How to Topple an Empire in Three Steps

By David Stockman  |  August 7, 2018

Well, normally I’m against big things. I think the world is going to be saved by millions of small things. Too many things can go wrong when they get big.

– Pete Seeger, on attending his 90th birthday party in 2009

It happened in 94 days. That’s a mere moment in monetary time.

But it was enough for madness to take hold.

Lehman Brothers imploded and the stock market melted down in September 2008.

In response, the Federal Reserve printed more money than it had during its first 94 years in operation. Its balance sheet expanded by 145%, from $925 billion to $2.25 trillion.

Wall Street and Imperial Washington applauded, gratefully. But future generations of American taxpayers will rue those days.

That’s when we crossed the point of no return on the road to fiscal oblivion.

The Fed’s massive intervention in the bond market radically suppressed interest rates.

And that led to a “Lost Decade” for fiscal policy.

The period between 2010 and 2020 was important. It was the last opportunity to “fix” a massive problem.

That’s the tsunami of spending about to be generated when Baby Boomers surge into retirement.

Imperial Washington didn’t take action when there was still time. It ignored Welfare State entitlements. It ramped up Warfare State budgets. It cut taxes whenever and wherever it could, too.

So, the public debt doubled from $10 trillion in 2008 to $21 trillion today.

But annual interest costs in 2017 were the same as they were in 2008.

So, right now, we spend about $260 billion a year to service our debt.

It’s stayed that way for 10 years. That’s despite the fact that the total debt had doubled.

But interest rates were historically low this whole time.

So, Imperial Washington could have its cake. And it could eat it, too.

I learned from first-hand experience that the one thing to finally impart some fiscal sense on Capitol Hill is the fear of soaring interest costs.

Politicians know that means a painful budget squeeze. Interest has to be paid. And their favorite constituencies and pork-barrel projects will, eventually, get short-changed.

So, during that crucial decade, Imperial Washington got all the wrong signals.

Rather than develop a fiscal cushion for the post-2020 spending storm, it ran giant deficits during what will soon be the longest peacetime expansion in history.

It’s not that Congress needs any encouragement or disincentive to or not to get anything done under normal circumstances. But the structural deficit was neglected during the political stalemate of the Obama years.

Of course, when Republicans gained control of Congress and the White House in 2016, there was no check on the GOP’s long-running hypocrisy on deficit finance and the public debt.

So, the annual deficit will hit $1 trillion in 2019. It’ll rise to $1.3 trillion by 2022 and $1.5 trillion by 2028.

The baked-in-the-cake deficit is $12.5 trillion over the next decade. That means the total public debt will grow to $33.9 trillion, or about 130% of GDP, by 2028.

And those figures are based on an absurd Rosy Scenario economic forecast.

Already-clipped attention spans are seized by a ridiculous stock market rally. They’re similarly dazzled by what we’ll soon understand as the death throes of a weak and, now, old economic recovery.

From a purely cyclical point of view, this lapse is bad enough.

But the Fed, finally, is “normalizing” monetary policy.

And long-suppressed interest costs are coiled to soar.

That’s the product of rising yields, public debt double what it was 10 years ago, and a structural deficit of $1.2 trillion per year.

During the coming decade, debt-service costs will approach $7 trillion per year. That’s three times what we’ve been spending.

And that assumes the yield on the 10-year U.S. Treasury is only 70 basis points higher in 2028 than it is today.

It neglects entirely even the slightest probability of a real “yield shock” in the bond market.

That’s a mistake. And it’s a big one. Indeed, it could undo the Welfare State, the Warfare State, and the entire American Empire.

Don’t let it do the same to your portfolio.

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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.MORE FROM AUTHOR