Economy

Batten Down the Hatches

By David Stockman  |  December 31, 2019

The Turbulent Twenties begin in two days. It will be the decade when the chickens come home to roost. The 2020s will mark an era when today’s economic and political fantasies give way to…

  • the spectacular failure of Keynesian central banking;
  • a violent implosion of America’s fiscal accounts;
  • a prolonged, painful reversal of the three-decade long hyper-inflation of financial asset prices that has resulted in the Everything Bubble;
  • a ferocious global economic headwind arising from the demise of the Red Ponzi;
  • an outbreak of unprecedented partisan acrimony rendering Washington completely dysfunctional and imperiling America’s very constitutional foundation;
  • the lapse of Imperial Washington into retreat and failure all around the planet;
  • a grinding halt to US economic growth while the Baby Boom retirement tsunami causes entitlement spending to soar and generational conflict to erupt like never before; and
  • a virulent outbreak of class warfare and redistributionist political conflict unprecedented in American history owing to a stagnating economic pie.

These baleful developments are not just possibilities – they are well-nigh certainties.
And they’re ultimately rooted in a common cause: the three-decade-long explosion of debt and speculation initiated in October 1987 when Alan Greenspan bailed out Wall Street speculators and launched a toxic regime of monetary central planning.


America is today saddled with $74 trillion of public and private debt. The global figure exceeds $250 trillion.

These Brobdingnagian figures didn’t materialize because everyday people suddenly lost their senses; folks didn’t just become addicted to unsustainable levels of debt, leverage, and speculation.

The people here and abroad were misled. They were induced and baited into burying themselves in debt by agents of the state – especially its central banking branch. The means were falsified interest rates, artificially inflated asset prices, and a hoary theory that debt-fueled “stimulus” injections can create a permanent increase in growth and wealth.

As a matter of keeping score, incremental debt does purchase added gross domestic product (GDP) in the current period. But that’s because of defective national accounting conventions promulgated more than a half-century ago.

GDP accounting is inherently incomplete because it views the economy as simply a matter of period-by-period flows – the more “spending” the better – without regard to balance sheets and the accumulated cost of debt carry over time. And this blindness has gotten far more consequential since October 1987.

The price of debt has been deeply and systematically falsified by central banks, providing a powerful artificial incentive to borrow and a misleading signal to debtors about its longer-run implications.

In the case of households and governments especially, balance sheets have been deeply impaired in order to fund current spending. Yet these two sectors – virtually by definition – do not borrow in order to acquire productive assets capable of defraying the accumulating cost of carry.

Over time, they suffer a progressive diminution of their ability to spend as interest costs on past spending/borrowing absorb an ever-larger share of current income.

Even in the case of the private business sector, where borrowings used to fund new assets that can add value if they generate returns in excess of the cost of debt, the relentless repression of interest rates has resulted in severe balance-sheet deterioration. And, in the long run, that too means slower growth and impaired wealth generation.

The cost of benchmark debt – the rate on the 10-year U.S. Treasury note – is really the master capitalization rate for the entire financial market. Artificial and sustained reduction of cap rates results in proportionately higher asset prices and increased price-to-earnings multiples.

Yet cheaper debt and richer share prices are one of the most toxic consequences of monetary central planning. It provides powerful incentives to the CEOs and CFOs to borrow at sub-economic costs, use the proceeds to fund stock buybacks, increasing per-share earnings, and expand multiples.


Likewise, cheap debt causes a huge distortion in the mergers-and-acquisitions market. Acquisitions are made to look “accretive” not because the make business sense or because there are true, sustainable synergies. They happen because they carry cost of purchase debt is so low.

These forms of financial engineering redistribute financial wealth to the top 10% and 1% of households, which own 40% and 85% of the stock, respectively. But that comes at the expense of reduced investment in productive assets and therefore lower growth and employment over time.

At the end of the day, the relentless and ever-deepening interest-rate repression of the last 30 years has generated modest gains in output and jobs on Main Street and a massive inflation of asset prices on Wall Street.

But, now, this bad money regime has finally taken itself hostage. Our monetary central planners have fostered such massive, egregious bubbles that they’re terrified by the prospect of another stock market meltdown like those of 2000 and 2008-2009.

Another event like that would bring a renewed bout of desperate restructuring, layoffs, and liquidations by Corporate America and a new recession on Main Street.

The Federal Reserve has simply launched another Hail Mary. It’s so transparent and so incendiary that it will surely catalyze the final blow-off top early in the 2020s.

Better Than 2020 Vision

This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR