David Stockman Says, “Next Comes an Epochal Deflation”

GDPThat was the title provided from a CNBC interview David Stockman did this past week. David expressed the same view as Dr. Robert McHugh that “It’s over!” In that interview, David said that the larger picture is that the world economy is heading for an epochal deflation the likes of which has never before been seen in modern times. He said we have had a debt supernova that has seen total world debt increase from $40 trillion in 1995 to $200 trillion now.

We have leveraged households to the point where they can’t borrow any more at a time when their real wages are shrinking with the housing bust. So we relied on China, which has printed money to create the most massive overcapacity of oil and gas and manufacturing and mining. So prices margins and profits are collapsing. So we are going to see the flip side of this massive debt expansion into a debt implosion. And this commodity deflation is not a temporary thing. It isn’t even a super cycle. It is the end of the central-bank-enabled bubble that is now going to reverse and reverse extremely hard.

David said the catalyst that will trigger this is already starting. It’s China! It is falling apart. It is the most lunatic pyramid of credit and speculation in human history. Capital is fleeing the China Ponzi scheme. They lost $800 billion of hot money. The fact that they are sending out the paddy wagons and propaganda to try to hold up this huge bubble in the stock market is just one indication of the desperation to try to hold this together. The bank of China will now be forced to shrink its balance sheet. But there are 90 million people trading in China on margin. There is no way the Chinese government can control this.

kondratieffThese artificial stimulations seem to work for a while, until they don’t. Then there is hell to be paid. We saw that with the tech boom that ended in 2000 and the housing boom that ended in 2007. And David doesn’t think the central banks will be able to do another QE because it will scare the hell out of everyone. David thinks the central bank credit driving strategy is over and that we are in the start of an epochal deflation.

David finished his interview by saying he wasn’t going to watch the Republican “debate” because if he wanted to see some clowns, he would go to the circus. If what we are facing now were not so serious, it would actually be funny.

Above is the late great John Exter’s inverted pyramid. I show it now because it illustrates what David Stockman is talking about.

Central bankers will extend as much credit as they can, especially when they get rich doing it, as has been the case since the world was forced off the gold standard by the Nixon Administration in 1971. As they expand credit, prices for luxury and speculative items shown at the top of the pyramid, like second homes, luxury cars and boats, as well as speculation in commodities, rise the most.

At some point, the expansion of credit stops, most because due to insolvency of the entire system, markets force the expansion of credit to stop. When that happens, the creditors want their money back and so they force borrowers to sell whatever they are able to sell. Of course people hold on to life’s most basic needs as they scurry to sell nonessential items to build cash.

As John Exter’s son-in-law once told me, the pyramid above is not quite the way John Exter drew it. John had Federal Reserve Notes (cash in hand) at the very bottom and the inverted pyramid was perched on top of a bar of gold. The idea is that once the system falls, the only monetary item of value will be gold, and possibly silver, too, though John saw only gold as playing the ultimate monetary role.


Now, I am convinced we have not only reached that point where the global financial system can no longer be expanded but in fact is being forced into reverse. What that means now is that virtually all prices must now decline until the existing monetary system is destroyed.

Indeed, for the first time since I created my Inflation/De-flation Watch on Jan. 31, 2005, we are now seeing the IDW not only fall below the three-year moving average but at the close of this week below the five-year moving average. And I do not believe it is a coincidence that this is taking place roughly at the same time that Dr. Robert McHugh has pulled the trigger on the top for the equity markets. And like Stockman, Dr. McHugh sees this top as not any ordinary top because the fall from this top will be far greater than the decline from 1929 or from 2008-09. Both men believe this will be the mother of all bear markets. You can throw into that mix the views of Ian Gordon as well as Robert Prechter.

As David Stockman pointed out, this decline has been a long time coming. Since we went off the international gold standard in 1971, all discipline against monetary promiscuity and theft through the expansion of fiat (debt) money has been removed. It has been one heck of a party, especially for the bankers and government that have created what can only be described as counterfeit money. But the ability to live for today with a “hell with tomorrow” attitude has been groomed in the people of the Western world in an addictive lustful manner that is totally pathological and has essentially conned everyone off the straight and narrow path and on to the more populated broad road of destruction. And so, the resistance to the big Keynesian lie, that all we need for prosperity is “animal spirits” created by deficit spending funded by the printing presses, was too hard to pass up, given the sinful nature of the human race.

And so here we are. We are at a major tipping point, and if Stockman, McHugh, Prechter, and Gordon are right, this is not an ordinary tipping point. This is a once in a 250+ year tipping point. With reference to the stock market, McHugh talks about a “cataclysmic nation changing event.” Prechter has talked about a return to the Dark Ages, and who can argue with that when you see the U.S. and NATO killing countless thousands of Muslims with our relentless bombing, which in turn causes angry people to send airplanes into the World Trade Center on 9/11 or to cut off hundreds of heads of Christians in retaliation for the “Christian U.S.A.’s killing of Muslims”? It is for sure a world gone mad, made possible by endless amounts of money creation that has led to hubris among the U.S. and NATO and the public in general. Americans couldn’t care less. We watch our CSI, So You Think You Can Dance, American Idol, or Republican debates that totally remove us from the reality of the atrocities America is creating around the world.


Looking more directly and less philosophically at the markets, it seems to me that the most recent tipping point toward the beginning of the end took place in late summer of 2011. Specifically it was then when the stocks continued to correlate with QE but gold suddenly decoupled.

Almost certainly that was by design! On August 5, 2011, S&P downgraded U.S. Treasuries for the first time in 70 years because of the $2 trillion of QE that had been created out of thin air by our Federal Reserve Bank. U.S. sovereign debt was downgraded from AAA to AA because of the irresponsible and criminal $2 trillion bailout of the shareholders of the unconstitutional Federal Reserve Bank.

But what were the Fed and its criminal shareholders to do with the 1,000 megawatt floodlights of a runaway gold price? If gold continued to rise, as it was, there was an almost certain risk that the general public would start to recognize the truth—that in fact the dollar was highly inferior to gold. If the masses traded their worthless digital currencies for a tangible monetary instrument, like gold, which did not receive its value from the ability of debtors to make good on their debts, the great criminal game of fractional reserve banking without limit would be over and the perpetrators of this crime might not only go broke but might also be hung upside down from light poles a la Mussolini.

And so the major banks that own and control the Fed went to work with massive naked short selling of gold (and silver) on the LBMA and Comex. (For more details of how this is orchestrated, listen to various discussions I have had with David Jensen at JayTaylorMedia.com.) On August 5th, the day S&P downgraded U.S. Treasury debt, the London PM Fix quoted gold at $1,658.75.

Exactly one month later on September 5, 2011, the gold price rose to an all-time London PM Fix high, which was 14.24% higher at $1,895. Need I say that is quite a jump for one month as the markets started to think, “Hey, perhaps I should own gold if the U.S. Government’s creditworthiness might not be so good.” Then, the next day, a strange thing happened. The London PM Fix closed exactly at that same all-time high of $1,895.00. (It is not unheard of for the gold price not to change at all from one PM Fix to the next day, but highly unusual.) It was September 7 when in all likelihood the bankers, seeking to protect their right to steal from society, went to work big time. On September 7, the price of gold fell $85, or 4.5% per ounce, in just that one day! By the end of the month, in three weeks, the gold price fell to $1,620, or 14.5% or just about the price it was when the U.S. Treasury was downgraded on August 5, 2011.

Up until that moment, as you can see from the chart above, along with massive QE, both gold and U.S. stocks rose together, both being driven by massive new money creation. But to keep the con game going and to keep the Wall Street theft game alive, the fascist economists at the Fed and in Washington slammed the gold price. And that has been going on ever since. However, an ever-increasing amount of naked shorts have had to take place to keep a lid on the gold price. But what it did too is buy some more time for the thieves to continue raping and robbing and destroying America and the Western world.

But as David Stockman said in his interview last week on CNBC, QE works for a while until it doesn’t. We should have learned from the dot-com bubble in 2000 and the housing bubble in 2008-09. But policymakers, either out of ignorance, insanity, or selfish greed and indifference for the good of humankind in general, don’t change their ways. Is it insanity? The definition of insanity is when people continue to do the same thing over and over again and expect a different outcome. Even with massive propaganda afflicting our Ivy League institutions, it’s hard for me to believe the best minds in our country are that stupid. I think more likely it is a matter of the sinful nature of humankind that is at work here. The employment of Bernaysian propaganda combined with that affliction of humankind causes the entire society to act in a Pavlovian manner and anyone who wants to disconnect pathological behavior from impulse is considered a lunatic—which is how David Stockman is viewed by the true lunatics of this world, like the Krugmans and others who are disconnected from the realities of how the world really works.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.