“For capitalism to work, you have to have effectively functioning, solid capital markets. And in order to do that, you need savings—real savings, not money printed by a central bank, but real savings from businesses and households,” says David Stockman, who served as budget director for President Ronald Reagan.
“Back then, the public debt was 30-40 percent of GDP—not good, but tolerable in terms of historic trends,” says Stockman. “Today, it’s 120 percent and growing rapidly—total change. We basically tried to borrow our way to prosperity.”
Stockman is the author of “The Great Money Bubble: Protect Yourself from the Coming Inflation Storm.”
“You can’t keep borrowing two or three trillion a year, building up the public debt, and leaving that massive burden to future generations. You can’t do it,” says Stockman. “There’s a lot of whining on Wall Street and elsewhere about how fast the Fed has raised interest rates. But the problem is they started at zero.”
How did we end up in the current fiscal crisis, what happens when we raise the debt ceiling, and what are we not being told?
“In this deal, there are no enforcement mechanisms at all beyond the current year,” says Stockman. “The mainstream media didn’t want any alternative except for the Republicans to blink and the debt to be raised yet again. And that’s exactly what happened.”
Interview trailer:
Watch the full interview: https://www.theepochtimes.com/david-stockman-debt-default-the-doomsday-budget-machine-and-failed-fiscal-restraint-explained_5311019.html
FULL TRANSCRIPT
Jan Jekielek: David Stockman, such a pleasure to have you on American Thought Leaders.
David Stockman: Great to be with you.
Mr. Jekielek: I’m going to start with something I picked up from your book, The Great Money Bubble. You write, “We should put an end to the insane central bank campaign against a non-existent deflationary threat.”
Mr. Stockman: Yes. But it’s relevant because for 10 years we heard from the Fed that we didn’t have enough inflation, that they were missing their 2 percent target from below, from the low side, and therefore, they had to keep printing the money and keep interest rates practically at zero in order to get inflation up to target. That was absurd.
It led to a drastic overshoot. It flooded the financial system with liquidity, which eventually worked its way through the world economy and delivered, once we had a big bump, which was the Covid and the supply chain breakdowns, and then, the war in Ukraine.
All those things dislocated the world economy. All that liquidity was out there. Suddenly, we had 4, 6, 8 percent inflation, and they didn’t know where it was coming from. But they had caused it along with other central banks that followed the Fed’s lead.
When inflation was clearly way, way above target a year-and-a-half ago, they said, “It’s only transitory. It’ll be gone soon.” But it wasn’t. Finally, in March 2022, they had to abruptly reverse course and begin to raise interest rates, so-called dramatically, because they were so far behind the curve.
But here’s the thing. There’s a lot of whining on Wall Street and elsewhere about how fast the Fed has raised interest rates. But the problem is they started at zero, and they never should have been at zero.
The interest rate, the one where they set the overnight rate, the so-called federal funds rate, is still kind of low by historical standards. The perception that they have drastically and sharply raised interest rates is only because they started from the rock bottom, from what I call the sub-basement of history in terms of relative positions.
You have to understand that the big problem in the world today is the Fed and the central banks. All of them have gotten into some big money printers convoy. They’ve so flooded the world market with fiat credit that it has distorted everything. That’s why we have inflation. That’s why we have these huge financial bubbles on Wall Street.
That’s why real estate values got so far overvalued and became so excessive. That’s why people are suffering today, who have a paycheck that’s not keeping up with inflation and living standards. Purchasing power is shrinking or falling, and that’s where the great majority of Main Street is today.
The whole thing was really a fiasco. It’s not going to change if the Fed merely retunes its policy or slightly adjusts its approach to things. We need a house cleaning from top to bottom at the Federal Reserve and in other central banks. We also need to recognize that it was all of this easy money, these ultra-low interest rates that enabled Congress to spend like there was no tomorrow, and to build up the national debt to this $32 trillion level that we’re at today.
That set the table, so to speak, for the big debt ceiling crisis that we’re having at the moment. Frankly, I would predict it is going to happen over and over and over as far as the eye can see because the Congress has allowed fiscal matters to drift totally out of control.
Mr. Jekielek: You’ve just given us a massive macro view of the last 40 to 50 years.
Mr. Stockman: Since the ’70s, really. Yes.
Mr. Jekielek: You’ve been watching this closely because you were the budget director at one point under Reagan in the early ’80s.
Mr. Stockman: That’s correct. I would just put a number in. People now recognize because of the debt ceiling battle that’s going on, that the public debt is $32 trillion, which is a pretty big number. But I’m still here. I’m not 900 years old. Okay. When I went to Washington in 1970 to begin as a young guy working on Capitol Hill, the public debt was $200 billion.
When I became budget director in late 1981 for Ronald Reagan, we were trying to hold the public debt under $1 trillion. Now, that wasn’t that long ago. That’s 40 years ago. And now, we’re at $32 trillion, a 32-fold increase in a few decades. The economy has maybe increased by three or four times, and the budget or the public debt by 32 times. Back then, the public debt was 30 to 40 percent of GDP; not good, but tolerable in terms of historic trends.
Today, it’s 120 percent and growing rapidly, a total change. We basically tried to borrow our way to prosperity. What we’ve ended up doing is creating an almost impossible fiscal equation, because as we look forward, what’s happening? The baby boom generation, 80 million strong, is all going into retirement.
I was in the first year of the baby boom, 1946. Then, there’s 12 to15 years worth of baby boomers. After that, they’re all going to be retired on Social Security, Medicare, and other retirement programs. We are drifting into a condition where the pressure is on spending due to pure demographics, and it’s baked into the cake. Everybody that’s relevant, workers or retirees has already been born. They’re there. They can be counted. It’s going to get a lot worse because the number of workers relative to the number of retirees will keep shrinking. So, we have big problems.
Mr. Jekielek: I want to go back to first principles here. I learned a ton from reading your book as you chart the progress of the development of the Fed. I think you call it the infernal money machine.
Mr. Stockman: Yes, the infernal money machine.
Mr. Jekielek: From a layman’s perspective, a lot of money is being made through manipulating money as opposed to through actually creating value, which one would hope would be the main way. The cost of that is huge, obviously, because there are huge industries that are dedicated to manipulating money, instead of actually creating something of value.
Mr. Stockman: Sure. If you look back in history 100 to 120 years ago, the great prosperity in America was created by new industry. The steel industry grew and boomed. The automobile industry was born in the 1890s, and by 1930 was a major U.S. industry, along with the modern chemical industry and plastics. All the products that came from that grew in that time. And then, along came radio and TV. These were all useful things that produced something of value based on tangible goods that ended up in the economy. Yes, John D. Rockefeller became a very rich billionaire in today’s dollars in his day, or Frick or Carnegie in steel, or many, many others. Actually, Thomas Edison became quite wealthy from his inventions.
Today, a lot of the wealth that has been created was created on Wall Street, not out in the real economy. It was created as a result of the Fed saturating the financial system, the stock market, the bond market, and real estate markets with cheap money, which was then used to invest in leverage speculation.
As long as the money bubble kept expanding, stock prices could go higher and higher and higher. People could get richer and richer and richer, but they weren’t necessarily creating anything new. They were simply revaluing what was already there, even the new companies that were really innovating and generating things.
Amazon is a great company. Google is a great company, but their valuations have become so extreme. Tesla would be the best example of all. Maybe there’s a role for electric vehicles in the future with a major share of the market, or maybe not.
Tesla became massively overvalued due to all of this speculation in the stock market. That’s the dilemma we have today. Finally, the Fed has realized it has to stop printing money. I know that sounds kind of simplistic. But the fact is, a year ago in March, they shut the printing press down because inflation was accelerating and getting out of control.
For a year and two or three months now, they have printed no new money, and interest rates have consequently risen. Bubbles have begun to break everywhere. The stock market has not yet totally collapsed, but it will. We’re now finally having to reverse course after this enormous money bubble, as I called it in my book, and as I write about every day in my newsletter, “The Contra Corner.” It’s a contrarian view of what’s going on in the world.
All of this now is being reversed. If people think that tomorrow is going to be like yesterday, then, they need to rethink where we are, because tomorrow is not going to be like yesterday. We’ve had a party for several decades. We’ve had huge bubbles. We’ve had unsustainable money printing by the Fed. We’ve had a public debt that has grown from one trillion to 32 trillion in a short period of time.
None of this was really sustainable. It didn’t represent sound economics or sound money or sound public finance. It was all kind of a fantasy. Now, we’re going to have to deal with the consequences. That’s what I was trying to say in my book. The direction of history is now changing, and there’s going to be some very difficult, unavoidable adjustments coming ahead.
Mr. Jekielek: This relationship between interest rates and-
Mr. Stockman: Inflation. Yes.
Mr. Jekielek: … inflation, exactly. That is not necessarily obvious to everybody. Why is that always so tightly connected?
Mr. Stockman: Capitalism is the only road to prosperity. Everything else that we’ve tried, government statism, democratic socialism, or communism, none of those work. We can see that in the pages of history. But for capitalism to work, you have to have effectively functioning solid capital markets. In order to do that, you need real savings, not money printed by a central bank, but real savings from businesses and households that can then go into investment for new capacity, new productivity, new goods and services.
That will not happen if the interest rate on savings is lower than the inflation rate. What that means is that if you save, you’re stupid. You’re losing money because every year everything you’ve saved is worth less than the interest you earned on it. That’s where we’ve been now for the last 20 or 30 years with a negative interest rate after inflation. We call it the real interest rate, or real inflation adjusted interest rate.
That created all these great bubbles that created this sort of full prosperity, temporary prosperity, but it was wrecking the system. Now, what’s happening is the Fed is finally, reluctantly, in the daylight and a dollar short, trying to get interest rates back up above the inflation rate. They have a long way to go.
Right now, the federal funds rate that they control, the short term money that you can earn in a money market, is at 4 percent. The inflation rate is 6 or 7 percent. Savers are still behind the curve. Until you get the inflation rate down dramatically or interest rates up even higher than they are today, that isn’t going to change.
That’s the pivot that we’re in today, trying to get interest rates back above the inflation rate and get honest price discovery back into the marketplace. Because that’s the only way you’re going to get real healthy capital markets and financial markets. Without those, you’re not going to have the investment you need for an economy to grow on a sustainable basis.
Mr. Jekielek: It’s really Main Street, the working class, the middle class that face the cost of this scenario the most, because their savings are effectively depreciating. The value they have is depreciating. Whereas, people that are speculating in these larger areas are possibly benefiting, correct?
Mr. Stockman: Yes. For a while, I would say the policy of the Fed— of course, they would never say it this way, but I would put it in delicately—their policy was to savage the saver. Because they decreed that short-term money, which is what a bank interest rate or a short-term CD, certificate of deposit, rate is based on, shall be 0.5 percent. In other words, 120 at the 1 percent.
Mr. Jekielek: Yes.
Mr. Stockman: That’s all savers were allowed to earn, or maybe a third of a percent or a half a percent. Even then, inflation was running at 2 percent, and if measured accurately would have been even higher. For years and years and years, the Fed said, “Keep saving suckers, because we’re going to shrink the value of whatever you’re putting in the bank.”
People weren’t that stupid, so they stopped saving. Our savings rate nationally kept going lower and lower, even as the governments were borrowing more and more. Deficits got bigger, and no one even bothered to balance the budget anymore.
There’s a pool out there. All the savings from private households or businesses come into the pool, and then out of that comes the investment of the private sector, plus all the money governments have to borrow, which has been several trillion a year to make ends meet in their current operations. Essentially, the real evil of the deficit is that it absorbs. It sups up all the savings that should be going into new factories or new shopping opportunities or new transportation systems, and ends up getting channeled into government budgets to fund the shortfall from current taxation. That’s really what’s been going on.
We have been redirecting savings which have been shrinking away from high value, high productivity, private investments into low value, in fact, often wasteful government spending and budgets. You can only do that for so long, and it catches up with you. That’s where we are today.
Mr. Jekielek: This is a good place to jump into our discussion about the debt ceiling.
Mr. Stockman: Sure.
Mr. Jekielek: Apparently, a deal has been reached. It’s going to be voted on sometime in the near future. You have a lot of thoughts about this.
Mr. Stockman: Yes.
Mr. Jekielek: I’ve gotten your newsletter. I’ll quote something you wrote, which I thought was fascinating and disturbing. You said, “We were within perhaps five days of breaking the iron grip of America’s fiscal doomsday machine.” That is the machine that we’ve just been describing right here.
Mr. Stockman: Right.
Mr. Jekielek: What do you mean here?
Mr. Stockman: Let’s look at the federal budget on a 10-year basis because one year at a time, they can only do so much. But on a 10-year basis, you have a pretty good take on where we’re going. If you take all of the current laws that are in place in policies for defense and nondefense and Social Security and Medicare and the safety net and all the other programs, spending will be $80 trillion over the next decade.
Unfortunately, if we look at the tax laws that are in place; the payroll tax, the income tax, and the corporate tax, only $60 trillion worth of revenue will be coming in. You have a gap of $20 trillion, which will be more deficit, more borrowing, and an even bigger public debt if nothing is done to change the trajectory, which is what they’re talking about, spending versus revenue.
Now, we were talking about how $32 trillion of public debt is a pretty terrible thing. But actually, if you look at the 10-year outlook and this built-in projection that I just described, you’re really heading towards $50 to $55 trillion of public debt by the early 2030s.
In other words, if they don’t do something, that’s where we’re going to be in a short period of time. That’s why we need to have big sweeping changes in policy, from my point of view, with much less spending, but if necessary, more taxes or a combination of the two.
But you can’t keep borrowing $2 or $3 trillion a year building up the public debt and leaving that massive burden to future generations. You can’t do it. So, that’s the background. That’s the context of the battle that’s going on today.
Now, I consider the deal that they made a joke. They didn’t address either the $60 trillion of revenue, or the $80 trillion of spending. Let’s look at the spending side which naturally would be our first point of reform and first point of change. Of that $80 trillion, nearly $50 trillion of that is in entitlements and mainly Social Security, Medicare, Medicaid, food stamps, student loans, and a few other big ones.
How much of that did they decide to save in this package that was agreed to? The total spending is $80 trillion, and $50 trillion of it is made up by these entitlements. It’s important to understand that they’re not approved every year by Congress. In other words, entitlements have that name because they are automatic.
If you don’t change the law, there’s 75 million people that are going to get Social Security. If you don’t change the law, even more than that are going to get Medicaid and Medicare costing $100 million. How much is in this compromise that would maybe reduce that just a little bit and help close the gap? The answer is zero. Zero. In fact, it actually goes the other way.
The House Republican package at least put a work requirement improvement on Medicaid and food stamps and family assistance. That would’ve saved $130 billion according to the Congressional Budget Office over the next decade. They went into negotiations a few weeks ago, and they kept reporting day after day. There’s a push and pull as they negotiate.
They came out of the room with a deal that did not cut $130 billion, or $70 billion, or $10 billion. It actually increased spending for those programs by two billion. In other words, it went in the wrong direction. It saved nothing.
Then, if you ask, “What’s on top of the $50 trillion that they didn’t cut at all,” the next $10 trillion is actually interest. You’re going to have to pay the interest or else the whole bond market of the world will fall apart. There is nothing you can cut. You’ve got to pay and you’ve built up the debt.
Mr. Jekielek: We’re up to $60 trillion.
Mr. Stockman: We’re up to $60 trillion. Now, what’s the next layer on that? There’s $10 trillion of defense over the next decade. How much of that did they cut? Zero.
In fact, the Republicans who were supposed to be the fiscally conservative party are constantly beating the drums for even more defense spending. Now, we’re totally out of control on defense spending. It’s $900 billion a year now, as much as the next 12 countries in the world combined.
That was set aside. That was off the table. There’s nothing in this package that will save a red cent from the $10 trillion defense. Now, we’re up to $70 trillion, right? What’s left? There’s $10 trillion left for the national parks, for grants to state and local governments, and for highway construction and veterans and a few other things.
They said, “We can’t cut veterans’ healthcare.” They set that aside, and they exempted healthcare. You see where I’m going. They back themselves into a tiny corner of the budget by exempting everything that would make a difference; no revenues, no entitlements, no interest cuts, and no defense savings.
Even in the so-called nondefense discretionary programs like the ones I mentioned, they came up with a freeze on a level that is higher than it’s ever been before. In other words, if we go back to when big spender Obama left the White House in January, 2017, nondefense, domestic spending, the little corner that’s left after all these others are set aside, was about $600 billion a year. Then, in comes the Republicans and President Trump and the majority both for a while in both the House and the Senate. Where did we end up?
They kept raising the spending, not cutting it, even though they spent years criticizing Obama for being a big spender. Then, came Covid, and they went nuts with trillions and trillions of free stuff and stimulus checks and unemployment insurance toppers and all kinds of money that was pumped into every sector of the economy.
My point was that today in 2023, non defense discretionary spending was $900 billion, 50 percent more than where Obama left it, which was bad enough. Then, the Republicans have the gall to come out and tell everybody, “We’ve frozen domestic spending for one year at that very high level.”
That doesn’t make a dent. It doesn’t make a scratch in closing this massive $20 trillion gap between spending and revenue that we’re facing as we go down the road.
Why do I think this was a failure? Not just because it didn’t cut anything and exempted practically everything, but also because it’s the only tool of budget control left, because Washington is so off the deep end on this debt ceiling.
Back in the day when I was there, I was a member of Congress from Michigan for a period of time. Then, while I was in the Reagan administration, we took very seriously the law that said, “Congress and the White House shall agree upon and pass an annual budget resolution that lays out all the policies that will generate revenue on the one side and spending on the other side.”
Hopefully, the two can come close to balance. That was to be done every year with something called the budget resolution, and then something called reconciliation, which was a set of policies designed to make more revenue or less spending in order to have a solid budget plan. We did that year after year. No one even imagined that you would skip having a budget.
A business has to have a budget. Most families have some kind of budget. Congress, in collusion with the White House basically said, “Forget it.” They haven’t passed a real budget resolution in years and years and years. That tool of financial management and fiscal management has just been kicked into the ditch.
The second thing is that if you look at the overall budget, 25 percent of it is appropriated each year for defense and these domestic programs that I’ve mentioned. 75 percent is for interest and entitlements. In the 25 percent, it used to be that you would have 12 appropriations bills every year, one for agriculture, one for Health and Human Services, one for the Interior Department, the national parks, and so on. People have vaguely heard about that.
When I went to work on Capitol Hill in the 1970s and then when I was in the White House in the ’80s, the annual appropriation cycle was a big deal. You had to get those 12 bills hammered out. You had to have them brought to both the House and Senate through committee, approved, reconciled in a conference, and sent to the president to sign. If he vetoed it, it had to then be re-enacted on Capitol Hill.
All of that was part of the routine of the financial management and fiscal management of the government. Guess what? They don’t pass appropriations bills anymore. They wait till the end of the fiscal year, which is September 30th. There are no appropriations bills for the coming year.
They pass something called a continuing resolution, a CR, that says for the next 30 days, you only spend at the rate you had approved last year. Then, the 30 days are up, and they still haven’t passed the bills, so they extend for another 30 days. Finally, nobody can agree on the bills. They can’t get them out of committee.
So, they pass some giant thing called an Omnibus Appropriation that is typically 3,000 to 4,000 pages long put together in the middle of the night, sprung on the House and the Senate the next day. They pass it sight unseen. No one could possibly read it or comprehend it. That becomes the appropriations bill substitute for another year.
Why am I going through this? Because if you don’t have an annual budget plan or a resolution, if you don’t do anything about entitlements, which is what reconciliation used to do, if you don’t pass any appropriations bills, then you don’t have any tools of financial management left, except that once in a while when the debt ceiling is reached you use that as kind of a leverage point to force action to do something about the spending and the borrowing and a fiscal process that’s out of control. That’s the only thing left.
In other words, the debt ceiling is a last resort fiscal tool. That is the only thing that’s going to stop what I call this doomsday budget machine from eventually taking this under financially. That was the battle that was going on all last month. That was the battle that was being addressed in this so-called deal that the speaker and president have agreed to.
What did they do in that deal? They threw away the leverage that the House Republicans had by saying, “We’re not going to agree to another debt ceiling increase unless we get some real fiscal retrenchment and spending cuts and reforms.”
They said this, and they said it over and over. They went into negotiations. They came out. Now, the debt ceiling will be effectively raised by another $4 trillion. We’ll go to $36 trillion from the $32 trillion that we’re at, with no spending cuts that make any difference that amount to a hill of beans in return. They gave up the tool, the debt ceiling leverage. What did they get for it? Essentially nothing.
Mr. Jekielek: There are savings that are being touted. You’re saying they’re not significant.
Mr. Stockman: Right.
Mr. Jekielek: There’s some kind of loophole that can be used against them. You keep hearing the debt default is going to be the end of the world. That’s exaggerating a little bit, but it’s very serious. You call that a canard, and you actually call it a bogeyman.
Mr. Stockman: Yes. They say the savings will be a big number. They’re probably throwing around a trillion, but that is based on targets for the last eight years of the 10-year window that we’re in that are not binding, that have no enforcement mechanism, and that history proves never materialized.
Just in 2011, we had a great debt ceiling crisis and showdown between the Republican Congress and President Obama. They came up with a deal, and it actually had 10 years worth of spending caps or reductions and a quite forceful mechanism to enforce it if they overshot the targets. But even with that mechanism and 10 years of enforcement, they ended up spending 25 percent more than was actually targeted.
In this current deal, there are no enforcement mechanisms at all beyond the current year. It’s all just pie in the sky. Wouldn’t it be nice to cap these programs going forward over the next of the eight years? Again, that is only on the nondefense discretionary part of the budget, which is 15 percent of the total. They’re not talking about any savings in any of the entitlements.
They’re not talking about any savings in defense. They save money on a work requirement for food stamps. It’s important to understand the cons and the tricks that these Washington types play, because they’ve been involved in this gamesmanship so long, even as the fiscal affairs of the country go to hell in a handbasket.
They’ve been so caught up in these games that they have lost sight of the negligence that’s really going on. But they’re saying, “For food stamps, the current requirement is that if you are 49 or under, you’re able-bodied, and you don’t have dependents, then you have to meet a work requirement of 20 hours per week.”
Nobody should complain about that. If you’re able-bodied, no kids, and 49, yes, you better be working. The Republicans got them to raise that requirement age to 55 from 49. There’s a lot of liberals screaming and beating the tom-toms about how unfair that is.
That’s ridiculous. A 55-year old with no dependents and able-bodied should be working if they’re going to get food stamps, period. Anyway, that would save a few billion dollars and that’s the savings they’re talking about. But what they forgot to tell you was that as part of the compromise, they entirely removed the work requirement for all veterans, no matter what their age.
If they’re 20 or 25-years-old and they’re out of the military, they can get food stamps, and they don’t have to work. If you’re homeless, you get food stamps, whether you’re able-bodied or not. That goes for anybody that comes out of foster care, and they could be 19-years-old.
The extra cost is more than what they saved by raising the work requirement from 49 to 54 years old for everybody else. This is just a shell game. They didn’t save anything. They actually spent a lot more money to save a little bit.
In terms of the big picture that we’re talking about here, it’s a total scam. Speaker McCarthy keeps saying, “We’re going to bend the trajectory. I know it’s heading in a bad direction, but we’re going to bend the trajectory.”
But if you’re going to exempt defense and all entitlements and you have to pay the interest, and that’s over 85 percent of the entire projected spending stream of $80 trillion over the next 10 years, how are you going to bend? How are you going to bend the curve? But even getting to the part that you haven’t exempted, and simply freezing it at a very high level for one year with no binding targets for the out years, is nonsense. It accomplishes a rounding error at best.
Mr. Jekielek: Politicians are deeply afraid of any sort of cutting because people will say, “Look, you’re cutting. Look how needy everybody is, especially at this time. Look, we’re having all these struggles in the economy.” Therefore, it looks like you’re going to make life more difficult for people? That doesn’t sound like a winning proposition.
Mr. Stockman: This is the same thing that I had to deal with back in the early ’80s in the Reagan administration, when we were trying to slow the runaway growth of big government under Johnson and Jimmy Carter. It was, “Oh, you’re going to throw the old ladies and the children out in the snow.” We never proposed any of that. It was all based on very logical things such as raising the work requirement age from 49 to 55 if you don’t have children and you’re able-bodied.
Who can argue against that? Now, my point is there’s tons of reforms that can be made to re-target a lot of these programs to what we call the truly needy and require that the rest of the population pitch in, pull their fair share of the weight, and not become lifetime dependence on the taxpayer. Because the taxpayers are being crushed with, one, the inflation that comes from all this borrowing, two, the taxes that they’re already paying, and, three, the prospects that it’s only going to get worse as we go forward because all these big entitlement programs are becoming insolvent.
The point that I should have made more clear is that there is no such thing as a debt default; if the Treasury is running low on cash, the president and the secretary of the Treasury have the power to decide whether some bills will be paid, and others will be deferred.
I spent a lot of time as an investor and in business, and we had a couple of businesses that got in big trouble with cash flow. What does a business do when they really get squeezed hard, but they can see a way out the road? Well, they leave some bills in the drawer. They pay their bills late. They defer the payments so they can keep their cash balance and then implement policies that hopefully will reduce their costs and get them back on a sustainable footing financially. The federal government can do the same thing.
Let’s just look at some numbers, which I think will show how silly this whole debt default thing is. Right now, and this has been the case for the last six or seven months, the Treasury is taking in $450 billion a month in revenue, even at the current kind of sloppy economy we have that’s bouncing along—$450 billion. What is the monthly average interest payment on this big public debt? $61 billion.
It’s 13 percent of the revenue coming in. If you make that the number one central priority, you will always pay the debt. The second thing you could say is, “There’s a lot of retired people on Social Security. You really can’t leave them out in the cold.” Okay. How much are we spending a month typically on Social Security? $128 billion. Okay. There’s 450 billion coming in. There’s plenty of room to cover Social Security.
Then, they’ll say, “But we’ve got men in the military defending the country. They expect a paycheck. We’ve got planes that need to fly and ships that need to sail.” How much do we spend a month on military pay and operations and maintenance? $50 billion.
All right. We could take the $128 billion, the $50 billion and the $61 billion. We still got room. Okay. Then, what about the veterans because a lot of them got injured for life and have disabilities. They need to get their pensions. Okay. How much is that? $25 billion a month.
All right. So when we pay a lot of these priorities starting with interest, we still have $180 billion left on an average monthly basis to pay everything else. If we have to pay some highway contractors a little bit late because Congress hasn’t raised the debt ceiling because they’re fighting over spending cuts, so what? They can get by for five days, or 10 days, or 20 days.
The same thing is true with all the other spending. Grants to colleges can be deferred for a short period of time. The idea that if on any given day there is a dime less revenue coming in than what we need to spend for due bills and scheduled payments owed, that we have to pay none of them if one penny short, is ridiculous.
What you do is prioritize. You pay the important bills. Then, you have a big fight in Washington to find ways to reduce spending or, in the worst case, increase revenue so you don’t have to keep borrowing all the money and raising the public debt time and time again.
This is a big opportunity that was totally blown. They blew it. They had a chance to prove that within five days, if there weren’t a debt ceiling increase, the Treasury would’ve been down to zero cash. Going forward, they very easily could have taken the huge amount of revenue coming in every day and allocated it to these high priorities that I’ve just mentioned.
They could have gone for day after day after day. There would’ve been no default on the public debt. There would’ve been no default on the interest payments. The credit of the United States would not have been impaired in some lasting way. All of this is what should happen.
The fiscal equation would change dramatically, and would be turned upside down if we ever finally killed the bogeyman of debt default and if we forced the Treasury to prioritize and allocate current revenue rather than raise the debt ceiling until some serious fiscal reform and restraint is put into place. That could happen. It should have happened. We were within days of doing that. This is a horrible, horrible deal.
It’s an open-ended increase in the public debt. It wasn’t even like earlier times. We’ve had these battles many times in the last two decades. But instead of raising it by a set amount like one trillion, it’s open-ended. It’s suspended. They suspended the debt ceiling limit until January 2025, which means that if somehow things really got out of hand and they borrowed another eight trillion between now and January 2025, fine.
It goes right on the public debt, and there’s no debt ceiling limit to stop it. It was a terrible, terrible thing to give an open-ended increase in the debt through the next election and into the next Congress. That’s exactly what Speaker McCarthy agreed to.
Mr. Jekielek: What is the best way forward in your mind? Is there something that can yet be done?
Mr. Stockman: Yes. That’s a huge question. Obviously, fiscal policy could be totally reoriented. We don’t need to spend $900 billion on defense. We could cut that to $400 or $500 billion and take a big chunk out of the $2 trillion a year of borrowing that we’re doing now.
We could have a better means test for Social Security. If you’re wealthy, you don’t need to get your Social Security. But you have a means test and refocus Social Security only on people that don’t have a pension or don’t have other sources of income in their retirement or graduated. That’s basically the case.
We could have sweeping changes in how much we spend on providers for Medicare and Medicaid. Those two together cost $1.2 trillion. There are sweeping changes needed there. These are the things in substance that need to be done. But it won’t happen as long as there are no tools to address budget policy.
These substantive issues require a policy change. The policy change is to recognize that the debt ceiling is the only tool we have left as leverage to force changes in revenue and spending policy. But we’re never going to get that as long as we allow the establishment media; CNN, MSNBC, ABC, CBS, NBC, the New York Times, and the Washington Post and all the establishment media to repeat over and over and over and over about this debt default bogeyman as this crisis has emerged.
They never have the nerve. Actually, they never have the honesty, it’s actually not nerve. It’s honest to tell you that back during the two 2011 crises when Obama was in the White House and the Republicans were trying to force spending cuts that the Obama people didn’t agree to. It was then that the dean of liberal constitutional scholars, the head and shoulders of everybody at Harvard Law School, Laurence Tribe—a lot of people will recognize that name, he’s the ultimate liberal jurist—said in these exact words, “If they don’t get the debt ceiling increase, Obama should prioritize spending, and should allocate the revenues coming in to debt service and other priorities.”
Now, they forgot that he said that 11 years ago, and that it didn’t come from some Right-wing source. It wasn’t some ultra-conservative law professor from the boondocks in Nebraska. It was from Laurence Tribe at Harvard Law School. But did you hear a word about that during this whole debate? The media blanked it out. They shut it out.
The mainstream media didn’t want any alternative except for the Republicans to blink and the debt to be raised yet again, and that’s exactly what happened. The debt ceiling is going to be raised by $4 trillion or more because it’s open-ended. The Republicans blinked yet again because nothing substantive and lasting was done about the fiscal equation.
Mr. Jekielek: What do you think the end game is for the people that seek these ever greater increases, because I’m certain that this isn’t the agenda of everybody?
Mr. Stockman: No. But it’s the agenda of the political class, the permanent apparatchiks that inhabit Washington. Look at Congress today. It is dominated by people who have been there 10, 20, 30 years as careerists. The staff are all careerists, or at least they’re building their resume so they can go get a good job somewhere out in corporate America and make more money.
The city is just saturated with think tanks and so-called non-government organizations that milk the money tree from both government agencies and private foundations. They spend all their money doing research in propaganda for more government. They just keep spending money to support operations and organizations that write justifications for what they’re doing and why they need more. It’s going to take an almost grassroots political revolution.
We have got to basically get government back in the control of the people and elected representatives who are not making a career out of it. That’s why one of my pet ideas for how to change the big direction is that we’ve got to have term limits.
Don’t let the careerists take control of the government because if they’ve been on the Potomac long enough. They think the be all and end all of life is government programs, and they’re totally wrong. We need a career limit; six years in the House, one term in the Senate, six years for a president, with no reelection. We basically need to get money out of politics, and this is not a very conservative position. But I actually believe in government funding and public funding of elections, so there’s no interest group money buying off politicians.
The elected representatives then don’t spend half their time raising money for the next election; one, because it’s illegal, and two, because they can’t run again. That is a sweeping change. That is a change in the basic rhythm and structure of how our political system works.
It may sound a little radical and impossible. But unless we do something like that, the system isn’t going to change. The people who live on the banks of the Potomac and have a career there and never leave, they’re carried out feet first. As long as they’re running everything, we’re going to have a state-dominated, state-oriented policy when actually democracy and free market prosperity is about the opposite.
The real history of personal liberty, free market economics and small government is that the private sector is where the action occurs, and government needs to be minimized and constrained and hobbled to the greatest degree possible. We’re nowhere near that today. We’re at the opposite end of the field.
Mr. Jekielek: As a society we accepted some pretty egregious top-down policy in 2020 and through 2021. We essentially shut down the economy. I saw in your newsletter that it was 56 percent of the hospitality sector.
Mr. Stockman: In the hospitality and leisure sector; hotels, restaurants, bars, museums, and sporting arenas, within two months, the number of employed people dropped from 16-and-a-half million in February before the whole Covid lockdown started to barely eight million in April, two months later, when the lockdown was slammed on the economy, especially on those kinds of venues where people congregate socially.
Now, I want to be clear, the whole thing was a drastic, terrible mistake. We weren’t faced with a Black Plague type situation where the very existence of society was at stake or at risk. That wasn’t true. This was always a bad virus that attacked a small portion of the public that had compromised immune systems or comorbidities or were aged. We should have done a targeted policy that was focused on helping nursing homes. We shouldn’t have been shutting down gyms.
Now, how stupid was that? It wasn’t just that this was stupid—it was unconstitutional. People who had spent their lifetime building up through sweat equity, a small business neighborhood bar, or a chain of three or four local restaurants, or a few gyms, or that had purchased a couple local theaters, their livelihood was wiped out when Fauci ordered them to close. He did that.
On March 16th, he got right there in the White House at this famous press conference that Trump held, and read what it said on the paper in small print; restaurants and bars are to be closed. All of a sudden, it was like a trap door opened, and a large share of the economy went right into a black hole.
This was terrible. Then, they had the audacity to say that since we’re ordering the supply side of the economy to contract—that’s what you do when you close all the restaurants and bars and hotels and movie theaters and malls and everything else—that’s going to cause a recession.
Let’s borrow trillions and trillions of dollars and pump it back into the economy when there’s nothing to buy. Okay. Well, that was a recipe right then and there for this virulent inflation that emerged over the next two or three years.
The whole thing was a fiasco. Harry Truman, who was a president of some standing, who I don’t agree with on a lot of what he did, but he had a big plaque on his desk that said, “The buck stops here.” What he meant was, “I’m not going to make excuses. If some bad policies were adopted and it was in my purview to sign off or I could have prevented it, then, the responsibility and the accountability lies with me.”
That’s the story with Trump. The whole lockdown was, at the end of the day, a Donald J. Trump production. Rather than listen to all of the dissenting voices that were out there in the medical community and in the scientific community and among epidemiologists and the people that eventually signed the Great Barrington Declaration, rather than listen to any of them during that period, he allowed what I called the virus patrol led by Fauci.
They economically ruined the lives of millions and millions and millions of workers and millions of small business people and entrepreneurs, and changed the face of our economy almost overnight.
Mr. Jekielek: I just want to mention one thing.
Mr. Stockman: Sure.
Mr. Jekielek: One of the characteristics of this time period was that there was a lot of guidance that was given by different agencies, which was then adopted as if it was rule, whether it was hospitals, whether it was doctors, or whether it was governors making decisions based on Fauci’s edicts. It’s like all of society accepted this and didn’t come out with pitchforks and torches, so to speak, and didn’t respond.
Mr. Stockman: It’s because the system was so unbalanced. In other words, there’s a whole bunch of people out there that think Donald Trump walks on water. Donald Trump was there every night with the White House Coronavirus Task Force basically endorsing or repeating what they were saying.
His constituency, at least for a while, said, “I guess we have to do this. It must be the Black Plague. We’re all going to die. The government has to engage in extraordinarily interventionist activities.”
Then, of course, on the other side of the political equation, they could see this was going to disrupt the economy, and this was going to help them, because they were way behind in the 2020 election. This was just part of the Trump derangement syndrome on the Left side of the political equation and in all of the mainstream media. They jumped on this thing with eyes wide shut.
No one asked any questions. Any dissenting voices got drowned out. We know about all the censorship, the cancellations, all the terrible things that were being done in the social media either on their own motion or at the instruction of the federal agencies. All of this happened.
Therefore, the people out there didn’t hear very much of the true facts of the matter of the alternative, at least for a while. But eventually, it did creep through. Some people started to raise their hand and say, “This isn’t right.”
I give Senator Rand Paul a lot of credit. He was the first one that was willing to sit there in the Senate Committee hearing and take the battle right to Fauci and call him a liar and call him a fraud to his face, which both of which are true.
But we need now to rewrite the true history, that this was a catastrophe beyond imagination that no one could have predicted five or six or eight years ago. We can’t allow it to be repeated ever again.
Mr. Jekielek: A lot of people were fooled, or didn’t realize how far things had gone in the wrong direction. But here we are.
Mr. Stockman: Right.
Mr. Jekielek: One of the things that you talk about, and indeed is an important part of your book that I so enjoyed reading and I want to recommend to everyone while I have the moment, is how individual people on Main Street can actually deal with this financial bubble that seems to keep growing as we’ve discussed today.
Mr. Stockman: I would say two things. First, people need to start with a recognition that we’re in a totally new ballgame. This party of decade after decade of easy money and rapidly rising stock prices and bubble wealth and so forth is over. Therefore, you need a new game plan.
Whatever worked in the last four years or the last 12 years or the last 30 years is not going to work going forward because the central banks have reached the point where even they have had to shut down their printing press. Ultimately, all of this was a result of printing press money flooding into the system. That’s the first point.
The second point is people know but sometimes don’t think about what really matters is your net worth, your wealth. That’s the financial security you have for the future and for a rainy day. But net worth or wealth is a function of liabilities on one side and assets on the other. The difference, of course, is your wealth, your net worth.
Over the last 30 years, the way to build net worth was to buy more and more assets and borrow money if you had to in order to purchase them or margin them because assets were rising rapidly in value. The cost of debt, the cost of liabilities was being pushed lower and lower to practically nothing by the Fed.
That was the game plan; accumulate assets and gather assets. If you have to borrow money to do it, so be it because the assets will grow faster than the cost of the debt will increase. We’re in the opposite ballgame now. Asset values are going to fall over time, and the cost of carrying debt or liabilities is going to increase and stay high. The strategy today is to work on the liability side and reduce it rather than on the asset side and increase it.
That’s hard to do. If you have debt, it’s hard to reduce the debt. But if you’ve made a killing on tech stocks, you can liquidate them and pay off debt, including home mortgages for that matter. You can spend less and save more. It’s not necessarily a pleasant thing to do. But the point is the new strategy is to work on liability reduction rather than asset accumulation.
Basically, the financial markets are now a dangerous place. Stocks are way overvalued on average. There’s still some gems you can find, but most people don’t have time or the capacity to do that. Bonds are way overvalued because the yields are still way too low, which means that the price is too high. Real estate, particularly commercial real estate, is way overvalued because it was all inflated by debt funded speculation in the real estate markets.
That’s the nature of where things stand today; overvalued bonds, overvalued stock, overvalued real estate, and way too much debt. In fact, if you look at our whole economy, there’s $93 trillion of debt on households, businesses, and governments combined. When I went into the White House and the Reagan administration, the number was $5 trillion.
It’s now $94 trillion. That’s how much debt is built up in our economy at all levels and is a measure of how out of kilter and out of balance the system is and why even personal financial management strategies need to change to recognize it’s a totally new ballgame.
Mr. Jekielek: Bottom line is, in a situation where inflation is still more than your yield that you’re getting in a savings account, where do you park your money?
Mr. Stockman: Inflation will be slowly coming down and the yields right now on treasuries, even short term treasuries, are in the 4 or 5 percent range. Now, that may not be satisfactory if inflation still feels like 7 or 8 percent. But it’s a lot better to be in the 5 percent yield than to be chasing tech stocks that are going to have a big comeuppance or some of the other high-flyers in the stock market.
In fact, even if you’re buying the S&P 500 through an ETF [Exchange-Traded Fund], the whole thing is way overvalued. It’s better to preserve capital with a modest yield than to swing for the fences in the high risk asset markets and lose a lot of capital when this day of reckoning fully resolves itself.
Mr. Jekielek: David Stockman, any final thoughts?
Mr. Stockman: There’s a lot to think about because the world has unfolded in a way that we couldn’t have predicted two decades ago or certainly three or four, but all is not lost. There’s a lot of good things going on in our economy today, but we need better governance.
We need to recognize that we can’t borrow and print our way to prosperity. We need to invent, work, save, and invest our way to prosperity. If we could get back to those fundamentals, things can get a lot better.
Mr. Jekielek: David Stockman, it’s such a pleasure to have you on the show.
Mr. Stockman: Great to be with you, and there’s a lot more to talk about on a future occasion.
Mr. Jekielek: Love hearing that, and we’ll do it.
Mr. Stockman: Sure.
Mr. Jekielek: Thank you all for joining David Stockman and me on this episode of American Thought Leaders. I’m your host, Jan Jekielek.
This interview was edited for clarity and brevity.
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