David Stockman on an Unprecedented Collapse of the Global Financial System

David Stockman on an Unprecedented Collapse of the Global Financial System by David Stockman for International Man

Doug Casey’s Note: David Stockman is a former congressman and director of the Office of Management and Budget under Ronald Reagan.

Now, anyone with connections to the government should elevate your suspicion level. But as you’ll see, David is a genuine opponent of government stupidity. Although his heroic fight against the Deep State during the Reagan Administration was doomed, he remains a strong advocate for free markets and a vastly smaller government.

We get together occasionally in the summer, when we’re both in Aspen. He’s great company and one of the few people in this little People’s Republic that I agree with on just about everything. Absolutely including where the US economy is heading.

I read his letter the Contra Corner every day and suggest you do likewise.

International Man: What do you make of the ballyhooed potential trade deal with China?

David Stockman: First of all, the deal is all ballyhoo. You know what they say in Texas, “All hat and no cattle.” That’s what we got here.

There’s not going to be a deal, because the problem that Trump is focused on and obsessed with is that we bought $543 billion worth of stuff from China last year, and we sold $120 billion.

It’s not because of bad trade deals The Donald thinks that his predecessor made. Or because the Chinese are the worst kind of trade cheats in world history.

The reason is the economic differential—the economic cost and wage gap between the two countries is so great, that we have this huge imbalance. The Fed is the partial cause of that economic and cost differential.

If you look at manufacturing, our average wage is over $30, which includes the cash wage plus the health benefits, retirement, and Social Security taxes, and all the rest of it.

And in China, it’s about $5. When you have $30 versus $5, it tells you all you need to know.

So, we have this huge gap overall, which is $423 billion, in other words, exports minus imports. But almost 55% of that is accounted for by two trade code categories that really focus on smartphones, laptops, desktops, other computer equipment, electronics, and so forth.

Apple iPhones and the whole rest of it—the supply chain has been entirely transplanted to China. That’s because of a wage arbitrage. Last year, in those categories, we imported $275 billion worth of stuff, including about $90 billion worth of cell phones—and we exported to them only $27 billion worth of stuff.

So, there’s a massive 10-to-1 ratio of imports to exports, and it’s due to wage and cost differences, not because the Chinese cheat. The point is you’re not going to negotiate that away.

Trump has identified the problem of $423 billion merchandise trade deficit of one country. He’s only going to blow up the global trading system and supply chains with these idiotic tariffs. They’re really getting pretty serious.

There’s no doubt that this isn’t going to stop anytime soon.

I think it’s important to recognize that by the end of this year we’ll be looking at $550 billion Chinese imports in the US economy. At all stages of the supply chain—some finished goods, some intermediate goods, some parts—that will be subject to tax of $120 billion by a unilateral action of the president of the United States, who thinks he’s the trade czar of the world.

If we tax one country as opposed to all imports, you cause massive repercussions and ricochet effects in the supply chain.

It’s the greatest foreign aid program the United States ever conceived. We’re driving business, jobs, and work to Vietnam, India, Indonesia, Mexico, and a lot of other places, as we rip up these supply chains in China.

China is a red Ponzi. It’s a house of cards. It’ll collapse of its own weight sooner or later.

But we are going to hasten the collapse of the red Ponzi because they’re selling at prices in order to maintain business and not lose it to Vietnam and others.

That means that the already meager profits of Chinese companies will disappear entirely.

No one’s ever tried to tax the flow of trade with one country at a 21% rate in today’s world, where things can change so rapidly due to technology and the massive infrastructure of global transportation and shipping.

Trump is the biggest, baddest bull in the china shop that has ever entered world commerce. This is a disaster in the making.

International Man: Speaking of the next crisis…

After the 2008 crisis, the Fed kept interest rates artificially low, as a “temporary” measure. All this did was create easy money and pump up the stock market.

The Fed’s attempt to normalize interest rates caused the stock market to tank. They’ve since capitulated and ended the tightening cycle.

What do you think about the Fed’s ability to paper over the next crisis by turning on the money spigots again?

David Stockman: I think it’s very limited. I think they shot their wad, so to speak. They have very little dry powder left.

Remember, before the dot-com crisis, the federal funds rate was over 6%, and so they had 600 basis points to cut. At the time of the housing subprime crisis in 2008, the funds rate was 5.5%. So again, 500 basis points to cut.

Here we are in month 121 of the longest business expansion in history—albeit the weakest one. The unemployment rate is at 3.7%, and they’ve already thrown in the towel and have cut the rates. This morning the federal funds rate is 2.12%.

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