Live from Music Row Thursday morning on The Tennessee Star Report with Michael Patrick Leahy – broadcast on Nashville’s Talk Radio 98.3 and 1510 WLAC weekdays from 5:00 a.m. to 8:00 a.m. – host Leahy welcomed the author of The Great Money Bubble and former director of the Office of Management and Budget during the Reagan administration, David Stockman on the newsmaker line to breakdown the ramifications of a national budget spun out of control.
Leahy: On the newsmaker line right now, is author and former director of the Office of Management and Budget, David Stockman. Good morning, David! Thanks so much for joining us.
Stockman: Happy to be with you. Good morning.
Leahy: You’ve got a new book out called The Great Money Bubble. But first I want to go back, David, and visit the 1980s. You were the wunderkind of the Republican Party, a two-time Republican congressman from Michigan, and named by Ronald Reagan as the director of the Office of Management and Budget.
Famously, in December of that year, December 1981, you gave an interview to writer and journalist William Greider in which you were honest about the need, among other things, for Republicans to actually cut spending. Ronald Reagan was not impressed with that interview, and you were famously, “taken to the woodshed” by President Reagan.
Looking back now, more than 40 years later, it looks to me like you were right, and the budget has been increasingly out of control. What’s your reflection on that period?
Stockman: First, well, it’s a long time ago, but the real reflection I have is that during that period, the struggle we were having internally was that Republicans had spent a decade denouncing Democrat big spending and budgets that were out of control and a national debt that was rising rapidly.
But when the opportunity came to take a stand, even to walk the plank, suddenly they got cold feet, and we weren’t really making the kind of sweeping reforms and retrenchments that were necessary. And as a result of that, something very bad happened from the point of view of that time and place, which seems kind of quaint today. And that is we ended up that year, 1981, having to raise the public debt ceiling over the $1 trillion mark.
And that was like a moment of, are we going to turn into a pillar of salt if we do it? It was a very bad, scary situation. Here we are four decades later, and the public debt is $31 trillion, and it’s rising so rapidly, and there’s so much red ink built in that is if they do nothing, it’ll just keep accumulating that we’ll be at $40 trillion in a very few years.
Think about that. Forty-time increase in the public debt over a 40-year period. That’s really kind of the nub of the matter. That one answers your question. Secondly is the heart of what I was trying to get at in the book. We’re kind of in a fantasy land.
We’re in an everything bubble in which the rules of sound economics have been thrown to the wind. We’ve borrowed like crazy. We’ve had huge inflation of financial assets on Wall Street. The Fed has printed money like there’s no tomorrow.
And here we are now, struggling with 40-year high inflation and a Fed that is going to throw the economy into a pretty severe recession because, at this point, it has no other alternative. Things catch up with you, and I think that’s exactly where we are at the present time.
Leahy: Roger Simon, who is a columnist with The Epoch Times, is in studio. Roger has a question for you.
Simon: David, what you’re describing, I think a lot of us know, unfortunately. So I would like to hear from you. We realize that we’re very close to having the annual budget just covering the interest on the loan the government has. What would be your prescription for how to solve this?
Stockman: If we had a couple of days we could probably go into the details. But the big picture is that spending is out of control both in the defense and nondefense areas and that entitlements that are on automatic pilot and cost upwards of $3 trillion a year need to be reformed dramatically.
But if they keep saying that, well, Social Security, we can’t touch Medicare we can’t touch the military, has to go up to levels that are just insane as far as I’m concerned, relative to the past at $850 billion annual budget and rising. If all of those things are sacred cows, then there’s only one alternative that I would be loathed to see, and that is massive tax increases because you can’t borrow your weight of prosperity.
And that’s kind of the path that we’re on today. Sacred cows everywhere on the spending side of the budget, reluctance for good economic reasons to raise taxes both economically and politically. And so we just drift along, adding to the debt and expecting the Fed will monetize it, which is what happened for many years.
But now we’ve reached the point where even the Fed can’t keep printing the money. They’ve basically said we’re pivoting to QT from QE. That is, from quantitative easing, where they were buying government debt hand over fist, to quantitative tightening, where they’re actually reducing their balance sheet, which is the same thing as selling all of those government securities, $9 trillion worth that they currently own.
So when you go into an era of inflation fighting and QT, which the Fed can avoid, even though they probably would like to, when you go into that era, and you have a budget that’s basically a doomsday machine, sacred cows on the spending side, and drastically deficient revenues. You’re asking for a pretty nasty economic and financial smash-up, which I think is kind of what’s baked into the cake.
Leahy: Now having heard all this, I want an alternative to jumping off the roof. (Simon laughs) David, help me out here! What can be done here?
Stockman: I think the main thing from the personal point of view, and I’m not in the investment recommendation business, but I have an overview of the big picture, is that we’re in a fundamentally different era in which the approach to wealth creation or preservation needs to change sharply.
If we can keep growing our assets because the stock market was going up, tech was going up, even cryptos were going up, real estate was going up and to borrow money, watch your assets grow and the difference is your net worth. And it gets larger and larger.
We’re now in an era where the assets are going to shrink. Real estate is overvalued. The stock market is going to go down. Bonds are way overvalued when you look at the 10-year treasury yielding only three and a half percent.
So you have to focus on the liability side because what’s going to happen is the interest carry costs of debt that people may have taken on either for living expenses or to buy assets. The cost of carry is going to go up dramatically. The Fed isn’t nearly done. Interest rates are going to go up two, three, or four percentage points more.
Listen to today’s show highlights, including this interview:
– – –
Tune in weekdays from 5:00 – 8:00 a.m. to The Tennessee Star Report with Michael Patrick Leahy on Talk Radio 98.3 FM WLAC 1510. Listen online at iHeart Radio.
Photo “David Stockman” by Gage Skidmore. CC BY-SA 2.0.
