Only A Major Crash Will Change The Economic Narrative

In an interview with HedgeyeTV, David Stockman explains why he believes we’re on the verge of popping another major financial bubble for the third time in this century. He and Keith McCullough also discuss the potential political fallout from this bubble – who will be the politician to fire Janet Yellen and refute Keynesian policies? They wrap up by talking about Stockman’s recent book The Great Deformation and how the financial media is caught up in a “recency bias” that allows them to ignore the monetary fraud being perpetrated by the Federal Reserve and the government.

While parts of this conversation are a bit technical, Stockman does a great job explaining the fundamental economic and political realities of the United States. Stockman was the Director of President Reagan’s Office of Management and Budget in the 1980s and went on to work on Wall Street for years. With his background, Stockman has keen insight into the financial mindsets of both Wall Street bankers and Washington politicians. He believes the Fed’s monetary policies have had the following consequences:

1. Misplacing of all financial assets.
2. Inflating the value of financial assets.
3. Fueling speculation and imbalance in the financial system.

Here are some highlights from the interview:

We no longer have honest price discovery anywhere in the markets. Everything is driven by the word clouds and the liquidity injections in the short run, by not only the Fed – our central bank – but all the central banks of the world are doing the same thing. As a result of that, all pricing is distorted. When you have zero interest rates in the money market for 71 months running… It tells the carry trade, “go to it”…

I say the most important price in all of capitalism is the price of money. Because that’s the cost of speculation. that’s the incentive that drives the gamblers in the financial markets. If they face risk like they did with Volcker, they could wake up some morning and the overnight rate would be up some 300 basis points – you would not perform the same kind of gambling maneuvers in that environment as you do today…