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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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  1. Greg Sails | May 1, 2013

    It's really refreshing to read an honest assessment of the worst Fed chairman I've ever seen. His methods- zero short term rates and quantitative easing- are UNKNOWN to work; that is they never have. He's a disgrace and if Obama tries to reappoint him, his own popularity will collapse. Even the least sagacious citizen realizes something stinks in current Fed policy. Worst of all is that he's managed to spread this contagion to Europe and Japan.

  2. Walter Baltzley | May 1, 2013

    Ok, everyone talks about the FED printing money and how that is so terrible, but nobody talks about WHERE that money is going. The truth is that it is all leaving the United States and being dumped into the "emerging economies" of China, India, and Mexico…guess where the INFLATION is…This is ECONOMIC WARFARE folks…

  3. Aubie Baltin | May 24, 2013

    Whether it is Al-Qaida or Economics, we cannot understand either because since the 1930 the only thing we have been teaching in our schools is Keynesian Socialism. the largest flaw in socialism is their constant lying to themselves that Socialism works and therefor there is never a self examination to try and determine why their policies are consistently, failing. Socialism is based on Central Planning. Our country was founded on Individualism and the more we have moved away from Capitalism the less successful our economy became.
    When it comes to Al-Qaida, we don't seem to understand that it is based on the individuals, willingness to die for a caused that is maid all the stronger when it is steeped in religion with the promise of not only Great reward in heaven but also great rewards to the family here on earth. As long as we don't also target the families of the suicide bombers, with confiscation of all their family's possessions, followed by deportation back to where they came from; so that all can see the hardship that a suicide bomber brings down on their own families, there will be an endless supply of suicide of Bombers.

    When it comes to economics as long as we maintain a one-sided press that does not report on socialism and the party that supports and sponsors Keynesianism we will continue to get more of what is not working until we kill of capitalism and we sink into depression which will be followed by our second Civil War. The result this time may be a Hitler type Fascist State.

  4. Aubie Baltin | May 24, 2013

    You are concentrating on the wrong man it is the government that hired (appointed) Bernanke that is not only approving his actions but most probably ordered them. Why don't you check to see who is benefitting from all the $ trillions of Fiat money being printed. It is certainly not the American people.
    We would been a lot better of, if instead we decided to give a $100,000 dividend to every income tax payer instead of bailing out the banks.

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