Episode 81: How Massive Government Debt is Changing America

Description:

Today's discussion is on The American Rescue Plan. David Stockman joins Tom Wheelwright to help us understand more about the bill and its implications.

SHOW NOTES:

02:03 – Quick review of the recent stimulus checks and overall stimulus efforts.

07:29 – A deep look into what is happening and why

19:43 – Are we heading for a real fiscal collision?

21:17 – Will we get inflation from this?

Transcript
Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show where we're always discovering how to make way more money and pay way less taxes. This is Tom Wheelwright, your host, founder, and CEO of the WealthAbility show.

Tom Wheelwright:

So we're going to discuss the American Rescue Plan, right? This $1.9 trillion, biggest giveaway, biggest handout in history. Let's face it. And it's hard to complain about what we call free money, but we have a special guest who can really help us understand, what does that free money really cost? And what does that mean for the future? So, we have David Stockman, one of my favorite guests. David, you have an amazing background. But if you could, just remind everybody a little bit about your background.

David Stockman:

Oh, sure. And I'm very happy to be with you. I guess I've had kind of a checkered past. Half of my career was in Washington as a staffer congressman from Michigan. And then I was [inaudible 00:01:20] spending should be curtailed. That wasn't too popular. I then went to Wall Street through the next 15 years and I sort of spent time in the sausage factory, seeing how it was really made. I was a partner at Salomon brothers. I was one of the founding partners at Blackstone. And now, I produce a daily analysis or newsletter, if you want to call it that, going after all of the folly, all of the insanity, all of the over-the-top nonsense that is coming out of both ends, Wall Street and Washington, the Federal Reserve and the fiscal side of the government, both Capitol Hill and the White House.

David Stockman:

But I think today might be labeled a day of infamy, to borrow that phrase from FDR way back in 1941. Because, at the crack of 9:00 AM this morning, on the account of the IRS, thousands of banks around the country distributed $1,400 stimmy checks to a hundred million people. That's 140 billion that went out in one nanosecond. Swish, it was out there. 140 billion to people who hadn't proved that they needed the money, that they lost their job or that they'd suffered any income loss at all during this so-called pandemic and lockdown that we've had.

David Stockman:

Now, and I'll continue, but let me just add that 140, that's just the down payment. The Biden so called 410 billion of stimmy payments. We're not talking about all the rest of it. And that comes on top of 470 billion, that went out in the first two rounds. So, at the end of today, really, this is 365 days, one year, that's it. $870 billion of stimmy payments have gone out, no questions asked, to 80% of the American public, who if they needed or not, lost income or not…

Tom Wheelwright:

Let me ask you this question, David. I love the marketing crew of the legislature because they're always coming up with these great names for their bills. This is the American Rescue Plan. Here's my question. First question. Did we need rescuing?

David Stockman:

Absolutely not. I thought we had some kind of calamity. I thought the economy was knocked on its rear end, which it was. But thanks to all of this free stuff, these massive bail outs, and this is the fifth… The Biden plan is the fifth. We have a spending level for the households of America that's virtually higher than it's ever been before. Now, how did this miracle happen? Well, it happened by simply borrowing like there's no tomorrow and measuring [inaudible 00:04:26]. And somehow, we think that this is sustainable, that this is sensible, that this is rational economics. It's not. It's just basically borrowing and printing our way to catastrophe.

Tom Wheelwright:

Well, of course we hear this all the time, but you know, the MMT people would say, no, it's… We can print currency. It's okay. This isn't going to be catastrophe. Even though they estimated that this is basically going to cost $3,000 per person in every household. So a family of four, this is a $12,000 loan. Right? That the federal government is taking out, that is basically secured by their taxes. Okay. So, why are the Democrats wrong about this? Why can't you do this?

David Stockman:

Well, it's not just the Democrats; the Republicans are talking about $6 trillion. Now, that amounts to $439,000 come from. It was borrowed. Every single dime of it was borrowed. And that means that forever going forward, we're going to be paying $200 billion a year in interest, even at the low interest rates, explosion of giveaways that happened in the last year.

David Stockman:

And, as I said, and you asked, it was total overkill. I've done a lot of analysis. And if you calculate the loss of GDP, so to get a measure, how much did we lose? How big is the hole in the economy, so to speak, from the COVID? And how much have we thrown at it? Well, the loss of GDP, as best I can calculate, is 800 billion. Now that's the amount of shortfall for the last year, before any of this hit. Now, we're spending 6 trillion against an $800 trillion hole in the economy as broadly defined or measured as you could make it. I mean, is that overkill? Is that insanity? You're going to borrow that much money to fill a hole of 800?

David Stockman:

Then, much of it is focused on, well, households got laid off. Some of them lost their jobs permanently. All true. Some households lost income. So, we looked at wage and salary incomes over the last year. And again, compared the actual to what was being earned in February 2020. Again, before the COVID, before the lockdowns, we were at so-called peak of the cycle and Trump said, at that time, the greatest economy ever. You remember that?

David Stockman:

Well, we have lost, over this entire period, only 310 billion. So, they passed out 900 billion and then [inaudible 00:07:04] benefits, the $600 topper and the 300 a week topper and additional coverage. So, just between those two, they've thrown a billion five of stimmy checks and unemployment benefits, adding wage loss that net, for the whole economy, was $300 billion. If that isn't overkill… That's five that were on there, I don't know what it is.

David Stockman:

But let's ask why this is happening. Politicians have always been wanting to give out free stuff. But in the past, they were constrained by the fact that if the Treasury tried to borrow too much money, interest rates would go up. People back home in the district, on Main Street, I knew this when I was a Congressman… Home buyers so high in the… The Treasury has sharp elbows. So they pull back when they got to the edge of the deep end. But now, we have the Federal Reserve monetizing, that is printing, the dollars for any amount, practically, that politicians want to borrow. And so, therefore, the restraint on the politicians is gone. So the heart of the problem, the culprit in all of this, is the Federal Reserve. They're making it possible for politicians to be as absolutely irresponsible as [crosstalk 00:08:31] basically what is happened.

Tom Wheelwright:

So what's the consequence?

David Stockman:

Well, the MMT people said there is no consequence at all. Okay. But even if you believe that nonsense, which it's almost isn't worthy of a refutation, it's so stupid and ridiculous, but even if you believed all that, then the fact is, you're going to have 6 trillion of more debt permanently on the public debt. It'll be up to 30 trillion shortly.

David Stockman:

And if you just say that interest rates are going to average over a long period of time 3%, well, that's 180 billion a year of interest that'll be paid by taxpayers, born and unborn, for the indefinite future. And that won't be available for all the other things that people want government to do.

David Stockman:

So that's the minimum. I mean, when the federal government is borrowing this kind of money, it was 2.3 trillion last year. Now with the Biden stimulus, it's going to be over 3 trillion. Again, this year, these numbers are just out of sight relative to the size of the economy. Print enough money to cover deficits of that magnitude. You're kind of on the slippery slope of undermining the entire financial system.

Tom Wheelwright:

And we'll be right back in just a minute.

Tom Wheelwright:

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Tom Wheelwright:

Welcome back to the WealthAbility Show, where we're always discovering how to make way more money and pay way less taxes. I'm here with one of my favorite guests, David Stockman.

Tom Wheelwright:

And one of the questions I have for you, David, is I'm a tax guy. So, my theory on this is that one of the reasons for this and why it was so important… I mean, you think about, we've got a new president. And in his first hundred days, his single major act of legislation is a $2 trillion handout. And the question is why? Okay?

Tom Wheelwright:

If it's not really needed, which none of the economists see it as needed, then why is this? And, there's always this well, it's to get money to the states, California and New York and Texas and so forth. And that's fine. But, what do you think of this idea? My theory is that this gives… You know what? One of the things that Joe Biden has campaigned on was higher taxes for people making over $400,000. And that all this new tax that he wants to raise. But it's pretty hard to raise taxes during a crisis. So is one of the reasons for this $2 trillion stimulus, an excuse to raise taxes next year, or later this year?

David Stockman:

Well, I think that's a very good point. I'm not sure they thought it all the way through, but, obviously, people like Janet Yellen are already whispering that somewhere down the road here, we got to tackle this deficit problem. But we got to do it in a way that's equitable, and all that baloney. And so, yeah. It's creating a complete set up for higher taxes on business, on corporations, on the producers in our society.

David Stockman:

So, I think that's part of it. I think part of it also goes back to the last year. They were just out of control. They passed four different bailouts last year with the original Families First Act, and then CARES, and then they needed more money for the PPP program, which is a total colossal invitation to fraud like you've never seen before, and money thrown in every direction. Some businesses need it, some didn't. And then we had one right before Christmas. And right as that thing was pending, remember, Trump had the lack of foresight to say, “Well, I'd like 2,000.”

David Stockman:

Well, the Democrats grabbed onto that as quick as it came over his Twitter account. And they said that we hear your 2000, and we'll do it. And so they did 600 before Christmas, and now they're around [inaudible 00:13:20]. That's the only reason. And, politicians, I was there as a Congressman in the 70s. I was a director right in the middle of all these battles in the 80s. Politicians in the past never would have thought about this kind of silly reason. The Republicans say 2000, we'll do it and we'll do it quick. Unless it has become so easy to spend money and borrow money.

David Stockman:

And so the answer to all, we called it in the old days, monetize. That's what they're doing, plucking credit out of thin air and buying bonds like there's no tomorrow. They're buying 120 billion a month. And, again, Paul's on there today saying, “Well, we're going to keep doing this for quite a while just to make sure the economy's working.”

David Stockman:

So that's, I think, the real reason they're finally, they're saying, look. They're all out there… And they said… I've been reading this morning, House Democrats saying, “Last time in 209, when we did the big bailout with Obama, we didn't go out and drag and advertise to the people how much we've done for them. So now they're all out there saying, “The check's in the mail. Open your computer and you'll see it in your account.”

David Stockman:

And they're basically trying to lay the groundwork for a big gain in 2022, where they can get the Senate majority and a bigger House majority than the razor thin one they have right now. I certainly hope this won't happen. Don't think it'll happen. But that's really what they're up to, they're spending the trillions of dollars of future taxpayer money in order to try to lock themselves into office in 2022.

Tom Wheelwright:

Okay. So, here's, I think, the personal conflict a lot of people feel. First of all, it's really easy to accept free money and vote higher taxes on somebody else. And second of all, it's very tough to turn down free money. Is there anything individuals can, should, ought to be doing to help deal with this that has the potential of being a pretty serious problem it sounds like?

David Stockman:

Well, I think that's simple. Here's what I'm writing about today that I posted on my site. 108 million tax filers have incomes of 75,000 or under, which means they'll all be eligible for the new $1,400 stimmy check plus a stimmy check for their kids if they have any. And you can just sort of do the math. Now, when I did the math, you take that stimmy on top of the 2000 that's already gone out, or the 1800 that's already gone out. Remember we had 1200, then 600. Now we got 1400.

David Stockman:

So, you put that all together, it's 3,200. When you add all that up, it amounts to about $700 billion going to households with incomes under 75,000. Now that's 108 million taxpayers. That's 71% of all taxpayers. And guess how much they paid in income tax in the most recent year, relative to that 708 billion of stimmy checks they will have received from last year? The answer is 155 billion.

David Stockman:

In other words, in the last year, these politicians have sent out four and a half times more stimmy checks to this massive base of the tax paying public than they're actually paying in taxes. Now, how in the hell you going to run a system on that basis? Because the 30% of taxpayers who are left are already paying almost all the income. The bottom 70% that I've been talking about here, 100 million, they count for less than 20% of taxes.

Tom Wheelwright:

The argument, of course is, is that there's income inequality. And this is a way to offset that income inequality. And I mean, to me, that's clearly their argument. And it's pretty hard for somebody who makes say, a million dollars a year, to complain about giving away some money to those people who make under $75,000. So, how do you deal with that income inequality issue? Because we clearly do have severe income inequality.

David Stockman:

Well, if they wanted to deal with income equality, which I don't think they should, then they should have said, “We're going to raise taxes. Right now, $708 billion for people above 75,000, okay, so we can give it as stimmy checks to people below.” They didn't say that; they're scared. They didn't have to say anything close to that. So, they said, “We'll just borrow it, charge it to the account of future taxpayers, and we'll tell the Fed to print the money in the interim to make it all possible.”

David Stockman:

So that's the problem with it, number one. Number two, the income inequality and wealth inequality the people are talking about is made, not by capitalism, not out in the free market. It is made by the Federal Reserve through this crazy policy that we've had for years and years and decades now, inflating massively the price of financial assets.

David Stockman:

And the fact is, 88% of all stock is owned by the top 1% and the top 10% of taxpayers. So the reason that income inequality has got dramatically worse in the last 30 years since Greenspan started all this in '87, is that the Fed is massively inflated Wall Street, even as his policies have been totally harmful on Main Street.

David Stockman:

So, there's your answer. If you want to deal with income inequality and wealth inequality, which I don't think you do because of free market capitalism operating honestly. But we haven't had it for 30 years. So, if you want to reverse this, correct it, go back to where we were at '87, then get the Fed out of this massive money pumping operation that isn't doing any good for the Main Street economy and is creating a problem, is now allowing the Democrats to say, they're going to tax the upper brackets out of existence in order to make ends meet.

David Stockman:

We're heading for a real fiscal collision, I guess you might say, and a hell of a political battle. Because even though they say we're only going to tax the rich, people know that you might tax the rich today, but, you're next in line when you let these politicians spend money the way they have. I mean, it's insane. We were spending about 4 trillion a year until this came along in 218 and years before. Now, we're spending at the federal level, 7 trillion and more a year. And with no more tax revenue than we had before. So you can see the dimensions of this insanity is underway.

Tom Wheelwright:

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine. He's a former board certified surgeon. And he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he's geared towards. So if you're a high paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financial educated. I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Tom Wheelwright:

Final question. Are we going to get significant inflation out of this?

David Stockman:

Well, I think more and more, the likelihood is possible. Again, the inflation in the first instance never gets out of Wall Street. They've now been pumping 120 billion a month into the bond dealers, okay? Supposedly, this is going to trickle down and help housing starts or business investment or households to borrow more than they… They already owe 17 trillion but what they have to borrow some more?

David Stockman:

But that's not happening. It is basically causing the stock market and all the speculators, which are, they're all over everything now, not just the normal stocks, but you can see these crazy outbreaks we've had with Bitcoin, which I think is a great idea, but who knows why it should be $60,000, with the NFTs, with all of these Reddit stock runs, [inaudible 00:22:19] and GameStop and all the rest of it. Or even something like Tesla, which is trading on 1400 times its meager net income. And even that net income comes from regulatory credits, not from making cars.

David Stockman:

So when you put all that together, they've created a hellacious bubble. And that's where the inflation is. And when that bubble collapses, I think Main Street is going to reel. In the interim, yes, commodity prices are going up. So I think we're going to have the worst of both worlds. Eventually, a stock market that collapses and in the interim, rising inflation, which is just going to eat away at paychecks that are already not going anywhere in real terms.

Tom Wheelwright:

Awesome. Well, thank you, David Stockman. This has been fascinating. Davidstockmanscontracorner.com. Davidstockmanscontracorner.com. And, David, you are a wealth of information. Love your energy. And any final words?

David Stockman:

Buckle up. We're heading into unknown territory, unchartered waters with this economy and the financial market and the borrowing and the political stalemate and partisanship in Washington. None of this adds up to an optimistic future. So, the best thing to do is get out of the bond market, the stock market, and wait for a better opportunity.

Tom Wheelwright:

Thank you, everybody, for listening. David Stockman, this is the WealthAbility Show, where we're always learning how to make way more money and pay way less taxes. We'll see you next time.

Speaker 1:

You've been listening to the WealthAbility Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.