'When the Real Margin Call Arrives, the Carnage Will Be Unimaginable'

Wow. Talk about calling it like it is.

The Associated Press is out with a report (via Business Insider), "David Stockman: You'd Be A Fool To Hold Anything But Cash Now," featuring a no-holds-barred interview with an individual (and former White House budget director under Ronald Reagan) who is no stranger to the pages of Financial Armageddon.

Here is a brief excerpt:

Q: Why are you so down on the U.S. economy?

A: It's become super-saturated with debt.

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

People were taking $25,000, $50,000 out of their home for the fourth refinancing. That's what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income.

It wasn't sustainable. It wasn't real consumption or real income. It was bubble economics.

So even the 1.6 percent (annual GDP growth in the past decade) is overstating what's really going on in our economy.

Q: How fast can the U.S. economy grow?

A: People would say the standard is 3, 3.5 percent. I don't even know if we could grow at 1 or 2 percent. When you have to stop borrowing at these tremendous rates, the rate of GDP expansion stops as well.

Q: But the unemployment rate is falling and companies in the Standard & Poor's 500 are making more money than ever.

A: That's very short-term. Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years.

Another measure is the rate of investment in new plant and equipment. There is no sustained net investment in our economy. The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8 percent — hardly measurable.

(Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

We're stalled, stuck.

Q: What will 10-year Treasurys yield in a year or five years?

A: I have no guess, but I do know where it is now (a yield of about 2 percent) is totally artificial. It's the result of massive purchases by not only the Fed but all of the other central banks of the world.

Q: What's wrong with that?

A: It doesn't come out of savings. It's made up money. It's printing press money. When the Fed buys $5 billion worth of bonds this morning, which it's doing periodically, it simply deposits $5 billion in the bank accounts of the eight dealers they buy the bonds from.

Q: And what are the consequences of that?

A: The consequences are horrendous. If you could make the world rich by having all the central banks print unlimited money, then we have been making a mistake for the last several thousand years of human history.

Q: How does it end?

A: At some point confidence is lost, and people don't want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5 percent for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8 percent)?

If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

That's what happened in Greece.

Here's the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) Paul Volcker running the Fed today 7/8— utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn't have half, you wouldn't have 95 percent, of the speculative positions today.

Q: You sound as if we're facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.

A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.

I urge you to read the rest of the article -- it might save anyone who is betting on Washington and Wall Street's version of reality a great deal of pain.

Comments

[roger]

We all make mistakes,David Stockman is
to be commended for waking up to reality,
but where oh where was he during the Reagan
reign.

[Our money was stolen and nobody is being held accountable]

Corzine and MF Global Crimes to Go Unpunished –
Surprise surprise, John Corzine, global elitist financier and flim-flam man will not be prosecuted for his role in the MF Global theft and fraud. It seems that the US Attorneys involved just can’t figure out if any crime was committed. There’s so much paper work for them to review and it’s just too hard. Never mind bringing the entire senior executive ranks before a grand jury to squeeze the truth out of them. Never mind the fact that CME Chief Terry Duffy, the head of a national exchange, testified before Congress that he was told that Corzine was aware that customer funds were being siphoned off to pay off MF Global bets that went South.

http://sgtreport.com/2012/03/triple-lutz-report-%E2%80%93-corzine-and-mf-global-crimes-to-go-unpunished-%E2%80%93-episode-166/

MF Global: What Happened to the Money - 'Well, This Is Not a Boat Accident'

http://jessescrossroadscafe.blogspot.com/2012/03/mf-global-what-happened-to-money-money.html

[Anon]

If you think the US economy is going to implode in a hyperinflationary hellfire, holding cash is idiotic.

Stockman may be massively confused, although it is more likely that he actually believes that his austerity Now! Now! Now! line is going to be adopted and the US economy will implode in a deflationary hellfire with blood in the streets and a good opportunity to buy property.

[Marc Authier]

How does it end ? By WW III.

[Macro Analyst]

Related to 10 year bond yields, I completely agree that the current yields are artificial. If we look at the extended bull market for bonds (1981-2012), there is a high probability that yields will start trending up higher relatively soon. Especially in a scenario where the CBO expects budget deficits of over USD10 trillion in the next ten years.

[roger]

@Mark Authier:
The world politics for me,are strangely reminiscent
of 1938.The smell of war is already in the air.
'When the Real Margin Call Arrives, the Carnage Will Be Unimaginable' except in won't be on the financial level.
ww1 and ww2 with the 100 million people killed will pale
in comparison with use of modern weaponry.
The world is ruled by mad people,while the crowds live
in a fantasy world.

[sharonsj]

If you read the ordinary financial sites (not just the gloom and doom ones), you'll find that most of them know there is no such thing as a free market, that the stock market is a gambling casino, and that insiders are getting very, very rich.

What they say is the opposite of what you hear on TV and radio, or what you'll read in establishment magazines like "Fortune." Those places are trying to get the average sucker to invest in stocks and bonds because that's how they make money, either in fees or by using your money instead of their own.

They also know that the SEC and other regulatory agencies aren't going to enforce any laws. IMF probably engaged in criminal behavior but gossip says he won't get indicted because of his political and financial connections.And have you seen any of the banksters go to jail yet?

That's why we're going down the tubes.

[Laugh or cry?]

The Joke's On US

Our whole system or Rule of Law and accountability has completely broken down at the highest levels of Government and banking. Our system is no better than the Banana Republics we grew up to mocking and despising - THAT's our system now...

http://truthingold.blogspot.com/2012/03/jokes-on-us.html

[RPY]

You hear that term 'free market' thrown around to describe the current system.. But has I have come to understand it, the term was original meant to describe a system free of 'unearned income'. A market in which prices reflected the actual necessary costs of production...
Unearned income being defined has interest and dividends, fees and commissions, exorbitant management salaries, bonuses and stock options, and “capital” gains (mainly debt-leveraged land-price gains).
What we have today is system promoted by the 'no such thing as a free lunch' boys from the Chicago school of economics.

[Doable Finance]

Americans have to be in debt. With so much credit available, who can resist not getting into debt?