 Our guest this week is David Stockman in the first of a two-part interview and David will be also joining us this coming Thursday in Stanford, Connecticut at our Mises Circle event along with Judge Andrew Napolitano and Jim Grant. So if you find yourself in the New York City area, please come join us this coming Thursday in Stanford. Now of course, David Stockman was a congressman. He was Ronald Reagan's budget director and also a private equity fund manager who saw first hand so many troubled companies in an American economy that was built on cheap debt instead of real productivity. His book, written a couple of years ago now, The Great Deformation, is really a tour to force expose of crony capitalism. It's an indictment of Treasury Department and Fed actions following the great crash of 2008. And from my view, one of the most important books on crony capitalism ever written. This Contra Corner website is for me a daily must read for anybody interested in the truth about our rigged economy. So if you're interested in the economy, what's going on, what's happening with the Fed and crony capitalism generally, stay tuned for the first of two great interviews with David Stockman. Ladies and gentlemen, as promised, we're back once again with Mises Weekends and our guest this week is none other than David Stockman. David, how are you this morning? Very good and great to be with you, Jeff. Well, I have to say there's so much to talk about, there's so much going on, but let me just start with this. The Fed recently announced just this past week that it would not use specific dates for targeting a higher Fed funds rate this year. And you almost get the sense that poor Janet Yellen is at the end of this Greenspan Bernanke experiment and there's not much left for her to do. I mean, what's your sense of Yellen and her position? Yeah, I agree with that. I think in some ways they're petrified as to where they've ended up or they should be. After all, we're in an experiment of monumental proportion that defies every cannon of sound money or even a pragmatic monetary practice that we had before the year 2000 or even later. Let's just assess where we are. If they don't raise the interest rate in June, and I think all the signals now are pretty clear, they're going to find another reason to delay. That will mean 78th straight month of zero rates in the money market. And as I always say, the money market price, that is the federal funds rate or overnight money or a short-term Treasury bill is the most important price in all of capitalism because that determines the cost of carry, the cost of speculation and gambling. And when you conduct a monetary policy that says to the speculators, to the gamblers, come and get it, you are guaranteed free money to carry your positions, whether you're buying German booms or you're buying the S&P 500 stock index or the whole array of yielding or price and gaining assets that are available in the financial market and that you can leverage and carry those positions for free and roll it day after day without worry because the central bank has pegged your cost of production and in a sense has pledged on its solemn honor that it will not change without many months of warning. That's what this whole thing is about changing the language and so forth. I think you have created a massive distortion in the very heart of capitalism in the financial system and that's exactly what the Fed has done. Secondly, I think even though they stopped actually adding to their balance sheet in October when QE supposedly ended in a technical sense, the point is that at 4.5 trillion compared to 900 billion on the eve of the Lehman failure, the Fed has put 3.5 trillion worth of basic financial fraud into the world financial system and economy. After all, when they bought all of that treasury debt and all of those GSE securities, what did they use to pay for its width? It was digital money, you know, conjured out of thin air and they certainly haven't destroyed or repealed, I should say, the law of supply and demand. So if you put 3.5 trillion of demand into the fixed income market at points along the yield curve all the way from two years to 30 years, that is an enormous fat thumb on the scale. That is an enormous distortion of pricing because you can't have that much demand without affecting the price and therefore the yield of security. And as a result of the Fed doing that as well as all the other major central banks of the world, the ECB now in full throttle, Japan in almost lunatic mimicking of the QE, you are creating the greatest distortion of fixed income pricing or bond market pricing in the history of the world. And the bond market is, you know, the monster of the midway. That is most like tens of trillions big and the central banks in some kind of quasi-coordinated or unison fashion have levitated the prices enormously and brought the yield right down almost to the zero line, to the zero bound, as they call it, and therefore have set up the world financial system for a huge day of reckoning somewhere down the road and perhaps not that far away. After all, only two weeks ago, I believe they had the German 10-year boond yielding five basis points. That is crazy in any kind of world that makes economic sense or that sustainable. Already, some of the more aggressive bond traders in the world are jumping on that, calling it the short of a generation. We'll see about that, but the point is five basis points of yield, even on the mighty German boond for 10-year money, is just a major kind of a ultimate measure of the lunacy that has been injected into the financial system. But, David, when you talk about the injections, when you talk about the thumb on the scale, as you discussed in Contra Corner recently, it's not working, right? The Commerce Department just announced anemic first-quarter GDP growth. I mean, is there any honest growth in the U.S. economy at this point? No, and this is one of the things that I've been harping on, and sometimes we get so caught up in the monthly so-called incoming data and the short-term releases that then are seasonally maladjusted anyway and get revised four times over that we really lose track of where we are. So the other day, I said, let's just look at two extended periods of time that occurred in different economic and policy environments and do an assessment of where we are. So I took 1953 to 1971, that representing the end of the Korean War and the beginning of the great prosperity of the middle century, ending in the August 1971 fatal mistake that Nixon made when he closed down Bretton Woods and the rest. I call that the golden era of prosperity. During that period, the economy grew and I used real, final sales to measure the growth because that takes out the inventory fluctuations and distortions that are in the GDP number per se. But if you take real, final sales for that 18-year period, it was 3.6% a year compounded during a time in which the Fed was run by William McChesney-Martin, a survivor or veteran, you might say, of the 1929 crash in the trauma of the 1930s, a man who wasn't necessarily in the classic sense a hard-money gold standard advocate, but he certainly was a wise financial hedge who understood the dangers of speculation in the financial markets and of too much heavy-handed intervention in the financial system. And my point is during that 18-year period, the balance sheet of the Federal Reserve expanded by only $42 billion over 18 years. Now, during QE, that was about two weeks worth of expansion at the peak. More importantly, if you look at it in real terms, inflation-adjusted terms, the balance sheet of the Fed grew about 3% a year. The economy grew at nearly 4%. Therefore, the Fed was engaged in a very modest light-touch policy, allowing the mechanism of capitalism, including the financial markets, at the heart of it to function. The balance sheet of the Fed grew by 0.8% of the growth in the GDP. Now, let's take the last 14 years. We're in a totally different world. The Greenspan has changed the whole notion of the role of the central bank. It's followed by Bernanke and Yellen. During that period, GDP growth of the economy has downshifted sharply to 1.8% a year over the last 14 years, half of what occurred during the Golden Era. By contrast, the balance sheet of the Fed grew from $500 billion to $4.5 trillion, $9x. Looked at it in the same annual term, 17% a year growth of the balance sheet, 15% after adjusting for inflation. That means that the Fed's balance sheet grew eight times more rapidly than the economy during the last 14 years, just the inverse of the relationship that occurred back in the Golden Era. So I think if you need any proof that all of this massive intrusion into the financial system, the huge amount of money printing and balance sheet expansion, the unremitting financial repression and tagging of interest rates, the way the Fed has been doing since the turn of the century, if you need any evidence that that's not working, look at the fundamental comparison that I just made. It's not working. The only thing it's really doing by not working, I mean, it's not working in the real economy. It's not generating expansion and living standard gains on Main Street. What it's doing is simply inflating serial bubbles that ultimately reach unsustainable peaks and collapse. We've had two of them this century already from that policy, and we're now overwhelmingly, if you really look at the evidence, in the third grade bubble that is even, in some ways, more fantastic than the earlier two. It's only a matter of time before it bursts and implodes, and we'll then be back to square one. Hopefully, on the third strike, you should be out. I think that might be a fair metaphor or proposition to make. Hopefully, when this next big bus comes, and surely it will, when you look at the degree of speculation in the stock market or the high-yield market or many other sectors that we can talk about, when the bus comes this time, hopefully there will be a great day of reckoning in the country in terms of demanding a fundamental change of monetary policy, the resignation of all the people who are sitting on the Fed today that have led us right into this gargantuan financial trap. Dave Stockman, thank you so much for your time today. We look forward to seeing you in Stamford, Connecticut on Thursday of next week. Ladies and gentlemen, have a great weekend.