had] constant massive expansion of the Fed’s balance sheet, which is just another way of monetizing the public debt. That’s what they do, and this whole idea that we could sort of centrally manage the whole financial system in the economy by sitting in the Eccles Building with 12 wise men dialing the interest rates and monthly purchase rate for securities – that’s where it all falls apart.

Suddenly the politicians realized they were financing this rapidly swelling national debt with free money that was being created by the Federal Reserve. When interest rates are driven as they were almost down to under three percent on the ten-year [Treasury bond] that the carry cost of the debt was practically nothing, kicking the can became the policy of choice.

I spent time in Congress. I was elected three times. I’m not totally anti-politician, but I can tell you this. If you make it so easy to kick the can, if you allow a $17 trillion debt to be financed at $250 billion a year when it really should be $700 billion or $800 billion under normal interest rates, then politicians are going to take the easy way out. They’re not going to fall on the sword. They’re not going to lay out the real painful choices to the public. They’re not going to vote against the squeaky wheels and the powerful constituents when the Fed is printing the money and doing the job of financing the debt for them.

So I think that’s where the crisis comes. When the Fed finally reaches the point where the entire monetary system is threatened – and I think it would be if it had continued [to buy Treasury bonds] at $85 billion a month – when we reach that point and the Fed is no longer the big fat thumb in the market buying up the monthly and weekly issue of Treasury debt, then we’re going to see the rubber meet the road, so to speak. We’re going to have the day of reckoning, because there isn’t demand out in the real marketplace among real investors for massive amounts of additional Treasury debt at these lower interest rates. And when interest rates normalize, Katy, bar the door, because the carry cost on the federal debt, which by then will be $20 trillion, will soar by half a trillion a year. The politicians will finally panic, but I’m afraid by then it might be too late that we’ll be in a very serious bond-market crisis.

Stansberry: David, thank you very much once again both for appearing here and also for writing such an incredible book. It really is, as I see it, the most thorough and comprehensive analysis of the current situation economically, globally, and I think in time people will look back and see that book as the clearest and brightest warning that folks have been given to date.

Stockman: Well, thank you very much. I’m happy to talk to you.

Stansberry: Bye-bye.

Crux note: If you enjoyed this excerpt, listen to the entire interview from Stansberry Radio. David shares a time when he was most disgusted by the actions of his peers in Washington… you won’t want to miss his response. You’ll also get to hear some of Porter and co-host Aaron Brabham’s classic rants…

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