Washington, DC -- (ReleaseWire) -- 09/20/2016 --DAWN BENNETT: David Stockman is the former Director of the Office of Management and Budget, which is the largest office within the executive office of the President, under President Reagan. David is also the author of the bestseller The Great Deformation: The Corruption of Capitalism in America, and he's got a new book out called Trumped! A Nation On The Brink of Ruin…And How to Bring It Back where Stockman writes about how 30 years of financial and political misrule by Washington and Wall Street elites has brought the US to the brink of ruin. David, welcome back to Financial Myth Busting!
DAVID STOCKMAN: Very happy to be with you again.
BENNETT: A couple of weeks ago, Donald Trump took issue with the Federal Reserve stock market manipulation remarking that the Fed has created 'false stock market', and even took it so far to say that the Chair Janet Yellen should be ashamed of what they're doing to our country. Was he right to say these things?
STOCKMAN: Absolutely! I thought it was a remarkable moment that finally someone called out the elephant in the room. Economic policy today is dominated front and center, beginning to the end by the Federal Reserve, and he is right: it has falsified the entire financial market. Now, the more sophisticated way of expressing that is that price discovery has been destroyed, market false liquidity has poured into the canyons of Wall Street like a flash flood, bond prices are crazy worldwide – there's $13 trillion of sovereign debt trading at sub-zero yield which on its face is the craziest thing anybody can imagine because no government should be paid for borrowing money. You know, we could go to the stock market, we could go to the entire financial system – I call it 'financialization' – I've got one great number in the book that I think kind of illustrates why we're so off the deep end. When this all started, I called it 'bubble finance' in 1987 when Greenspan took over the Fed. There was about $13 trillion outstanding of total debt plus the market value of the entire stock market of the United States. That was a little more than double the GDP at the time, so call it 200% financial asset value to GDP. Today it's $93 trillion of debt; $64 trillion of debt plus the stock market value, and that's five and a half times the current $18 trillion of GDP. So, we've had this massive inflation of the financial system not rooted in the growth of productivity or through capitalist expansion and prosperity but simply a consequence of the money-printing policy so that we could go into the Federal Reserve. And what this has done, and that's kind of what's front and center on the book jacket of my book, is that it's created a tremendous prosperity for the bicoastal elite who own most of the financial assets and there's all kinds of secondary trickle down from that that ends up in Washington, DC as well because they can borrow money endlessly for practically free, but in the flyover zone of America except for a few islands of prosperity that live off venture capital, there is kind of parched earth economically. I use two facts that I think are quite powerful: one, since the year 2000 there's not been one net gain in what I call full-time, full-paid, breadwinner jobs in America – not one! In fact, when Clinton was packing his bags to leave the Oval Office, there was 72.4 million of those jobs and 71.5 today. Secondly, if you measure inflation honestly, and certainly that's not what the BLS puts out or the Fed swears by with the so-called PCE deflator – without food and energy. If you measure it honestly with something we've laid out in the book called 'the flyover CPI' which focuses on food, energy, health and housing, which is the overwhelming share of what main street America pays out of their paycheck. Real household income adjusted for that honest inflation measure is down 21% since the year 2000. Think about that: no breadwinner jobs, most of them fled to the offshore, and a 21% decline in the real standard of living. That's what's happened in the flyover America. On the other hand, 13 to 93 trillion dollars' worth of financial value falling onto a very small slice of population.
BENNETT: Let's go back to the jobs. I want to refer back to your flyover America. You've long argued that the Federal Reserve and Washington is hollowing out middle class America, and again, you referred to this as 'flyover America', but why is Obama saying he's engineered a recovery and created millions of jobs? I just don't understand why he's saying it. I certainly know it's not true, but people do feel like we're in a recession. They do feel like things are getting worse, not better.
STOCKMAN: First of all, his statement is essentially the same old Washington propaganda I called 'imperial city'. If you start with the job count of the BLS in February 2010, the very bottom of this devastating, great recession, and then you see where we are today according to the BLS which I think there's a whole lot of talk about why those numbers won't be sustained and aren't valid, but in any event he then gets 40 million jobs. The point I make in my book is half of them are born-again jobs. They were created between 2000 and 2008, then came to crash, we lost them all and we got half of them back. That's the first point. The second point is the other half that aren't born-again are essentially part-time jobs in restaurants and bars, retail sales jobs and so forth which I'm not saying they're not worthy jobs. They're necessary, but the point is you can't support a family on jobs that pay less than $20,000 a year in aggregate pay and that are essentially 26 hours a week and are barely above the minimum wage.
BENNETT: I get your point but the progressives out there use the excuse of income inequality to argue for more government intervention in the economy. Yet, as you have stated, especially in your book, these interventions are actually making income inequality worse. Why is this happening and do you think that these bureaucratic busybodies even realize the effect that they're having?
STOCKMAN: Well, it's like that story of the 11-year old who killed his parents and then threw himself at the mercy of the court on the grounds that he was an orphan. Now, the point is that this income misdistribution they talk about is real and I mention it in my book, but it's a consequence of bubble finance, it's a consequence of the Fed falsifying the financial markets, of turning Wall Street into a casino. But the fact is that it is not real capitalism at work and that is not permanent wealth creation, so if we look at the period since '87, the Forbes 400 has had a 1000% gain in real terms and net worth. The top 1%, a 300% gain in at least paper net worth, as calculated by the Federal Reserve. The bottom 90%, zero. Net worth today is not higher than it was in 1987. Now, that's a perversion or corruption of capitalism, as I said in my last book. And going back to where we started, finally after all this time, a politician has pointed out that the Federal Reserve has falsified the financial market. This whole mythology about "The Fed is independent. You dare not comment on their policy," is at the heart of what I call this illicit Wall Street/Washington regime that is ruining the country and that's why I say it's at the brink of ruin. Finally, I don't know whether Trump has thought through what a better direction would be. I've got a whole chapter on why we should abolish the FOMC entirely, go back to the original version from 1913 of what the Fed is to do, which is not to be the agency of national monetary central planning. I'm not sure where Trump is, but at least he us not so schooled and brainwashed in the propaganda and in the consensus of Wall Street/Washington that he's willing to speak up and raise fundamental questions.
BENNETT: David, in your book you have argued that Trump's candidacy is directly attributed both to the growing sense that the US economy out there is rigged and it's only helping those at the top, so I guess now is a good time to ask do you think Trump actually has the goods to address these problems or is he simply just capitalizing on this populist wave he sensed was building and took advantage of?
STOCKMAN: I think right now he's capitalizing on the wave because clearly—and I don't use this word in a condescending way—but I think it's a fair statement that the rubes are in revolt. They're treated as rubes by the Washington/Wall Street bicoastal elite and they've had enough and I think Trump's phenomenal rise is reflective of that. Now, how that translates into fundamental change in policy… that's a huge, open question.
BENNETT: What if Trump asks you to join his economic policy shop? What advice would you give him in terms of things he's getting wrong and what's his biggest shortcoming on the policy front?
STOCKMAN: Okay, I think the three things he needs to address are: one, the Fed and how we can basically launch a campaign that says 2% inflation targeting has to go because that is a mortal threat to purchasing power or wages throughout America; number two, zero percent interest rate or interest rate pegging has to go because that is savaging millions of retirees and savers; third, we don't need an activist Fed intervening massively in the market day in and day out, we'll need to go to a much more restrained, passive liquidity provision system, but the heart of it would be let the free market, let interest rates do their job. If we had flexible or mobile interest rates both in the money market and across the yield curve, this market would begin finally to reorient itself and heal itself from this tremendous bubble distortion and malinvestment that's occurring today. So, that'd be the first thing. I think the second thing is—although I think it's fine he's proposed a $4.4 trillion tax cut because that sounds huge but the built-in base under current tax law is $42 trillion, so it's a 10% reduction, but the failure of this in the speech which otherwise was brilliant and had some great kind of pro-capitalist prosperity rhetoric in it which we haven't' really heard recently, but we're going to have to have spending cuts too, and the starting point is defense. There's no case in increasing the defense budget. We have no real enemies in the world and at least he understands "I better make a deal with Putin," but it hasn't been explained to him that if he does, then we can actually substantially demobilize the defense budget: not just ask Europeans to pay more for NATO, but recognize we don't need NATO. So, that would be the second thing. Third, and this is probably the most important of all, the Fed is basically responsible for the massive offshoring of jobs that has occurred over the last three decades, because if you have a 2% inflation target that means that every year nominal wages get higher and higher and we become less and less competitive with China on goods or India on services, and the whole rest of the world. And I point out in my book that the nominal wage when the Greenspan started all of this, the average wage was $9 an hour; it's $22 an hour now. That means that we're dramatically less competitive with the China price or the India price, but in real terms, because of this idiotic 2% inflation, the real wages are actually lower than they were in 1987. So, you get the worst of both worlds. These good, productive, breadwinner jobs get offshored, and what jobs that remain, the purchasing power, the wages earned actually shrink. That's so dumb, so what we need to do now is say how can we reduce the cost of labor in the United States in order to make it more competitive. My answer is let's get rid of the corporate income tax entirely, number one. And second, get rid of the payroll tax entirely and replace it with a tax on imports and business sales or consumption because what we have in this country is way too few jobs, not nearly enough work to support a growing population that wants a higher living standard and all these baby boom retirees, so we need to take the burden off labor. We need a sweeping tax cut to try and rejuvenate the economy but this is a different world than the Reagan world of 1981. I think what we need now is a major reduction of the burden on labor given the fact that said policy has inflated wages to wholly uncompetitive levels internationally. So, I proposed in the book that we eliminate the payroll tax entirely. That's $1.1 trillion a year; it's 15% employer and employee combined, and a refund of that revenue source with a tax on imports, and consumption, of which we have way too much. That would actually benefit 160 million people who pay payroll tax today as opposed to the income tax cuts which I'm not against, but at the end of the day 10 or 15 million households get all the benefit because they pay most of the income tax at the present time. So, we need something different and we need to pay for it with spending cuts, and that's probably an area where a lot work needs to be done on the Trump program if it's going to make a difference assuming he's elected.
BENNETT: David, I get the sense that you're not exactly a full-throated Trump booster, but I'm also guessing you agree he probably is preferable to Hillary Clinton and the third party options. Am I correct about that?
STOCKMAN: Absolutely! I was asked the other day what my opinion was, and I said Hillary represents a 30-year old bag of deplorables. I'm not talking about her supporters like she did with Trump. I'm talking about her ideas. She has never seen a war she didn't like. She is a hundred percent behind this whole bubble finance regime at the Fed. She thinks Janet Yellen is some kind of superhero. She thinks that we can make the economy prosper by even more meddling and intervention and control from Washington and obviously we have 30 years now proving that because the economy after this limp recovery is now grinding to a halt. I think we're near the edge of a recession, and think about it – it means that in the last 16 years the average growth rate has been 1.6% or less than half of what it was historically, and that's only if you credit the inflation measures used by the Washington statistical mills. If you have an honest measure of inflation, I doubt the real economy for most of America has grown at all over the last period.
BENNETT: Since Yellen probably knows how Trump feels about her and then she's more preferable to Hillary, isn't it obvious to you that monetary change towards tighter credit won't be coming any time before the election because that would mean death to the incumbent party, right?
STOCKMAN: Yes, and I think he hit the nail on the head the other day, and again he got criticized for being politically inappropriate or saying the wrong thing. You can't say the truth of the matter is they're not going to raise interest rates next week and they're probably going to raise them before the election certainly because they don't want to upset the political apple cart. I mean, some of the members of the Federal Reserve board actually contribute to Hillary's campaign so they're not even hiding the ball. But it's not just that political thing, it's the state of mind, it's the belief that all of capitalism depends on what twelve people sitting on the FOMC conclude is the better course of wisdom. That is so fallacious, that is so wrong in terms of sound finance, economics and money... that's the heart of what needs to change if this campaign is going to make a difference.
BENNETT: Could you please tell our listeners how to get your new book Trumped! A Nation On The Brink of Ruin…And How to Bring It Back?
STOCKMAN: Well, it's on Amazon, just a couple of clicks away. The e-book is now available. We rushed this to press because obviously it's very pertinent of huge issues being raised by this campaign. The printed book can be pre-ordered right now. It will be available in a week or so, and I might say just launching this week it's doing really well because it's not – and I emphasize this – it's not a promotion for Trump, it is an explanation of the giant mess we're in.
BENNETT: Thank you, David.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.