End of the Debt Supercycle

"The mother of all evils is speculation. Leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Great interview with David Stockman. Many issues touched here under the general thesis that we're at the end of a multi-decade debt supercycle.

Stockman points out something that we noted months back: Austerity is not an elective course of action. It is something that happens when you are broke. He notes, "austerity is what happens when you break the rules." He is referring to economic rules: you can't forever consume more economic resources than you generate in income.

Spending cuts, defaults, falling prices, rising savings rates all constitute corrective measures for the economic system to get back in balance.

He fingers the Fed as a primary culprit in creating the problems that we face today. Discretionary meddling in the money markets have distorted decisions far and wide. At the very least, we should end the interventionary actions of the FOMC. Should we not dismantle the institution entirely, the Fed could provide a 'last ditch' source of liquidity (per Bagehot), but that liquidity should be priced appropriately for markets under big-time stress (in other words, super high rather than super low interest rates)

As Stockman states, capital markets need "an honest interest rate." Right now we have no interest rate, so we solve nothing. Instead, we are subject to "the monetary Politburo of the Western world" engaging in "Ponzi economics."

Near the end of the interview Stockman reveals his personal positioning. Cash (T-bills) with gold for insurance. He shuns all "securities markets" because he does not think the risk in the current system is worth it. He suggests that when the curtain closes on the Treasury market, all asset classes will be sold as "the great margin call in the sky comes down." To him, the 2008 credit crisis was "just a warm up."

What he's describing is major league deflation.

position in SPX, gold