07/22/14 – David Stockman – The Scott Horton Show

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All right, y'all, welcome back to the show.
I'm Scott Horton and this is my show, The Scott Horton Show.
And our first guest today is David Stockman.
He is a former congressman and was budget director in the Reagan White House for a time and later was an investor and now is an author and writer.
His book is The Great Deformation, The Corruption of Capitalism in America, and he writes at DavidStockman'sContraCorner.com, DavidStockman'sContraCorner.com, and, well, first of all, welcome back to the show, David.
How are you doing?
Very happy to be back.
How are you?
I'm doing great.
I really appreciate you joining us today.
And let me mention three titles here, Keynesian Myths.
This is the Tour de Force.
This is the most important thing anybody can read, I think, if you want to know about the history of the warfare state in America.
Keynesian Myths, Monetary Central Planning, and the Triumph of the Warfare State.
And then these two about the First World War are also just great.
Sarajevo is the fulcrum of modern history, the Great War and its terrible aftermath.
And if only the U.S. had stayed out of World War I.
So that's my first question for you, David.
If the U.S. had just stayed out of World War I, what's so bad about American intervention there?
Well, I think the next hundred years of history would have been totally different.
There was really no U.S. interest in entering that war late as we did in April 1917.
Had we stayed out, and we should have, then the war would have ended in mutual exhaustion with the bankruptcy of both sets of combatants, the Allies and the Central Powers.
There would have been no Versailles Peace Conference.
There would have been no extended period of war, which went on until, as you know, November 1918.
Now, why is that important?
Because the two most important events that came out of our intervention was, one, the collapse of Russia and the eventual coup in October 1917 by the Leninists, a small ragtag group of Marxist fanatics who never could have taken power had the war ended earlier in a mutual exhaustion in 1917.
From that, obviously, flowed the whole evil of the Soviet Empire, the subsequent reign of terror under Stalin, and all the things that flowed from that to the Cold War up through 1990.
On the other hand, also, it is highly unlikely, in my view, that had the war ended in mutual economic exhaustion in 1917, that we would have had Nazi Germany.
After all, it was the War Guild Clause that Germany was forced to sign after the U.S. weighed into the war and tilted the scale in favor of the Allies.
It was the reparations that were imposed on Germany during the 1920s that led to the chaos of its political and economic system, the hyperinflation in 1923, the huge German army that was demobilized and left with millions of veterans without any place to go, and great huge discontent, belief that they had been stabbed in the back, and so forth.
So out of that came Hitler, out of that came Nazism, fascism, out of that came the buildup and rearmament of the 1930s, and the eventual Second World War.
So to say that Wilson made a huge mistake is an enormous understatement.
It fundamentally changed the world and led to the onward developments that I've described.
Well, and the expansion of the British Empire by, I think Buchanan writes, a million square miles, mostly in the Middle East.
Yeah, and that's haunting us today.
The Ottoman Empire was on the losing side of World War I, again, because it ended in victory for the Allies.
The Ottoman Empire was then carved up by the French and British foreign offices of unsustainable boundaries and unstable and unsustainable nation-states were created by drawing lines on a map.
That's how we got Iraq.
That was never a country.
That's how we got Syria, which is in turmoil today because of the internal ethnic differences.
That's how we got Lebanon, the Palestinian mandate, and much more.
So there were lots of things that came out of World War I and its aftermath that shaped the modern world and planted the seeds for all the troubles that we have today.
Iraq would be one good example.
Historically, the Ottoman Empire kept the Shia in the south and the Sunnis in the center and west and the Kurds in the north separate with their own system of local governance and relationship to the center.
When they were put in one country, it was just an accident waiting to blow up, and they had one kind of dictatorial government after another over the subsequent decades.
But we see today, after the final invasion and occupation by the U.S., the chaos that's been left behind, the animosities that are so deeply embedded, and the failed state that was implicit from the very beginning when the lines were drawn in 1960.
Yeah, well, and you can also see how the buildup for the whole Cold War, they kind of had to go somewhere with it when the Soviet Union fell apart.
So they decided to take it to Iraq, of all places.
And of course, that helped generate the terror war against the United States, the terrorist war against the United States, and then, of course, the American so-called War on Terrorism in response, which included Iraq War II, which then has led directly to the Libya war and the Syria war, which has led directly to Iraq War III, which is raging right now.
Yes.
And you're getting to a larger point, and that is that beginning with our intervention in 1917, and then the massive expansion of the warfare state necessarily during World War II, its perpetuation then in the Cold War when an unnecessary overreaction to the Stalinist regime occurred in Washington in the late 40s, that put into place a permanent warfare state, massive machinery of empire that Eisenhower, in fact, warned us about in his famous farewell address in 1960, the military-industrial complex.
But once that got into place, then the history after, let's say, 1948, 1949, is a history of a massive system of foreign intervention and global occupation, looking for places to intervene, looking for missions to undertake, looking for troubled areas to plunge into.
And that's how we got into Korea.
There was never anything that affected truly the security of American citizens in Lincoln, Nebraska, or Iowa City when the dictatorship in the North started a war with the thugs who were running the South of Korea.
We never should have gotten involved.
Obviously, the same is true with Vietnam, which was a catastrophe and ended up practically in genocide imposed by us.
And then all the subsequent interventions after that point.
More importantly, when the Cold War finally ended, as unnecessary as it really was, that was a reprieve.
That was an opportunity to begin dismantling the machinery of the warfare state, and including NATO.
But instead, during the 90s and then during the Bush II presidency, NATO was massively expanded from 16 countries to 28, encroached right on the border of Russia, with all of these small countries being added.
And it set up the circumstance that we're in today, this utterly unnecessary collision that we're having with Putin at the moment.
All right, y'all, welcome back to the show.
I'm Scott Horton.
I'm sorry, sometimes I talk with my microphone off.
I leave it off to try to prevent myself from interrupting all the time, but then I sometimes forget to turn the dang thing back on.
Anyway, that's a pretty good place to end that segment, anyway.
Talking with David Stockman, former budget director in the Reagan administration, author of The Great Deformation, and writer at davidstockmanscontracorner.com.
We've been talking about how Woodrow Wilson's intervention in World War I is really what turned the 20th century into the worst thing that ever happened to humanity, and on into the 21st now.
And so I guess one of the things I wanted to ask you about, too, David, is that economists Murray Rothbard and Robert Higgs seem to think that central banking and inflationary monetary policy is entirely wrapped up in the warfare state, and a couple of your article titles seem to imply those same kind of things.
What do you think about that?
Well, I think that's exactly right.
And I think World War I was the first great example during the 20th century.
The U.S. economy was transformed overnight.
It became the arsenal and granary to the entire allied world.
The economy just exploded with expansion, investment, exports, the steel industry producing armaments, the wheat and dairy and hog industries producing exports.
The economy went from $40 billion to $95 billion in four or five years, 15 percent rate of growth.
Prosperity soared, and so it was a kind of wartime prosperity, but it wasn't sustainable because it was all based on massive loans to the Allies, who then took those loans from Washington and purchased export material, both food and war material, from the U.S.
We should have gone through a period then in which the economy was normalized to a peacetime basis in the 1920s, and we had a sharp but short recession in 1920.
But unfortunately, the Fed by then had learned that it had a printing press that it could operate, and so it vastly expanded credit in the U.S. economy during the mid-'20s, created the boom on Wall Street that finally ended in the great crash of 29, but more importantly, created a global bond market that foreign countries then used to borrow massive amounts of money, the equivalent of a trillion and a half in today's dollars, in the overheated New York bond market.
They used the proceeds to buy exports from the U.S.
That caused our economy to boom even more.
We became the great creditor and export powerhouse of the world.
But when the bubble finally broke in 1929, the global bond market, the equivalent in those days of the subprime housing market we had in, you know, 205 to 207, but when that bond market collapsed, foreign borrowing dried up, default rates rose, the bonds became nearly worthless, and their ability to continue to buy exports from the United States totally evaporated.
So that was the driving force that took the U.S. recession into the severity of the depression from 1929 to 1932.
And now, last time we spoke, just a few weeks ago, we covered the Great Depression a lot, and we've got a lot of wars to cover in very little time, so if it's okay, let's skip ahead to World War II.
Everybody knows the Great Depression lasted all the way, at least until World War II.
They say World War II got us out of it, but what about the inflationary bubble then?
Yeah, we didn't spend our way or borrow our way out of World War II, as the Keynesians keep saying.
We did get the national debt from about 50% of GDP to 120%, but the reason that happened was the U.S. economy was put on a wartime command-and-control footing.
Everything was rationed.
You couldn't buy a car, you couldn't buy appliances, even daily things like shoes and eggs were rationed.
And as a result, the people had nothing to spend money on.
It was a mobilized wartime economy.
The savings rates soared, and it was the savings of the public, plus monetary expansion by the Fed, that allowed the war to be financed.
So in a way, we saved our way through World War II.
We didn't borrow our way.
Private borrowing totally disappeared, and so the great myth was created that deficits don't matter, and it's still being peddled today, when in truth, just the opposite is embedded in the facts.
Well, what about Korea and Vietnam?
They created moderate-sized bubbles.
The economy was red-hot by 1952-53.
The unemployment rate was down to about 3%, as they measured it in those days.
Inflation was beginning to soar.
Truman tried to reimpose wartime wage and price controls.
Taxes were raised substantially to contain the budget deficit.
And so we ended up with a mild recession in 1953-54 to unwind and demobilize from the Korean War.
It was not an inherent problem of capitalism.
It wasn't another piece of evidence, as the Keynesians say, that without the Fed and without the fiscal stimulus, the economy is always going to collapse.
No.
Instead, it was demobilizing from a overheated, overstretched wartime economy.
The same thing happened with Vietnam.
By 1968-1969, the budget deficits had soared.
The Fed had been forced into money printing.
Our foreign trade accounts began to turn deeply red as a result of the massive outflow of funds for conducting the war in Southeast Asia and the overheating of our internal economy.
So again, we went through a period of adjustment in 1970, 1971, and 1972 that was the natural consequence of an economy distorted by the warfare state.
Again, though, the Keynesians and politicians interpreted that development as another sign that capitalism doesn't work on its own two feet and you need Washington to prop it up.
And so that got us into Nixon's wage and price controls, his announcement that he's a Keynesian too, the closing of the gold window, and the new era of fiat central banking after 1971 that, you know, has led us to the present era.
The era of stagflation there.
I don't even know if that counts as a bubble when the whole dang economy is just suffering inflation across the board.
But then, and I guess you could comment on that, but we're very short on time, but I wanted to set you up with, Paul Volcker came and my best understanding, he went ahead and raised interest rates up through the roof and finally put a stranglehold on the economy and on inflation.
So we got to beat inflation.
And then they turned right around and Reagan didn't wage any giant wars, but he did wage that giant arms buildup, all the MX missiles and be whichever bombers.
And I was wondering, I don't know, but I was wondering if you think that that kind of arms spending and that buildup of the Reagan years played into the bubble, which then popped in 1988 with the stock market crash then.
Yeah, I agree with that.
The huge Reagan buildup was totally unnecessary by then.
Socialism and bureaucratic communism was failing, you know, on its own two feet in the Soviet Union.
It was only a matter of time before that rigid system would fail.
We simply needed, we already had all the deterrence we needed with our triad nuclear force.
We didn't need this gigantic 1.5 trillion Reagan defense buildup.
I fought against it internally, but obviously it was not in any way successful.
But that led to the massive deficits because after the tax, deep tax cuts, which were necessary, the failure to cut domestic spending because the Republicans essentially chickened out.
And then when you laid on top of that, this massive defense buildup, we ended up with huge unplanned deficits.
It would have led to serious economic trouble by the end of the 1980s, by the end of the decade.
But instead of Volcker, we got Greenspan.
Greenspan came in, the market collapsed, he panicked, he opened a spigot at the Fed and bailed out Wall Street after so-called Black Monday and never looked back, and continued to do that throughout the 90s, followed by Bernanke, followed by Yellen, followed by this massive money printing and monetization that we've had ever since.
But I would say that the huge, unnecessary Reagan defense buildup set the stage, was the catalyst for the modern central banking catastrophe that we're suffering from today.
The cereal bubbles, the unstable economy, the casino that has emerged on Wall Street, all of these things flow from the mistakes that were made by the warfare state expansion of the 1980s.
And I'm sorry, we're way over time, but in a word, could you confirm, does it seem right to you, too, that the denial of the American people their piece dividend was papered over by the inflationary bubble that finally popped, the dot-com bubble that finally popped?
Absolutely right.
If it weren't for the Greenspan bubble of the 1990s, you would have had a totally different scenario.
And then the terror war, too, right?
George W. Bush went to Greenspan and said, lower them even more, we've got to have a bonus war in Iraq, it's got to seem free.
Yep, absolutely.
So all the way through World War I for 100 years straight to the present day.
And now we're just, as you're saying, we're in the Yellen bubble now for Obama's wars, basically.
Exactly.
The fact is, we should have had a serious demobilization in 1991 when the Cold War ended.
There were no industrial state enemies left.
We didn't need a defense budget that in today's dollars was a half a trillion.
We didn't need 13 carrier battle groups and all the rest of it.
We should have done what we had done historically, and that is gone back to a peacetime, demobilized, minimally sized defense establishment.
But by 1991, it was too late.
The warfare state was so deeply embedded in the infrastructure of the economy and in the politics of Washington that it became impossible to seriously reduce the deficit.
And then, or reduce the defense budget, and then they began to look for new missions.
And that's how NATO got expanded to countries like Albania and Bulgaria, Croatia and Estonia and all the rest of them.
What did that have to do with real U.S. security?
Nothing.
What did it breed for the longer term?
The collision that we have on the border of Russia today.
All right.
Thank you so much for your time.
I've kept you over time and we have to go, but I really appreciate it, David.
Thank you.
Okay.
Very happy to be with you.
Great.
That's David Stockman, everybody.
David Stockman's Contra Corner.
He's a former congressman, former Reagan budget director, tried to be good on defense, and author of The Great Deformation.
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