Jason Hartman starts the show with investment counselor Adam as they look at signs of financial risk in the mortgage industry. They go back into what caused the Great Recession as it relates to bundled mortgages. Later in the show, Jason brings on guest 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 some of President Reagan’s policy failures and compare it to the job Trump is doing and how that impacts inflation.
Basically found creating wealth podcast by searching iTunes in immediately resonated with your message, you know, the great returning investment, significant, significant reduction in taxes, steady income that could eventually replace my corporate job income. Also, what I found very powerful is along with that message, I was impressed by the high caliber of your guests. And I remember listening to economist investors, lawyers, authors, basically people who could present their expertise and allow me to judge their response against your message. So as an example, when you talk about inflation, your your your ideas about inflation going up over the next few years, I could vet that message against your guests and in be sure that what you were saying made sense. So that was very powerful to me.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing Staying some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:43
Welcome listeners from around the world. This is Episode 1149 1149. And this is Jason Hartman Today we’ve got another great show for you. We’re coming to you five days a week now and we’ve been doing that for quite a while. Today we will be talking with one of the founders of Blackstone capital. Yes, this guy is kind of a big deal. That is david stockman, and he is talking about peak Trump, and how that impacts the economy. You know, oddly, as I recall, when I recorded this interview, we didn’t talk that much about Trump. We talked more about the economy and financial markets. But of course, this all weaves together as as we all know. And first Adam and I have an interesting article that we’d like to talk to you about Adam founded and this topic is of interest, because it’s something that was really one of the cornerstones of the Great Recession just over 10 years ago, and this trend is coming back. Adam is coming back, and that is the purchase of mortgage pools. You know, it looks like the first
half of the great recession is coming back. So banks and other institutions have been purchasing mortgages that aren’t Fannie and Freddie back, but they’re supposedly as good as Fannie and Freddie loans.
Jason Hartman 3:04
Right, which we know those weren’t even that good during the Great Recession, right.
And then they’re packaging them up. And they’re selling them to other financial institutions. And they’re selling them as bonds. So we’re now selling mortgages as if they’re 100%, secure bonds, and going out there and buying them in they it says here that they’re not just doing it a little bit. It’s gone up three fold since 2016.
Jason Hartman 3:31
Yeah. And so the numbers in the overall scheme of things these numbers are not huge that we’re about to mention to you. In the what’s called the private label securities world. That’s the catchphrase private label securities. They told $3.9 billion last year, and just a little higher the year before 4 billion in 2017. And that was what do you say Adam? triple the amount vertical than 2016. The reason Adams says this is the half of what happened in the Great Recession. Now, it’s really only a fraction because there’s a lot more than this to it. But a cornerstone of the great recession was this pooling of these bad what they call toxic loans into these pools. They were being sold off as securities, right? And then they were being insured. And I’m saying insured in air quotes as credit default swaps. And this was a form of really fake insurance. You know, normal insurance requires reserves and all kinds of regulatory stuff. And the credit default swap was like a form of fake insurance, where they didn’t have to have the reserves to buy this insurance. And what that allowed was this massive, massive, just untold, unimaginable amount of leverage in the system because they could go rinse and Repeat, rinse and repeat the process of buying and selling these pools and having credit default swaps in there, which there was a tiny premium on the fake insurance, the credit default swap. Right. And this is pretty arcane, and it’s hard to understand. And, Adam, when we were talking before this, we decided we’re going to do a whole episode just to remind you on credit default swaps, because, you know, history has a tendency to repeat itself. And we want to know, the risk in the marketplace. This is an inkling of some risk in the real estate market because of these loans are toxic. Again, very little regulation whatsoever here, right? There’s just these private deals. You know, they’re being sold off by JP Morgan, you know, flag star bank or all kinds of companies are selling these off, and it allows them to not comply. They don’t have to comply with a Fannie Freddie underwriting standards, which even those had lots of toxic loans in them, obviously, and we all saw that post Great Recession. But it does lessen the role of the Fannie Mae, Freddie Mac’s in the housing finance industry, and I like that. But who knows if they’ll do it right. I don’t have much faith in that, you
know, not a whole lot. And it’s also interesting, because as they start doing this, their share has grown a lot since the Great Recession, because in 2008, it says here, the amount of loans that were being originated through Fannie and Freddie was 65%. But now in 2018, it was only 45% of mortgages. So in up to 55% of these mortgages, obviously won’t be all of them could be packaged into bonds, and sold. Yeah. And as this continues on, you’re getting more and more at risk, because you know, you know, as soon as the they start making money on these things, they’re not going to stop
Jason Hartman 7:00
Yeah, it’s just going to become another feeding frenzy,
another feeding frenzy. And before you know it CDs are going to be back because this time it’s safer.
Jason Hartman 7:07
Right? Yeah, somehow somehow this time it’s different, famous last words. Yeah, very interesting. Well, we’ll keep an eye on this for you and tell you about it on future shows, of course. But we we kind of see an inkling of this, it seems as though it may put some additional risk into the market is if we already didn’t have enough. I mean, you look at the high end markets around the country and they are really in trouble. I just heard this morning that in New York City, the average time on market now for a residential property is 132 days, in that market, of course, has collapsed. And you know, this is one of the many markets where everybody living there, you know, repeated and love to repeat in a braggadocious way about, oh, well, this is New York City. I mean, it’s a world class city. It’s a world destination you Know It, people will always want to buy properties here. It’ll never go down. Yeah, well guess what I told you. So it’s already happening. People may want to buy there but not at that price. Yeah, exactly. The question is at what price right and we’re seeing this happen with with high end markets all over the country. You know, the cyclical markets are really showing signs of significant trouble. But it is a tale of two cities, folks, because the linear markets that we recommend these prudent markets where buyers are following commandment number five, Thou shalt not gamble property makes sense the day you buy it, those markets are super strong. Now we’re going to be presenting eight of these markets. Well, I should say, eight local market specialist groups will be at our upcoming meet the Masters event, and so we’ll be talking about that. And Adam, you know what I told you this morning, I’m super excited about a presentation from a non practitioner a guy with zero agenda has no financial interest. And that is my friend drew Baker, who’s been on the show many times, where he’s going to talk about self management. And he has a slideshow that he’s going to share with meet the Masters with over 100 photos. And I said, Drew, the rule is a minute to slide. He can’t take this long. So I’m gonna see if I can pare that down a little bit for him. You know, he’s going to talk all about all this stuff. He’s learned self managing his properties. And you know, it’s like the real practical roll up your sleeves, rubber hits the road type of stuff. You’ve heard him on the show before in prior episodes. I’m just super excited about that presentation. I think it’s going to be highly practical. The other highly practical thing is we have a very good home inspector who’s going to be doing a presentation. That’s the first time ever we’ve done this, a presentation on home inspections. I mean, practical stuff. This is likely going to be the most practical meet the Masters ever remember the theme is the big boring and profitable idea. So yeah, it’s gonna be good. Good stuff. Adam. I will look forward to seeing you there less than two weeks away. Well, we can have away right? Yep.
I think Yeah, we’re right at whenever this airs. It’ll be 10 days away.
Jason Hartman 10:16
Yeah, good stuff. Well, Jason hartman.com slash masters for your last minute tickets. We still have a few seats left. Jason hartman.com slash masters. Adam, let’s go to our guests.
Join us March 23 and 24th for the 2019 meet the masters of income property.
Jason Hartman 10:33
Let’s break this down and look at some of the strengths of income property
as an asset class. Now I found that this event is really helpful because I am totally a newbie to real estate investment. And so I picked up so much information. One of
Jason Hartman 10:47
the great things about it is that it’s so fragmented, right? embrace the fragmentation
actually been learning a lot about the tax benefits to what Real Estate and a lot of I’ve been investing actually well over 10 years now, and I learned a lot of new things today.
The other advantage of this weekend is networking, meeting new property managers meeting new area specialists and then seeing the product they have to offer that changes here by you.
Register now with Jason Hartman comm slash masters.
Jason Hartman 11:21
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, the 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 11:54
Very good and happy to be with you.
Jason Hartman 11:56
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? That’s correct. And it’s a great time to be here. three feet of snow and perfect weather outside. Yet 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
David Stockman 12:36
a little bit? 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 awarded on Capitol Hill at practically every turn. 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 since that’s also 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 quazy 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 propose and the defense 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 ends up creating 2 trillion of additional debt during his term and office eight years, which was double what his predecessors in the previous hundred 80 years. It put on the book. compared to today, it’s like nothing. Yeah, exactly. And that’s the key point. The take off point for present times, it started is 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 1982. 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 15:43
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 15:52
Yes. Yeah. Well, I think that we learned that in the 1980s. And it’s the lesson has only been compounded in the three decades. gates 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 is actually been declining ever since World War Two, when it paid for, you know, war finance reasons. And so therefore there was a lot of headroom to make a mistake, you could have two big attacks cut and two smaller spending cuts, larger, much larger deficit for new plant. 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 do this till the cows come home year after year decade of writing, and it would never catch up with you. So today we’re 22 trillion published 10 1 trillion back then it was 30% of GDP. So hundred and 6% today, but worst thing is the habit of deficit finance. It was deeply ingrained that now we have a trillion dollar per year deficit built in. In other words, if no one went to Washington, 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 this 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. Let me just say a couple of things. If I may, number one way back to the Reagan, defense, or offense spending, whatever you want to call it.
Jason Hartman 17:52
In the military, it
David Stockman 17:54
Jason Hartman 17:57
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 the problem. Yes,
David Stockman 18:50
you’re absolutely right. It gets institutionalized it becomes permanently embedded, and then the original reasons are lost. The bureaucracy to the deep state, if we want to use that term just makes up new missions to justify what they have because they live off the large Yes. 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 on defense, 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. Well, he made it happen a little faster, right? 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 300,000,000,002 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 at least the 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 20:19
and all their Star Wars junk. Yeah, yeah, it was. Yeah.
David Stockman 20:22
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 if deterrence fails, it was the end of the world that was simple. But when they build all these New naval capacity the 600 ship Navy, 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 should have left the name alone and called it the Department of war. Like it used to be called because that’s a proper name. 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 build up 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 a hill of 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. Right, right. Yeah, I got it.
Jason Hartman 22:10
Okay, 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 true dragons or something? Yeah, with a tea that’s trillion with a tea. What you’re by the, at the end of the 10 year cycle that we’re in 2028. And that’s 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 22:40
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 days. What about just our central bank? I mean, doesn’t have to meet inflation. Now, I don’t think so. What it’ll mean is a crunch in the bond pits, where the demand for my borrowing will vastly exceed the supply of private savings yields will soar that will cause a crunch time on Main Street at 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, finance and 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 into. So is it doesn’t necessarily mean inflation? Does it necessarily mean higher interest rates? 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 hire in 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 huge 4.4 trillion because you know, when Greenspan started this whole thing, and he’s the culprit where it all Oh, I always
Jason Hartman 24:21
say that if you want to lay the whole financial crisis at the feet of one person, it would be Alan Greenspan.
David Stockman 24:27
Thanks. Yes, 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 assigns an airs to double down and triple down and that’s what Bernanke he did and Yellen after him and to some degree, Today, so we reach 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 kept pushing rates lower, the lower they push the rates, the more people borrow, 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.
Jason Hartman 26:04
Are you taking into account all the unfunded mandates to
Jason Hartman 26:12
Laurence Kotlikoff on the show a few times? And you know, I mean, that’s just wow, that’s mind boggling.
David Stockman 26:17
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 debt and not 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 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 26:51
Nothing. So let me let me ask you about that debt. You’re talking about the private in public debt or just private Yes,
David Stockman 26:56
combined. Okay. Okay. Okay. So wait, wait, wait on the private Debt though,
Jason Hartman 27:00
is that really that bad? And 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 27:28
Well, I think I think what you’re saying is, and that’s true of government debt, actually, that for every debt issue or less 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 net, you know, might be 30 trillion or 40 trillion or something. But the problem is the people that all in the people that own aren’t the same thing. 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 had 6 trillion in debt today it’s pushing 15 now hit 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, end up failures and then they just unwind them and say Don’t you know writing them off and don’t mind the write offs, but my
Jason Hartman 29:00
Wall Street does with mutual funds. they close their phones. They were never there so they don’t go into the
David Stockman 29:06
stats, you know 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, d cash based m&a deals, it all goes back to Wall Street, which then got cycled back into new bids for stocks and other risk assets at higher higher prices. So in a sense, it’s set off a kind of financial Ponzi scheme in which the corporation business borrowed money borrowed, put it into Wall Street, Wall Street speculated on stock prices that encourage businesses to borrow more shrink their stock in order to drive up you know, their stock price in the value of options and the whole thing got out of control. And you know, that’s where we are today. So what can we expect? I mean, you look at you have got a tremendous resume. Founder of Blackstone, what else? Wall Street you you had some other I started on at Salomon Brothers. And that was right at the peak of the prominence of Salomon Brothers when it was a king of Wall Street and it intended mortgage backed securities. It was a huge trader and purveyor of bonds. That’s where long term capital started john Merryweather.
Jason Hartman 30:22
ctm, right. Yeah.
David Stockman 30:24
Yeah. So much came out of there and came here when I was 40 years old, because I 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 been 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, 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 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 bank said 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 bonzi. Setting I’m 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. into a 209. 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 policy makers try to struggle with a debt encumbered economy that simply can’t grow even as population get older and so security and welfare costs keep soaring. So it’s not a positive.
Jason Hartman 33:07
Okay, so 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 33:23
they may want to, you know, 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, he hit 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 late and 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
Jason Hartman 34:23
another business cycle, right? Because it’s so slow like that.
David Stockman 34:26
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 bank’s keep printing money, which I think even they realized that is far too dangerous at the present time to do but I would
Jason Hartman 35:04
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 was just compared to the deflation that otherwise would have happened, you know, well,
David Stockman 35:37
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. Okay, 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 this Air and never escape 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 only private economy then adjust negatively for some reasons we can go into or two away you get another financial asset, boom going it finally reaches unsustainable levels. So this time, especially in mortgage backed securities, it crashes the economy setback, 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 why they’re raising rates now. So they’ll get they can reload the you’re right there. 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 bond 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. You’re certainly right. But you know, no one wants to take the Punchbowl away at the party, right? They don’t want to be a bad guy. Only paul volcker was willing to do that. Well, you know, that is true. And that’s why he’s the greatest central banker of modern times. And we don’t have him anymore. And I would say also, those who go back to William McChesney Martin was said, 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 burn Anki or waylynn or even a Greenspan Oh great. Never.
David Stockman 38:01
Yeah. Yeah, he was very
Jason Hartman 38:04
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,
David Stockman 38:10
doesn’t it? Yeah. Well, the book is, again is Pete Trump, the untrainable swamp and the fantasy of magha. And, you know, it’s essentially saying Trump peaked out last September when the market hit a artificial and unsustainable Hi, 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 stockman is country corner. You can Google that and it’s a subscription based service, but it’s easy to sign up for
Jason Hartman 38:51
fantastic good stuff. Well, david stockman, thank you so much for all the insights and for joining us a fascinating discussion. Very good. Thank you. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman. Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.