A Letter to David Stockman
Dear David:
I want to let you know just how glad I am I'm not in your shoes. Responsibility goes with the territory. You oversee a lot of territory.
You obviously have a lot of spare time on your hands, and so you have started a website. It gets a lot of traffic.
The site has what we in the direct-response advertising industry call a USP, or unique selling proposition. Your site's USP is this: "Why Keynesian economic policies are going to blow up the world." You provide both the economic theory and the statistical evidence that justifies the message of the Mogambo Guru: "WAFD." ("We're all freaking doomed.")
This places you in an unenviable position. You are the lightning rod for all of the establishment economists and senior bureaucrats who are overseeing what is going to become the worst economic disaster of modern times. They don't like the criticism. They fully understand that, if what you're saying is true, they are going to get blamed in the media, the textbooks, and the cultural memory for a comprehensive disaster that they personally engineered, supervised, and took credit for when the going was good.
You are likely to become the John Maynard Keynes of this century. You will be remembered as the spokesman who called attention to the fact that the emperors have no clothes. Keynes served as the chief designer of the fabrics which have clothed the emperors ever since 1936.
Keynes provided exactly the clothing that the emperors of the mid-1930's wanted, since they had already adopted both the fiscal and monetary policies that Keynes recommended in 1936. He provided the covering they wanted. This is why they heralded him as the economic prophet of the age. This is why his successors and acolytes have done the same. His position of pre-eminence will prevail until the great wardrobe malfunction takes place. We know the mark of this malfunction: Washington's checks will bounce.
Your website is the premier site today which monitors the check-kiting operations of the world's central banks. When taken in conjunction with Prof. Lawrence Kotlifoff's assessment of the fiscal implications of the unfunded liabilities of Social Security and Medicare, we have the weather report on what is clearly going to be the perfect storm.
You are providing what every intellectual revolution requires. First, it requires an assessment of what has gone wrong. This assessment must be grounded in a coherent theory, and it must also be grounded in evidence for the theory. Second, every revolution involves the substitution of a better theory than the prevailing theory that undergirds the policies of the present order. Third, there has to be a prediction of inevitable disaster. Fourth, this prediction must be grounded in a rival theory and also on the evidence of how that theory is going to play out in the future: cause and effect. Fifth, there has to be a practical recommendation of how we get out of the disaster.
You have a coherent economic theory. You have grounded your analysis in the Austrian theory of the business cycle. You understand that it is central bank monetary expansion, which lowers interest rates in the short run. This is the basis of the subsequent boom, followed by contraction and widespread bankruptcies. In other words, you are not trying to fight something with nothing. You are returning to the original criticism of Keynesian economics, which was the only coherent alternative to the Keynesian analysis and prescriptions.
You have been able to show why the policies that have come out of the Keynesian economic tool kit will lead to the disaster that the Keynesians have promised would not take place if we just let them tinker with the fiscal and monetary policies of the major trading nations. You have pinned the tail -- a looming catastrophe -- on the backside of Keynes's economic doctrine.
So, you have told us what has gone wrong, and you have done so by means of a cogent economic theory. This wins you no brownie points today in most circles. But when the checks stop coming, there will be a frantic search for explanations. You have offered a cogent explanation, based on a consistent theory, and also based on plausible statistical evidence. You have shown why specific causes have had specific effects.
As I have written elsewhere, you have the advantage of bringing to the table experience in the following fields: electoral politics, cabinet level bureaucratic infighting, fund management, and rhetorical confrontation. There is nobody else out there who has gone through these hoops. Because of this background, when Washington's checks bounce, you will be in a strong position to benefit from the crucial words of any revolutionary: "I told you so." More than this, you will also be able to utter these words: "I also told you why."
It was unfortunate that the man who was most critical of Federal Reserve policies and central bank policies in general, from the year 2000 until 2007, was Dr. Kurt Richebächer. Every month, he reminded us that central bank bubbles were going to pop. Sadly, he died in August 2007, four months before the recession began. He therefore was not given credit retroactively for having taken the stand that he took. He was truly a voice crying in the wilderness.
On the assumption that events play out in such a way that they will corroborate your warnings, you will then have a problem. The problem is simple to state, but exceptionally difficult to solve: to present a cogent road map of what should be done in the midst of a major crisis to get us out of the crisis, but without once again setting up another bubble operation, which will in turn lead to an even greater crisis. No more bubbles!
This is what no major central banker has been willing to do since 1934. Paul Volcker came close, 1979 through mid-1982, but the threat of the nationalization of banks by Mexico on Friday, August 13, 1982 forced a reversal of the Federal Reserve's comparatively tight money policies. That led to the great expansion that took place from that point until late March 2000. It was a great run while it ran, but it ran out of gas 15 years ago.
Depending upon the severity of the next bust, you will have a tremendous opportunity. Unlike John the Baptist, who was a voice crying in the wilderness, you have enough website traffic to get back into the streets of Jerusalem. Of course, as you may remember, John the Baptist did not experience a lot of success in persuading the political leader of his time to change his ways. I will not pursue this here, because the thought of Janet Yellen dancing seductively in front of President Obama is beyond my powers of imagination. I will only say this: your head is probably safe.
I suggest the following. At some point, you should write the equivalent of Keynes's General Theory. You already wrote the foundational work: The Great Deformation. That is a magnum opus on what went wrong. It will stand the test of time. But it is a fat book. It is heavily historical. And it is not, for all its insights on economic theory, an explicitly theoretical treatise.
I'm not suggesting that you have to do the equivalent of Human Action. You don't have to reinvent the wheel. I am suggesting that you have to write the equivalent of Henry Hazlitt's Economics in One Lesson. That little book provided a framework in 1946 for the discouraged troops that had been put to flight, and would continue to be put to flight, by the Keynesian orthodoxy.
Monetary theory is a subsection of economic theory. Ludwig von Mises started with his Theory of Money and Credit in 1912, and he ended with Human Action in 1949. Human Action was a magnum opus. We will need a book that can recruit the cadre. The Keynesians will be put to flight. The question is, will there be a book that rallies the cadre, as well as recruits the next generation of foot soldiers?
Next year will be the 70th anniversary of Economics in One Lesson. I suggest that you honor this anniversary with something similar. That book began with the broken window fallacy. Central bank policies will shatter a sufficient number of windows to attract the attention of the victims.
Keynesianism is the consummate philosophy of the broken window fallacy. It has never explained how aggregate demand can be increased by taxing or borrowing: shifting money from private investors to political spenders. The Keynesian solution to this dilemma has been central bank expansion of its holdings of IOU's from governments.
As you have written, we have reached peak debt in the private sector, but we have not reached peak debt in the government sector. When central bankers decide that they can no longer afford to buy more debt from governments, because this will lead to mass inflation and then hyperinflation, the day of reckoning will arrive. The checks will stop coming. That will be the window of opportunity for those who have never accepted the broken window fallacy. As an entrepreneur, you should appreciate the possibility of this opportunity.