Jason Hartman interviews David Stockman, former budget director for President Reagan, former US Representative for the 95th Congress, a former partner at The Blackstone Group, and author of the new book Peak Trump: The Undrainable Swamp and the Fantasy of MAGA. They talk about Reagan’s spending cuts and Trump not having a program to address the failing economy. They also touch on private debt and the impact of increasing debt on inflation.
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Welcome to the holistic survival show with Jason Hartman, the economic storm brewing around the world is set to spill into all aspects of our lives. Are you prepared? Where are you going to turn for the critical life skills necessary to survive and prosper? The holistic survival show is your family’s insurance for a better life. Jason will teach you to think independently to understand threats and how to create the ultimate action plan. sudden change or worst case scenario, you’ll be ready. Welcome to holistic survival, your key resource for protecting the people, places and profits you care about in uncertain times. Ladies and gentlemen, your host, Jason Hartman.
Jason Hartman 1:53
It’s my pleasure to welcome David stockman, he’s a former two term congressman from Michigan, and Director of the Office of Management and Budget under President Ronald Reagan. He’s the best selling author of the 1986 book, the triumph of politics, as well as several others the great deformation, the corruption of capitalism in America, and Trump to nation on the brink of Ruin and how to bring it back in his newest book peak Trump, the untrainable swamp and the fantasy of mega meaning make America great again. Of course. David, welcome. How are you?
David Stockman 2:27
Very good, and happy to be with you.
Jason Hartman 2:29
It’s good to have you. And you’re coming to us today from one of my very favorite places I visit often. And that is beautiful Aspen, Colorado, is that correct?
David Stockman 2:36
That’s correct. And it’s a great time to be here. three feet of snow and perfect weather outside.
Jason Hartman 2:41
Yeah, one of my friends in Aspen, Alicia just told me that a couple of days ago. So she said come up and ski. It’s good time. You’ve got quite a history. I mean, you served under reagan for five years, just to take it back way back to 1986. And then in 1987, you were one of the original founders of Blackstone, you have quite a wall street career. You’ve done a lot of stuff. But what is the thesis of the triumph of politics? That’s sort of before my time, a little bit.
David Stockman 3:08
Yeah, well, the thesis was that despite his best intentions, which was to balance the budget shrink, the federal government unleashed private enterprise in the private sector, President Reagan didn’t make a lot of progress, because he was thwarted on Capitol Hill at practically every turn on spending cuts and even on numerous areas of deregulation. And not just because of the democrats or because of the, you know, permanent government bureaucrats who have so much influence or even lobbyists because of because of the Republican Party. They talked a good line about spending cuts and deficits are bad in the national debt is out of control. But that was it $1 trillion in national debt. When it came time to vote to reform food stamps, for instance, or to bring Social Security back to its original intention of a retirement program, not a quiz AI welfare program. They were nowhere to be seen. So Reagan probably ended up getting less than five or 10% of the spending cuts he asked for. He got a much bigger tax reduction than we proposed. And the defense budget just soared out of sight once the military industrial complex, you know, got up ahead of steam. And so instead of ending up with a balanced budget, he ended up creating 2 trillion of additional debt during his term and office eight years, which was double what his predecessors in the previous 180 years. It put on the book terrain and compared to today, it’s like nothing Yeah. I know exactly. And that’s the key point, the takeoff point for present times, it started as down a path of just rampant borrowing. And not just in the public sector, but the private sector as well. It set up a situation where the Federal Reserve, which had historically been economically independent, became essentially the handmaid of the Treasury and bought up huge amounts of Treasury debt, thereby making it easier to finance these deficits, but at a cost of creating enormous financial bubbles or the ability in the private economy that we’re still struggling with today. So yeah, no question was a mixed legacy. It was the intentions were all perfectly aligned. It was an exciting time in 1980, to think we might be turning the corner the direction of history back towards fiscal rectitude, sound money, free markets. But frankly, it just didn’t happen. Because of the title of the book, the triumph of politics, it got stopped on Capitol Hill. Yeah, yeah.
Jason Hartman 6:15
Well, maybe that’s the point is that you know that to tie it in with your newest book, The Swamp is untrainable. Right?
David Stockman 6:24
Yes. Well, I think that we learned that in the 1980s. And it’s the lesson is only been compounded in the three decades, since. But now it is a far more serious matter. Because see, when this whole thing started 1980, the public debt was only 30% of GDP. It’s actually been declining ever since World War Two, when it peaked for, you know, war finance reasons. And so therefore, there was a lot of headroom to make a mistake, you could have too big a tax cut to smaller spending cuts, larger, much larger deficits than you planned. And yet, there was room on the clean balance sheet of Uncle Sam at the federal government to absorb that for a while. But what it did was set in motion, a incorrect, you know, mindset assumption that you could do this till the cows come home year after year decade. And it would never catch up with you. So today, we’re 22 trillion public debt. 1 trillion, back then it was 30, instead of GDP is 106%. Today, but we’re saying is the habit of deficit finance is so deeply ingrained, that now we have a trillion dollar per year deficit built in. In other words, if no one went to Washington for the next five years, we still borrow a billion dollars a year or more. And the national debt will keep rising. And one of the things that I point out in my book is that on the automatic pilot that the budget is on today, the fiscal side of the will end up with 40 trillion of public debt by 2028, at the end of the next 10 years, or double where we are today. And the problem with Trump is that he recognized the economy was failing, but he did not have a program to address it. Before you go on.
Jason Hartman 8:16
Let me just say a couple things. If I may, number one way back to the Reagan, defense, or offense spending, whatever you want to call it. In the military, it was
David Stockman 8:26
It was offensive.
Jason Hartman 8:29
I justified that and I still do like Part one is I say that was okay. Because that was really a business plan to bankrupt the Soviets. And it worked. I think that was a success. But the problem is, you set up all these The reason we’ve got this, the military industrial complex gets a hold of that or any special interest group. And that’s just another big special interest group. And they form these iron triangles in this infrastructure gets in place that can never be taken away. And that’s the problem. It’s not like the government can do anything for a few years, which might make sense. It might make sense to you know, spend like a drunken sailor, I love Reagan saying about that, you know, it’s an insult to drunken sailors for a few years. But the problem is you set up a complex and that complex is an Iron Triangle and it never goes away. That’s a problem.
David Stockman 9:22
Yes, you’re absolutely right. It gets institutionalized it becomes permanently embedded. And then the original reasons are lost but the bureaucracy the deep state, if we want to use that term, just makes up new nations to justify what they have because they live off the largest now, I would disagree with you slightly on it was a business plan to bankrupt the Soviet Union. The Soviet Union was nearly bankrupt when reagan was elected because socialism inherently leads to bankruptcy. They were spending 40% of GDP under Since they couldn’t even mobilize their tanks because they didn’t have enough fuel, the threat simply wasn’t there. They were about ready to keel over and crash from
Jason Hartman 10:10
Well, he made it happen a little faster, right?
David Stockman 10:11
Maybe it happens a little faster. But But my argument today would be it wasn’t worth the price. Because you see, I was there fighting that damn thing. And I knew we could never balance the budget if you’re going to take defense spending from 140 billion to 300 billion in two or three years, which is exactly what they wanted to do back then. But they got so much money. And this is a really important point because it leads to where we are today. They didn’t know what to do with it. And so instead of going into strategic weapons, that allegedly could counter the Soviet build up a first strike capacity that never really happened, but it was argued,
Jason Hartman 10:51
and all their Star Wars junk. Yeah, yeah.
David Stockman 10:54
But, you know, the point was, they couldn’t spend 10% of that money on strategic weapons, the Minuteman missile upgrade and all the other things we were going to do the rest of it, and here’s the key point went into conventional capacity, you know, more aircraft carrier battle groups, a much bigger Air Force that was conventionally and tactically oriented. But what good was that against the Soviet Union, we weren’t going to have a land war with the Soviet Union, you know, we were going to tear a nuclear war and have deterrence failed, it was the end of the world that was simple. But when they build all these new naval capacity, the 600, ship Navy, a whole new generation of tanks, new helicopters, in various kinds of airlift capacity was perfectly made to begin invading countries all over the world, like Iraq, and Libya and Sudan
Jason Hartman 11:51
It should have left the name alone and call it the Department of War, like it used to be called because that’s a proper name.
David Stockman 11:55
But you see, now we’re the warfare state. Now, it’s the American Empire spread all over the world. Now we’re in the world that are bankrupt. He has 17 years in the Hindu Kush in Afghanistan. And here’s the key thing, it was enabled by the reagan buildup, because frankly, if someone would have said in 1992, Bush, his successor, if you want to go rescue Kuwait is having the fight with Saddam Hussein, that didn’t amount to hell beans, from our security point of view, then I’m going to have to raise taxes in order to finance the military capacity I need, it never would have happened. If the first Gulf War wouldn’t have happened. The second one wouldn’t have happened. If that wouldn’t have happened. We wouldn’t be mired in Syria.
Jason Hartman 12:43
Right, right. Yeah, I got it. But here’s the question. Here’s the question I have for you, though, with the debt and deficit on this disasterous course, to I believe you said 42 trillion, or something with a T that’s trillion with a T?
David Stockman 12:57
Or what your by the, at the end of the 10 year cycle that we’re in 2028? And that’s
Jason Hartman 13:02
if we don’t get a spendthrift in office, right and make it to make it worse. That’s just on the current trajectory. So my question for you is this. Does that mean inflation?
David Stockman 13:13
It doesn’t mean inflation? Unless all the central banks of the world go crazy, printing even more money than they have been over the last two decades?
Jason Hartman 13:23
What about just our central bank? I mean, doesn’t it have to mean inflation?
David Stockman 13:26
No, I don’t think so what it’ll mean is a crunch in the bond pits, where the demand for borrowing will vastly exceed the supply of private savings yields will soar, that will cause a crunch time on Main Street and corporate America, in households and everybody else that is leveraged to the hilt. Remember, we have 70 trillion of debt on the US economy, public, private households, business, financing government, and we can’t afford to have an interest rate crunch that’s implied by the amount of new debt that the federal government is going to be issued. So if it if it doesn’t necessarily mean inflation, does it necessarily mean higher interest rates? To find out? Yes, absolutely. Because it’s the law of supply and demand. Now, here’s the key difference. For the last two decades, the Federal Reserve has been doing the heavy lifting, instead of the squeezing out or crowding out of private investment to higher interest rates as the federal government borrowed and borrowed and borrowed. The Fed stepped in and bought up the bonds, monetize the debt, expanded his balance sheet by and this is a staggering figure 4.4 trillion because you know, when Greenspan started this whole thing and he’s the culprit, where it all
Jason Hartman 14:53
No, I always say that if you want to lay the whole financial crisis at the feet of one person, it would be Alan Greenspan.
David Stockman 14:59
But let me just add when he took over the balance sheet of the Fed was 200 billion. Now that’s 1987. So it’s taken 73 years to get there from when the Fed opened the doors in 1914. And when he left, it was 800 billion. So it quadrupled in his years in office. But it paves the way for his, what I call protegees as signs and errors to double down and triple down. And that’s what Bernanke he did, and Yellen after him, and to some degree bald today, so we reached 4.5 trillion. Now, I want to tell you in 30 years, if you take the balance sheet of the central bank, from 200 billion to 4.5 trillion, you have printed a lot of money out of thin air, you have totally undermined the healthy balance of supply and demand, you got false prices in the bond market prices too high yields way too low. And that outcome gave signals to both private and public actors don’t worry about the debt, because it doesn’t cost very much. And so, you know, the system was put on a kind of Doomsday cycle where, because there was so much debt, the central bank pushing rates lower, and the lower they push the rates, the more people borrowed, the less financial discipline there was, the less fear of risk there was. And we basically painted ourselves into what I today would call a $70 trillion corner. That’s how much debt we have today, compared to the 5 trillion and listen to this number in our
Jason Hartman 16:36
Are you taking into account all the unfunded mandates, too,
David Stockman 16:39
No
Jason Hartman 16:44
that I read Laurence Kotlikoff on the show a few times and you know, I mean, that’s just wow, that’s mind boggling.
David Stockman 16:49
Yeah. But let’s just take the visible contractual debt loans and bonds that are out there. When Greenspan started this whole thing, and you and I are on the same wavelength here. The total data in the US economy, public and private households business government was 5 trillion. It’s now 70 trillion, right? When he started this, that 5 trillion was about 150% of GDP, which was 3 trillion or so a little more at the time. Today, GDP is 20. But the debt is 70. So we’re at three and a half times not one and a half.
Jason Hartman 17:24
Okay, so let me let me ask you about that debt. You’re talking about the private and public debt are just private?
David Stockman 17:28
Yes. combined. Okay. Okay. Okay. So wait, wait, wait,
Jason Hartman 17:31
on the private debt, though. Is that really that bad? In the here’s why I asked that question. Like everybody talks about the derivative crisis, right. Yeah. And they talk about the debt for both of those things, you have a Counterparty. So it’s not the same as the government debt. The government debt is a different animal. The private debt, though, because you’ve got a Counterparty? I don’t know, it’s not as bad as it seems. It’s bad. But I’m just saying I think it’s
David Stockman 18:00
not? Well, I think I think what you’re saying is, and that’s true of government debt, actually, that for every debt issue, where who has to pay interest? There’s some debt holder, who gets, you know, receives the, okay, that’s true, but it’s not the same people. And that’s the same problem that you have with derivatives. Yes, you can, you know, balance out the equation. So if it’s 500 trillion gross, the net, you know, might be 30 trillion or 40 trillion or something. But the problem is the people that Oh, and the people that own aren’t the same thing in today’s economy, basically, 80 to 90% of US households are tapped out, they can’t borrow anymore. And so that source of growth that we had for the last 10 or 20 years, is simply gone. Business, on the other hand, borrowed a huge amount of money in the year 2000. business this is Corporation and unincorporated mom and pops and all the rest of them have 6 trillion in debt today. It’s pushing 15. Now head, they here’s the thing, had they use that huge increase in debt to fund you know, plant equipment, technology, intellectual property, all the rest of it, that is productive assets? It would be one thing, but they spent the overwhelming share of it on the margin for stock buybacks, special dividends, m&a deals, most of them which you know, and failures. And then they just unwind them and say, don’t you know, we’re writing them off and don’t mind the write offs.
Jason Hartman 19:31
But my guess is the same thing Wall Street does with mutual funds. they close their funds. Like they were never there so they don’t go into the stats.
David Stockman 19:38
Such a scam. Yeah. So my point is it didn’t go into productive investment. It basically got channeled back into Wall Street. You know it stock buybacks, dividends m&a, de cash based m&a deals all goes back to Wall Street, which then got cycled back into new bids for stocks in other risk assets. Instead hired higher prices. So in a sense, it set off a kind of financial Ponzi scheme, in which the corporation business borrowed and borrowed, put it into Wall Street, Wall Street speculated on stock prices that encouraged businesses to borrow more shrink their stock in order to drive up, you know, their stock price and the value of options and the whole thing got out of control. And, you know, that’s where we are today.
Jason Hartman 20:27
So what can we expect? I mean, you look at you have got a tremendous resume, founder of Blackstone, what else? Wall Street, you
David Stockman 20:35
you had some other I started on at Salomon Brothers. And that was right at the peak of the prominence of sound brothers when it was the king of Wall Street. Okay. And it intended mortgage backed security. And it was a huge trader and purveyor of bonds. That’s where long term capital started, john, Merryweather
Jason Hartman 20:53
old nctm, right. Yeah.
David Stockman 20:57
Yeah, so much came out of there and came here when I was 40 years old, because I’ve spent the first 20 years of my life in Washington in government. But you couldn’t have had a better lesson in corporate finance and how Wall Street works than to be at Salomon Brothers in the mid 80s. And then, after that to be in the leveraged buyout business and private equity business for a long time. Okay,
Jason Hartman 21:19
so what can we expect next? That’s what I want to get to all of this. I mean, it’s a tremendous concern, obviously. But what is going to come of the economy over the next 10 years? And how should investors prepare themselves? How should they deal with it? Well, I
David Stockman 21:34
think the investors need to hunker down, I think investors need to recognize that we’re at the end of a 30 year cycle in which the debt grew enormously, as I said, 5 trillion to 70 trillion worldwide. In the last 20 years, it’s gone, you know, from roughly 40 trillion to 250 trillion. It was all fueled by massive central bank expansion. Central banks had balance sheets right before the turn of the century at about 2 trillion today’s 25 trillion. That was the motor force that drove the debt. The debt created this globally debt based global economy of which China is the epicenter, I call it the red bonds, etc, not 40 trillion of that debt. And I think we’re at the end of that road, because even the central banks have now recognized, they can’t expand their balance sheet forever at the rates that were being incurred, especially after the crisis in 208209. And they’ve pivoted, the Fed is now for the first time in recorded history, shrinking its balance sheet under Qt at a $600 billion rate. And that is big. And the Fed is the leader of the central bank convoy, and whether they others like it or not, sooner or later, they will have to stop buying bonds and begin to shrink their own balance sheets, or their they will have huge capital flight exchange rate problems and so forth. So I say to investors, we’re at a historic pivot point where the 30 year money printing party led by the central banks is over. And we’re now going to have to wallow in the morning after for years and years to come. as policymakers try to struggle with a debt encumbered economy that simply can’t grow, even as populations get older. And so security and welfare costs keep soaring. So it’s not a positive. Okay, so
Jason Hartman 23:39
you talked about cost soaring, but not inflation, you don’t think that’s necessarily inflationary? See, to me, it seems like high debt high spending means the government is going to want to inflate their way out of it. Right. You know,
David Stockman 23:55
they may want to, they may want to, but what we’ve learned in the last 10 years is central banks, on a worldwide basis can’t cause inflation. You can have one godforsaken country like Zimbabwe, you know, because they import inflation when their exchange rate collapses, but on the total global scale, there is no imported inflation. But when central banks all over the world drive interest rates down to zero or below and you know, we had something like 14 trillion at one point of debt that was trading below zero yield. They simply cause massive malinvestment, as we call it over investment. So we end up with so much capacity, we bring the latent labor out of the rice paddies into the tradable world economy, we cause all kinds of new infrastructure and shipping capacity and factories and steel industry demand. It just creates another
Jason Hartman 24:55
business cycle, right? Because it’s
David Stockman 24:57
so So what I’m saying is The ultimate effect of money printing is not what some people told you 25 years ago, inflation, it’s actually deflation, that we create so much excess capacity, that prices don’t go up, savings are crushed, because nobody’s making any return. And as a result of that, we get a highly lopsided supply demand equation that will, you know, undermine the whole system unless the central banks keep printing money, which I think even they realize is far too dangerous at the present time to do
Jason Hartman 25:36
but I would argue that they did cause inflation immediately following the Great Recession. And the reason I say that, is because the question I always ask is, compared to what, maybe that spiral of potential deflation would have been much greater, had they not done all the QE, right. And so the QE did cause inflation, you just didn’t notice it, because we were still so underwater, you know, it took years to get our head above water, right. So there really was inflation there, it was just compared to the deflation that otherwise would have happened,
David Stockman 26:08
you know, we would have Well, you know, I buy that to some degree, but I think the inflation was overwhelmingly in financial assets, not in Main Street goods and services, because because all of this excess liquidity, which is really what the balance sheet expansion tracks are majors, you create 4 trillion of liquidity out of thin air and never escapes the canyons of Wall Street. Because we’re at peak debt on Main Street, it therefore causes prices in the financial markets, asset prices to be bid up, rather than the price of labor goods. So that’s what’s happened. But the danger is to get markets high enough, like we saw with.com in 2000, they eventually crash on their own the private economy, then adjust negatively, for some reasons we can go into or 208, you get another financial asset, boom, going, it finally reaches unsustainable levels. So this time, especially in mortgage backed securities, it crashes the economy set back, and you get up and dust yourself off. But I think we’re now at the point the third time around where the Fed is out of dry powder, you know, they’re there. That’s what that’s
Jason Hartman 27:22
why they’re raising rates now.
David Stockman 27:23
So they’ll get they can reload there. You’re right. There’s they’re desperately trying to make up for lost time, because Yellen was a chicken Hawk. Okay, Bernanke, he was delusional. And so they spent four or five years keeping rates on the zero bound with anybody with common sense. And a sense of historical cycles and reality and financial markets would have said, we got to get these rates normalized. So the economy can function in a healthy way. They never did that. You’re certainly right. But you know, no one wants to take the Punchbowl away at the party, right? They
Jason Hartman 27:58
don’t want to be a bad guy. Only paul volcker was willing to do that.
David Stockman 28:03
You know, that is true. And that’s why he’s the greatest central banker in modern times. And we don’t have him anymore. And I would say also, though, if you go back to William McChesney Martin, who was Fed chairman for 19 years, it’s like Greenspan, he’s the guy who invented the phrase. It is our job to remove the Punchbowl just when the party is getting started. Can you imagine a Bernanke cookie or, or even a Greenspan? Oh, Greenspan ever?
Jason Hartman 28:33
Yeah. Yeah. He was very good stuff. give out your website. And you know, anything else you want to say about your books? I know we got to wrap it up. But
David Stockman 28:43
yeah, well, the book is, again is Pete Trump, the untrainable swamp and the fantasy of magga. And, you know, it’s essentially saying Trump peaked out last September when the market hit a artificial and unsustainable high. It’s all downhill from here, and he’s going to suffer for embracing a big, fat ugly bubble that he identified during the campaign, but then adopted once he was in office, rookie mistake. That book is now available on Amazon as an E book. I also publish daily something called David stockmans. contra corner. You can Google that and it’s a subscription based service, but it’s easy to sign up for fantastic good stuff. Well,
Jason Hartman 29:25
David stockman, thank you so much for all the insights and for joining us some fascinating discussion.
David Stockman 29:31
Very good. Thank you.
Jason Hartman 29:34
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