David Stockman Explains Why the Bond Bubble Will Burst

09.02.2017 • The Economy

Chris Lowe – Inner Circle (United States) –

Bonds are going to blow…

This latest warning on the dangers lurking in these supposedly “safe haven” assets comes by way of another one of the special guests at our 2017 Inner Circle roundtable event in Baltimore last month, David Stockman.

David knows a thing or two about the dangers of debt – and politicians’ love affair with issuing as much of the stuff as they can get away with.

As President Reagan’s budget director in the early 1980s, he was the chief architect of the “Reagan Revolution.” The idea was to slash taxes and take an ax to entitlement programs to allow the private sector to grow.

In 1981, David sat down with the newly elected president to crunch the numbers.

The result: the first Reagan budget. It wasn’t perfect. But it went further than previous presidents had dared in curtailing the growth of America’s “welfare state.”

Bond Bust

But it soon became clear to David that, although it was keen on cutting taxes, the Republican Party had no real appetite for reducing government spending.

This meant spiraling federal budget deficits.

And just four years later, he quit the Reagan administration in protest and wrote the New York Times best-seller The Triumph of Politics: Why the Reagan Revolution Failed.

To this day, it’s the single most insightful account of why it’s so difficult to get anything meaningful done in Washington.

You can probably tell why we invited David along to our roundtable session…

He spent years in the Washington “swamp.” And he’s seen firsthand how hard it can be to push through truly conservative agendas. Candidates may talk a big game about reining in government spending, but when the rubber meets the road, the temptation to spend out of an empty pocket can be too great.

As he explains in this week’s Q&A, this has led to the mother of all bubbles in supposedly “safe” bonds.

And when it bursts, it’s going to make the 2008 financial crisis look like a picnic…

Unique Perspective

But before we got to talking about what lies ahead…

I wanted to get David’s perspective on my Inner Circle roundtable interview with former Fed chief Alan Greenspan… the full transcript of which you can find here.

You see, David knew Greenspan going all the way back to the early 1980s.

Still in his early 30s, David was the youngest member of President Reagan’s cabinet. And Greenspan, who had been an economic adviser to President Ford, was keen on introductions to the Reagan team.

So first, I wanted David’s personal perspective on some of the comments Greenspan made in our one-hour session with him…

Q&A With David Stockman

Chris Lowe (CL): The financial crisis you see coming is closely linked with the immense influence Alan Greenspan had over the economy… during his almost two decades as the world’s most powerful central banker. We got to sit down and talk to Greenspan about this in Baltimore on behalf of our members. What was your big takeaway from that meeting?

David Stockman (DS): A lot of stuff that came out of our meeting is worth highlighting. But I want to focus on a couple of the whoppers I picked up on.

I want to be respectful. I have known Alan a long time. I understand that each of us has to do what he has to do. But his claim that the kind of central banking we have now… the kind he pioneered and practiced… was meant to “replicate the gold standard” – that was a proposition too far.

Activist central bankers do the opposite of what the gold standard did. Alan got it right in 1966 when he wrote his essay “Gold and Economic Freedom” for Ayn Rand’s newsletter, The Objectivist.

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