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David Stockman: Debt Default, the ‘Doomsday Budget Machine’ And Fiscal Restraint Explained

“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:



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