Another Stockman tells the story of his ride

Hardly anything is more iconic to Australia than the story of The Man from Snowy River, a stirring poem by Banjo Paterson. It tells the tale of a truly heroic effort by a young, gangly stockman (in America they're called cowboys) who rode hell bent for leather to corral a runaway and his herd of wild horses.

The poem starts:

There was movement at the station, for the word had passed around
That the colt from old Regret had got away,
And had joined the wild bush horses - he was worth a thousand pound,
So all the cracks had gathered to the fray.
All the tried and noted riders from the stations near and far
Had mustered at the homestead overnight,
For the bushmen love hard riding where the wild bush horses are,
And the stockhorse snuffs the battle with delight.


There was Harrison, who made his pile when Pardon won the cup,
The old man with his hair as white as snow;
But few could ride beside him when his blood was fairly up -
He would go wherever horse and man could go.
And Clancy of the Overflow came down to lend a hand,
No better horseman ever held the reins;
For never horse could throw him while the saddle girths would stand,
He learnt to ride while droving on the plains.


And one was there, a stripling on a small and weedy beast,
He was something like a racehorse undersized,
With a touch of Timor pony - three parts thoroughbred at least -
And such as are by mountain horsemen prized.
He was hard and tough and wiry - just the sort that won't say die -
There was courage in his quick impatient tread;
And he bore the badge of gameness in his bright and fiery eye,
And the proud and lofty carriage of his head.

And it finishes:

The man from Snowy River is a household word today,
And the stockmen tell the story of his ride.

And in between is a tale of legends.


Recently, on NPR, another stockman, David Stockman, told of his heroic ride with the Great Communicator. Who, it appears, quit communicating with the stockman when the stockman began to communicate things the Great Communicator didn't want communicated.

The David Stockman interview begins as follows:

Economist: Bush Tax Cuts Will Make U.S. Bankrupt

RAZ: In the early 1980s, Stockman became a kind of Washington wunderkind, the vanguard of a new type of economic thinking, supply side, deregulation, low taxes to stimulate growth.

As the White House budget director, Stockman was an architect of what would come to be known as Reagonomics. But a few years into the job, he became disillusioned.

Mr. DAVID STOCKMAN (Economist): He was one of the, you know, greatest human beings I've ever met.

RAZ: And he noticed a problem. The government wasn't collecting enough money to cover its costs and he started telling that to Reagan.

Mr. STOCKMAN: The military budget got out of control and the tax cuts went to special interests as much as they did to the broad public.

As time passed, he was less and less enthusiastic about what I had to say.

RAZ: So, in 1985, Stockman left. Now these days, he's still a conservative and still a Republican, but he doesn't think his party is taking a responsible position on taxes any longer. At the end of this year, the Bush era tax cuts are set to expire. Republicans want them renewed, Democrats want to keep the tax cuts for the middle class but not for the wealthiest 2 percent of Americans.

Now, Stockman says they're both wrong and he says extending either of those cuts is tantamount to the government declaring bankruptcy.

Mr. STOCKMAN: So we're spending $3.8 trillion in defense, non-defense, entitlements, everything else, and we're taking in only 2.2 trillion. So we got a massive gap, you have to pay your bills. You can't keep borrowing from the rest of the world at that magnitude year after year after year. So, in light of all of those facts, I say we can't afford the Bush tax cuts.

RAZ: And I think many people will be surprised to hear Ronald Reagan's former budget director make this argument. I mean, what happened to the idea you once pushed that tax cuts ultimately stimulate the economy?

Mr. STOCKMAN: I think that's true. But we're in a much different world today than we were in the early 1980s. We have had a spree of debt building for the last 30 years, both in the public and in the private sector.

So in that environment, the highest priority is solvency now, not incentives for growth.

RAZ: You seem to suggest that many of our economic troubles are the result of Republican economic policies over the past few decades. You are a Republican. You are a conservative. Why do you think Republicans are largely to blame?

Mr. STOCKMAN: Because the Republicans abandoned their old-time fiscal religion in favor of two theories, which I think are now proving to be both wrong and highly counterproductive and damaging.

One was monetarism, which said let the dollar float on the international markets. Let 12 men and women at the Fed decide whether to raise or lower interest rates and use the Fed to try to run this massive economy. What they've done instead is run the printing press, they've flooded the world with dollars. The whole monetarist policy has been a mistake.

The second thing was the perversion of supply side. Yes, there was a good idea that in certain circumstances, lower tax rates will encourage economic activity and savings. But when you make it a religion, when you make it a catechism and you say you cut taxes no matter what the circumstance, what the season, what the condition, then I think the whole idea has been perverted.

By getting off track over the last 30 years, the Republican Party has basically given out its historic view that the key thing was financial discipline, financial responsibility and that we had to live within our means. Today, we have two free lunch parties, and as a result, we're borrowing ourselves into grave danger with each passing month and year.

Guambat wishes Stockman was as great a communicator as Mr. Reagan. The information in the interview is most interesting, and you should go read it, but, unfortunately, Mr. Stockman doesn't have the vast PR backing that Mr. Reagan had, nor the screen charisma. Regretfully, it does not appear his fellow stockmen will be retelling his tale.

Let alone learn anything from it.

MORE NEWS AT 10:00:

See Paul B. Farrell's take on Stockman's message here: Reagan insider: 'GOP destroyed U.S. economy'

"Wall Street banks are wards of the state, not private enterprises"

That's not Guambat's characterization, though he might share it. That's Ronald Reagan's head of OMB, David Stockman talking.

You remember Reagan. The Middle Class' "Great Communicator"; in other words, a populist.

Republicans do not consider him, unlike the current President, to be a socialist. He's the economic hero of the Republican Party, the architect of Supply Side Economics. Banks as wards of the state !!? Surely Stockman has committed GOP treason here.

Stockman said that in a NYT Op-Ed, which, if you are a non-subscriber could soon cost you to read, so read this one whilst you can. Some appetisers for you:

Taxing Wall Street Down to Size

WHILE supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks

Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks.

Meanwhile, by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks’ cost of production — their interest expense on depositor funds — to the vanishing point.

In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income.

The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. [I.e., a financial rocket scientist's alphabet soup of derivatives and other securitizations, much backed by dubious debt, including subprime real estate.]

But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

It is a vast and capricious reallocation of national income, which would be hooted down in the halls of Congress, were it properly brought to a vote.

The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient.

Interesting to read of a bankers' "culture" of entitlements. Usually, when lawmakers and Wall Street types talk about cutting back on "entitlements", they're talking about the "culture" of welfare and other so-called handouts to the poor and others in need of a helping hand.

The long train wreck

Trouble with you is the trouble with me,
Got two good eyes but WE still don't see.
Come round the bend, you know it's the end,
The fireman screams and the engine just gleams...

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.

-- Casey Jones, by the Grateful Dead
(via sing365.com)

The Great Depression was not all for naught. At least not yet. The social safety nets put in place in the aftermath of that Great Ruction have kept unemployment at half the rates seen then. And the unprecedented bail out of bankers in the last couple of years have kept them in fine fettle, caviar and Housewifes.

It has all conspired to conjure a complacency that is as unwarranted as it is fanciful.

But David Stockman has his hand on the train whistle as the Great Depression redux continues picking up speed. Just a couple of weeks ago he did an Op-Ed for the NYT:

Four Deformations of the Apocalypse

The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice.

In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

After a short intermission, he's back for round two with more op-ed.

Beware the light at the end of the tunnel (Commentary: It's a debt train about to collide with federal obligations)

The federal deficit is no longer an abstract long-term problem; it's a financially critical freight train hurtling down the track at alarming speed.

Here's a dramatic way to look at it: Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.

Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running!

the federal debt still has grown at two times the rate of GDP during what looks to be the strongest phase of the recovery.

at $52 trillion, credit-market debt today is 3.6 times that of GDP, compared with 1.6 times that of GDP when the original argument of supply-side versus Keynesians opened up back in 1980.

Moreover, this 1980 total economy "leverage ratio" hadn't fluctuated appreciably for 110 years going back to 1870. So I call it the "golden constant," and note that had the total economy-leverage ratio not gone parabolic after 1980, credit-market debt today would be $22 trillion at the 1.6 times ratio.

In short, the economy is freighted down with $30 trillion in excess debt. The process of liquidating the household and business portion of this -- about $24 trillion -- will swamp the normal cyclical recovery mechanisms for years to come. And it's insane to keep adding the mushrooming public-sector portion of the debt or order to artificially juice the GDP numbers for a few more quarters.

Further, if we're in a period of sustained debt deflation, it's extremely likely the GDP deflator will shrink toward zero and real growth will struggle to make 2-3%. Hence, nominal GDP growth is almost certain to be even slower in the quarters ahead

At the same time, there's virtually no chance unemployment will drop much below 10% in the context of a deflationary "recovery," meaning that budget costs for unemployment, food stamps, etc. will remain elevated, not come down by hundreds of billions as currently projected

So we have baked into the cake a rather frightening scenario: monthly federal debt growth upwards of $125 billion, or three times the likely nominal GDP growth of $40 billion per month -- as far as the eye can see.

At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines and how healthy business-sector balance sheets are.

That's pure baloney. If you peruse the flow of funds, and you'll see that corporate-sector cash assets have increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. According to the same data, non-financial, corporate-sector debt has increased by $480 billion and now stands at $7.2 trillion. Corporate debt net of cash has actually increased by $200 billion during the Great Recession.

Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There's been no de-leveraging in the business sector either -- especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period.

Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Also, there's no possibility in either this world or the next of obtaining the needed $700 billion to $1 trillion in structural deficit reduction by spending cuts alone. We've had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies and even Amtrak!

Like Casey, the GOP has been in the anti-spending batter's box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity -- the "roadmap" of Congressman Paul Ryan -- has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it's too late and too urgent for anything else.

That should be a call to arms, fiscally and monetarily. But this is an election year (isn't every year, these days?) and no elected doctor will be prescribing caster oil for the ailing economy. Or, should they, they will add a bucket full of sugar to make it go down -- and out -- before any prophylactic effect.

And what's the Fed to do? Well today, they said this:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.

Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

inflation is likely to be subdued for some time.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

As Rex Nutting summed it up,

The Federal Open Market Committee announced it would reinvest the proceeds of its investments in mortgage-backed securities as they mature into Treasurys.

As economic stimulus goes, this is pretty thin gruel.

What has the Fed accomplished? It avoided a second Great Depression, but large sectors of the economy are still struggling. It's not clear what easier credit conditions can do to ease that suffering.

Trouble ahead, Lady in red,
Take my advice you'd be better off dead.
Switchman's sleeping, train hundred and two is
On the wrong track and headed for you.

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, YOU KNOW, trouble behind,
And you know that notion just crossed my mind.

-- id.

The prospects of a US$ Banana Republic??

Paul Keating has made his inimitable mark on Australian politics, first as Treasurer and later as Prime Minister. He was the self-proclaimed "Placido Domingo of Australian politics". He certainly was (and mostly remains) a man of words.

In 1983, as Treasurer, he did away with the fixed exchange rate mechanism of the Aussie Dollar, allowing it to float. It floated like a rock. Interest rates jumped up to 20%.

As one admiringly critical website explained,

In spite of the lower value of the dollar, many areas of the manufacturing sector were not competitive with more technologically advanced industries in Asia, especially South Korea and Taiwan. Imports continued to rise. By 1986 foreign debt was higher than anticipated.

Treasurer Keating warned that if Australia did not "get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, it would end up being a third-rate economy . . . a banana republic."

His "banana republic" remark, made off the cuff in a radio interview if Guambat's memory doesn't fail (most unlikely), had the same salutary effect as Alan Greenspan's "irrational exuberance" quip.

But it was Keating's banana republic quote that came to mind whilst Guambat was perusing the most recent soothing words from David Stockman, who once advised The Other Great Communicator -- the American one.

Commentary: Trillion-dollar deficits don’t matter

According to CBO’s August update, the two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. But that doesn’t count the upcoming lame duck session’s predictable one-more-stimulus bacchanalia.

Juiced up by their election rout, the tax-side Keynesians in the GOP are certain to ram through a two-year extension of the Bush tax cuts for one and all.

In return, the hapless White House will insist this one-half trillion dollar gift to the “still haves” be matched with several hundred billion more in presently unscheduled funding for emergency unemployment benefits and other safety net programs for the “no-longer-haves.”

In combination, these measures — along with more realistic economic assumptions — mean that the FY2011-2012 deficit will be $700 billion higher than current projections, pushing the two-year total to at least $2.5 trillion. Read Minyanville’s “What a Republican Victory Means for Equity Markets.”

These considerations make one thing virtually certain: After the new Congress sinks into rancorous partisan stalemate and does absolutely nothing about this fiscal hemorrhage, the Treasury will be selling at least the $100 billion per month of new government paper for so long as the New York Federal Reserve is open to buy. Stated differently, national policy now amounts to monetizing 100% of the federal deficit.

In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more. Earlier this week, William Dudley, who occupies the Goldman Sachs permanent seat on the Fed’s Open Market Committee, helpfully clarified that the new-age Fed should be judged by what’s in its heart, not what’s on its balance sheet. He said:

“I am mindful of concerns… that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.”

They may devoutly believe in their hearts (if hopefully not in their minds) that it’s economic milk and honey that they’re bringing to America, but in fact what they’re dispensing is digital greenbacks.

At the moment, the five-year note yields barely 1.0%, and the maturities below that quickly descend toward zero — with the 2-year at 35 basis points and 90-day bills at 12 basis points. Those maturities account for in excess of 90% of the $9 trillion in Treasury debt presently held by the public. So, in the world of ZIRP, the public debt is now essentially non-interest bearing.

Moreover, with a stroke of the “repo” key it can also be turned into cash — that is, legal tender — in a millisecond.

But what emergency motivates today’s greenback experiment?

It would appear to be two self-evidently foolish objectives.

The first is the claim by the Fed’s money printer’s caucus that QE2 in the magnitude being contemplated might lower the 10-year benchmark rate by 50 basis points.

Stunning.

We have a nation drowning in 19 million empty housing units owing to the Fed-engineered housing bubble, households still buried in $13 trillion of debt from the same cause, and idle business capacity on a scale not seen since the 1930s — and we’re supposed to believe that taking down the current all-time low interest rate by another 50 basis points will make a difference?

Worse still, [the other] salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways -- owing to the illusion of higher net worth, as conjured by the Fed.

These are pretty pathetic reasons for issuing massive quantities of digital greenbacks.

Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don’t matter because the Fed is financing them for free.