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David Stockman: Fed buying insane percentage of government bonds (Audio interview)

In an hour long interview, David Stockman says, "This bond bubble is the most dangerous thing ever imagined by policy makers."

The former budget director has written a book, The Great Deformation: The Corruption of Capitalism in America, outlining the god-awful policy mistakes of recent years. He covers the Fed, interest rates, the bond bubble, Bernanke, Paulson, the debt, the scope of the dilemma, very much confirming our favorite country Dr.


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The Book has hit the stands

The Book has hit the stands and it is a terrific exposition and commentary. Buy it! It is a great read: The Great Deformation. Stockman knows how to write, as well as analyze.


Another source of this interview from Business Insider

and some commentary.


"In the end, more than they wanted freedom, they wanted security. They wanted a comfortable life, and they lost it all -- security, comfort, and freedom. When ... the freedom they wished for was freedom from responsibility, then Athens ceased to be free."

The Federal Reserve are going to make $5n+ of losses on the

insane amount of debt that they are currently buying.

They are going to try and bill the Treasury (i.e. the taxpayer) for their multi trillion losses at some point in the future.

(Charts included on the above link.)

Nick Leeson and Barings bank vs the Federal Reserve and America

The Fed are behaving in exactly the same way as Nick Leeson, who kept doubling down on his bets that the Nikkei would turn around and start rising again in the early 1990's.
The Nikkei was way over valued at the time - just like US Treasuries are now.
It was a sure fire losing trade.
Nick Leeson broke Barings Bank.
Barings Bank had been a profitable institution for 230 years - it was founded in 1762.
The Federal Reserve private bank is going to do the same thing to the whole of America.
America has also been a profitable institution for about 230 years.

The Federal Reserve's sure fire losing bet

The Fed is currently making healthy profits from it's greatly expanded balance sheet - $96bn for 2012.
But just a small rise in interest rates will turn these current profits into losses.

The Fed is now doubling and tripling down on a 100% sure fire losing bet (they are exactly akin to the worst kind of rookie trader).

They are increasing their balance sheet by $1tn a year ad infinitum, by buying US Treasuries at record high prices and overpaying for impaired mortgage debt in QE3.

WHEN (not if) interest rates start rising back towards normal historical levels the Fed will start making losses.
The longer the Fed continues with their current policy of buying huge quantities of debt at extremely high prices the greater these future losses will be.

Instead of returning a health sum to the US Treasury each year, the Fed will call upon the US Treasury (i.e. taxpayers) to pay for their losses.

These future payments by the US Treasury to the Federal Reserve private bank have not been factored into future deficit or National Debt calculations.

The Federal Reserve will not be able to escape the path that it is on.
There is no way out.
The Fed is already buying US debt equivalent to the ENTIRE annual government deficit every year.
There is an extreme shortage of other buyers at current rates.
The Fed will not be able to reduce their balance sheet at any stage in the future without taking a very substantial loss.

Any selling by the Fed in any quantity would lead to a dramatic decrease in the price of US Treasuries (and other US debt held on the Federal Reserve's balance sheet).
The Federal Reserve is by far the largest player in the market for US debt - they are greater than all the other Central Banks put together.
The market has already priced in that the Fed will be buying $1tn of US debt a year ad infinitum and any change in that policy (even without actually buying or selling anything) would dramatically lower the perceived worth of US debt.

The interest rate for 10 year government debt averaged over the last 200 years is between 5 and 6%.
An interest rate of between 5 and 6% is the historical norm.
Markets ALWAYS revert back to historical norms sooner or later (unless they cease to exist entirely).

Source : Société Générale Institutional Research

10 Year US Treasuries currently have an interest rate of 2%.
Some estimates put the break even point for the Fed at 4.5% at the end of 2013 (below this and the Fed makes a profit).
Some estimates put it as low as 2.5%.
There is no doubt it is closer to the latter number.
You have to factor in the future losses on the huge amounts of debt the Fed has already bought while the 10 year note has averaged between 2.5% and 3% over the last 4 and a half years ($2.1tn from mid 2008 to January 2013).
You have to factor in the $1tn of US debt the Fed will be buying each year while the 10 Year note is paying around 2% interest, as it currently is.

The future Federal Reserve bank crisis is already set in stone alongside the US sovereign debt and bank crises.
By the end of 2013, if not earlier, the future will of already been set in stone. It is only a question of when these future events happen.

(The only remedy would be for the Fed to stop printing now and for the Federal government to stop borrowing now. There are no plans to stop doing either of those things - quite the reverse.
The Federal Reserve is going to keep printing and increasing it's balance sheet by $1tn a year ad infinitum.
Current congressional budget plans are to increase government spending to over $5tn a year by 2020 and to run a circa $2.5tn deficit in 2020 and it will continue to get worse after this.)

When the market woke up to Greece's debt problems in 2009, Greek interest rates moved from 2% to 7% within a few months.
Anybody who investigated the Greek government finances in the years before 2009, would also have known it was just a question of when, not if, their crisis happened.

There is NO way out.
And like all bubbles - the longer it is before this bubble bursts, the worse the eventual fall out will be.

Update 02/24
The frightening path that the government and the Federal Reserve has set out upon.

Source P48 of the following report

When it comes to forecasting the long-term trajectory of the US economy, things usually get very fuzzy some time after 2020 because, as even the most hardened optimists, the "impartial" Congressional Budget Office have recently admitted, America has at best 3-4 years before everything falls apart due to the unsustainable demographic crunch that will wallop the US entitlement state as demographics suddenly becomes a four letter word. Beyond that, not even the CBO dares to plot a straight line as to what happens should America not get its fiscal house in order.
Which is why we were very surprised to see none other than Morgan Stanley's David Greenlaw and Deutsche Bank's David Hooper release a paper (whose views do "not necessarily reflect those of the institutions with which they are affiliated") titled "Crunch Time: Fiscal Crises and the Role of Monetary Policy" which is a must read for everyone interested in what very likely will happen to the US as ever more power is handed over by the country's now terminally malfunctioning fiscal and legislative apparatus to the monetary policy vehicle controlled by the US financial oligarchy.
Since we know that most readers are pressed for time, we will cut to the chase: the above chart shows what according to the authors' own simulation of the US economy, and not that of the CBO, rates on the 10 Year will look like through 2037. The second chart shows what US debt-to-GDP will be for the next two and a half decades.

We (the authors of the report) have assumed the U.S. current account deficit holds at 2.5% of GDP-- a level that matches the best result seen in the past decade and is slightly narrower than the 2.7% of GDP recorded in 2012. If, instead, we assume that the current account deficit reverted to the 3.7% of GDP average seen over the prior five years, then the projected debt burden would reach 180% of GDP in 2037.

We can also examine a scenario in which policy actions and economic outcomes produce a less favorable path for the primary budget deficit (using our baseline current account deficit assumption of 2.5% of GDP). For example, suppose that the looming budget sequester scheduled to occur on March 1 is cancelled and that the steady-state unemployment rate is assumed to be 6% (as opposed to the 5.25% as assumed by CBO). In this case (which we refer to as Simulation II), the budget deficit would be quite a bit higher than in the initial scenario. The debt/GDP ratio would rise much more rapidly, hitting 304% of GDP by 2037 (Figure 3.13) and bond yields would skyrocket, eventually getting above 25% (see Figure 3.14).

We should emphasize that we are not presenting these alternative simulations as more realistic forecasts of what the U.S. experience will actually be. In a country like the United States, the debt premium presumably would arise from inflation fears rather than concerns about outright default. And if we are talking about a higher inflation rate, forecasts of nominal GDP should be adjusted as well. Instead, we view these simulations as illustrating the extent to which the path implied by baseline CBO projections could quickly become much more difficult to manage than some policy-makers may be assuming-- something dramatic will need to change well before U.S. interest rates reach double-digit rates

Our main conclusion is that higher debt levels can have a significant impact on the interest rate path and that feedback effects of higher rates on the level of indebtedness can lead to a more dramatic deterioration in long-run debt sustainability in the United States than is captured in official baseline estimates. Figure
Putting some numbers to the forecast by Greenlaw and Hooper, and assuming a 1.5% CAGR for GDP, which in the new structurally slower normal is quite generous, we get $23 trillion in US GDP by 2037, $70 trillion in debt, and a blended cash interest expense that is over 75% of total GDP.
We also get the Fed monetizing all of it.


Federal Reserve financial statement for 2012.

5 year chart of 10 Year US Treasury Notes

US government spending

US government spending is planned to rise by nearly 50% to over $5tn a year in 2020 and continue rapidly rising thereafter.
Federal spending was $3.6tn in 2012.

The principal planned increases for 2020 compared to 2012 are roughly :-

$750bn on interest payments
$400bn on Healthcare
$400bn on Pensions
Over $100bn on the military

Total circa $1,650bn

There are also various inflation adjustment increases to the multitude of other government departments, but these are relatively small - adding up to an additional $50bn+ in total.

As noted above - the adjustment for payments from the Federal Reserve to the Treasury of $90bn a year to the opposite or much worse are not factored into the above calculations.

2012 Federal government spending

A look inside the Fed's balance sheet

Some scenarios of Federal Reserve future losses

When US interest rates revert back to their historical norm of between 5 and 6% the Federal Reserve will take a realizeable loss of 50%+ on their balance sheet.

If this were to happen by 2016, the Federal Reserve would charge a loss to the US Treasury and the US taxpayer of about $3.5tn.
It would be spread out over a few years. The Federal Reserve imagines a scenario of about 5 years.
This is one of the more optimistic future scenarios in the Federal Reserve future forecasts.

If interest rates did not rise for a few years and then rose in an orderly way over a few years back to lower historical norms of 5% by 2020, the Federal Reserve would charge a loss to the US Treasury of about $5.5tn.
This is the scenario envisioned in current Congressional budget plans.
If this were spread out over 5 years the Federal Reserve would charge the US Treasury $1.1tn a year for 5 years on their losses.
The US government would already be spending circa $1tn a year on debt servicing, so this would double it.
The budget deficit would not be $2.5tn in 2020, it would be $3.7tn.

A much more likely outcome is that the market suddenly wakes up to the scenarios outlined above at some point in the future (just like the market eventually woke up to Greece) and interest rates rapidly rise from just over 2% to 7% in just a few months.
Then you have panic with far greater Federal Reserve losses and far higher interest payments having to be paid out by the Federal government.
Markets always tend to overshoot historical norms slightly, when they revert.

Why the Federal Reserve private bank is the root cause of America's problems

Rick Santelli talks about the "sandcastle economy"

Rick Santelli from 01/29
"The Feds exit will be very very messy"

Yes it will - the Fed is already buying up more than half of all new government debt issuance because there is an extreme shortage of other buyers.
Imagine what the shortage of buyers will look like when the Fed turns around and say they are going to be massive sellers instead of massive buyers of government debt.


"In the end, more than they wanted freedom, they wanted security. They wanted a comfortable life, and they lost it all -- security, comfort, and freedom. When ... the freedom they wished for was freedom from responsibility, then Athens ceased to be free."

Tom Woods talks about it today

and basically says that that DS does not take it far enough etc.

So before you shower praise on DS - listen to Tom Woods critique it. He is the guest host on The Peter Schiff show:

"I'll be hosting the Peter Schiff Show today, and will be joined by guest Tom DiLorenzo! We'll talk about his book Organized Crime: The Unvarnished Truth About Government. Listen live for free during showtime, 10am-12pm Eastern."


I guess you will need to wait for the archive of today's broadcast.

Ron Paul is My President

too late to it... any updates

too late to it... any updates on what was his critique?

He that would make his own liberty secure, must guard even his enemy from oppression.
Frontline: The Untouchables

egapele's picture

The last chapter is called "Another Road That Could Be Taken"

I'd be interested to see what that is.

trading word-clouds

David Stockman: "Ron Paul is right about the FED" I like the part with: "...Wall Street isn't even home - as it's now a bunch of computers trading word-clouds emitted by this central banker and that..."

of course he also endorsed Ron

He that would make his own liberty secure, must guard even his enemy from oppression.
Frontline: The Untouchables

The Trillions of dollars being spent by the FED

will be expected to be payed back by taxpayers. Even if the system implodes the FED will try to bring all the bond debt it holds forward into the new currency. They have to keep us slaves.

Surviving the killing fields of Minnesota

Todays brainwashing: GMO's are safe

No, but I know people who did, and there was terrible poverty

In reply to the question below, "Have you ever lived through a total bond collapse?" "No." But I live with someone who did. In Russia in 1998, several banks including the Central Bank, collapsed overnight, taking the state's bonds with it. And it was a time of terrible poverty for all.

Inflation peaked at several hundreds of thousands rubles per dollar. Two days were given to change money. Most average people didn't hear about it.

My wife was aboard a train at the time. When she got off, she and her mother raced to banks to change money, but it was too late for them, and for millions of others. Stores shut down. Banks were shuttered. Credit was destroyed.

Interestingly, the author of this nightmare just committed suicide last week. Boris Berezovsky used the 1998 bond crash to reap the biggest portion of his criminal empire, snapping up worthless oil stocks from the totally bankrupt state.

He deliberately steered this disaster, which led to many hundreds of thousands of deaths due to depression, misery, and poverty. Boris' reason for killing himself? He couldn't bear to live "poor".

He was down to his last $300,000,000.

"Cowards & idiots can come along for the ride but they gotta sit in the back seat!"

Bloomberg: Stockman Warns of Crash Of Fed-Fueled Bubble Economy

In an essay published yesterday in the New York Times (NYT), Stockman wrote that the Fed’s quantitative easing policies in the aftermath of the credit crisis have flooded stock markets with cash even while the “Main Street economy” remains weak. The combination, he wrote, is “unsustainable.”


Here's the link -

to the NYT article - "Sundown in America":


Front Page of Drudge too.

Front Page of Drudge too. Stockman outlines the whole situation perfectly.

Have you ever liver through a complete and total Bond Market collapse?

The full picture of the purpose and dynamics

of such financial machinations can only be understood via today's DEMOCRACY where 75% of potential voters are affirmative-action recipients (if you count women and gays.) It all started with a demand for "equal pay for equal work" and affirmative-action laws, then (since government & courts took away liberty from a private owner to decide whom and how to hire/fire) it became "equal pay for equal title by default."

Tight government regulations to cater for majority of affirmative-sction recipients, trade unions, tenured professors and government workers resulted in 1) lower productivity on average compared to capital spent; 2) consuming capital of the productive on today's "needs" designated by wise central planners instead of for long-term maintenance of private business.

As a result, further redistribution of wealth via borrowing and infaltion was LOGICALLY and PRACTICALLY NEEDED in order to keep socialist-progressive ideas being implemented in reality. As RP said - the FED is just facilitator not the problem...

Great post

Thank you so much for sharing this. It's a must-listen for all of us here (give it a comment-bump after you check it out!). I hope Stockman gets some serious exposure when his book hits the stands.