David Stockman: Thanks to the Fed, We're in "Monetary Fantasyland"

David Stockman, who served as budget director under President Ronald Reagan, is taking aim at a favorite target: the U.S. Federal Reserve.

Stockman minced no words in a Monday interview on FOX Business' "Varney & Co."

Speaking of the Fed, he told host Stuart Varney, "They have violated every rule of sound money that's ever existed. They've got the money market rates at zero. They have managed and rigged the entire yield curve so nothing is real out there. It's all trading against the Fed."

He said speculators will continue to invest as long as the Fed can hold the bond price up and the yield down "and keep shoveling out free overnight money."

"We're in a monetary fantasyland," Stockman said.

Stockman, the author of "The Great Deformation: The Corruption of Capitalism in America," says the market will suffer a major downturn when the Fed, which is buying $85 billion worth of securities a month as part of quantitative easing, indicates it will stop printing money.

"The minute the Fed hints that it's going to normalize interest rates in some way, that trade will be unwound," Stockman said. "The fast money will sell the bond and then the slower money will sell the bond and then pretty soon, the mutual fund managers will panic.

"And where is the bid? Right now, the Fed is the bid. The Fed is propping up the price of the bond and the Fed is shoveling free money into Wall Street to speculate."

Stockman: "Bubbles are Being Created Everywhere"

Stockman, who created a stir last month when he predicted a stock market crash in an op-ed piece in The New York Times, told Varney, "Everything's trading against what the Fed is doing, and bubbles are being created everywhere...

"We've got the subprime auto bubble, a housing bubble started, the stock market in a bubble, the risk assets all in a bubble. When all of this is generated by policy that is so far off-base, you don't know when confidence is going to break, but when it does, things will unwind very rapidly. This has happened twice in this century already. It's not speculation," he said, pointing to the crashes in 1999-2000 and in 2007-08.

In his book "The Great Deformation," Stockman scrutinizes central banking as well as what he calls "crony capitalism" from the Depression to the present.

Varney asked Stockman about a New York Times column by Nobel Prize-winning economist Paul Krugman in which Krugman argued now isn't the time for government austerity. Rather, Krugman argued, increased government spending could help ease unemployment.

"I think he's completely wrong," Stockman said of Krugman. "We have been doing this over and over for about 20 years now, and the economy is actually failing."

Stockman said the real growth rate of the economy for the past 13 years has been the lowest since the Civil War and median income of the average family is down 8% since 2000.

"What we have is massive fiscal stimulus; what we have is a Fed that creates serial bubbles," Stockman said. "All of this creates kind of the appearance of prosperity temporarily and then the day of reckoning comes, the bubbles break. Then we have disaster in its wake and then they come back and say let's do more of the same so that we can get out of the mess that we're in."

More Money Morning coverage on David Stockman: Is David Stockman's Stock Market Crash Prediction on Target?

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