In an interview with HedgeyeTV, David Stockman explains why he believes we’re on the verge of popping another major financial bubble for the third time in this century. He and Keith McCullough also discuss the potential political fallout from this bubble – who will be the politician to fire Janet Yellen and refute Keynesian policies? They wrap up by talking about Stockman’s recent book The Great Deformation and how the financial media is caught up in a “recency bias” that allows them to ignore the monetary fraud being perpetrated by the Federal Reserve and the government.

While parts of this conversation are a bit technical, Stockman does a great job explaining the fundamental economic and political realities of the United States. Stockman was the Director of President Reagan’s Office of Management and Budget in the 1980s and went on to work on Wall Street for years. With his background, Stockman has keen insight into the financial mindsets of both Wall Street bankers and Washington politicians. He believes the Fed’s monetary policies have had the following consequences:

1. Misplacing of all financial assets.
2. Inflating the value of financial assets.
3. Fueling speculation and imbalance in the financial system.

Here are some highlights from the interview:

We no longer have honest price discovery anywhere in the markets. Everything is driven by the word clouds and the liquidity injections in the short run, by not only the Fed – our central bank – but all the central banks of the world are doing the same thing. As a result of that, all pricing is distorted. When you have zero interest rates in the money market for 71 months running… It tells the carry trade, “go to it”…

I say the most important price in all of capitalism is the price of money. Because that’s the cost of speculation. that’s the incentive that drives the gamblers in the financial markets. If they face risk like they did with Volcker, they could wake up some morning and the overnight rate would be up some 300 basis points – you would not perform the same kind of gambling maneuvers in that environment as you do today…

You can’t put any stock in the BLS [Bureau of Labor Statistics] numbers. For instance, the headline jobs number once a month is apples and oranges and kumquats. You know, it’s part-time jobs, full-time jobs, high-pay jobs, low-pay jobs, temporary ones, more permanent – it doesn’t measure anything that’s meaningful, and yet the Fed and Yellen and the rest of them are focused on all of this noise…

If you look at labor hours supplied to the private, non-farm business economy – that’s a fundamental metric. In 1999, the index for that was 108. You know what it was in the third quarter of 2014? It’s 108. In other words, in 15 years there has been no increase other than minor little fluctuations in the amount of labor-hours consumed in the private economy of the United States. So how do we get these job counts going up all the time? Because the jobs are becoming lower and lower quality. There are more and more part-time jobs, there are more and more temporary jobs, there are more and more jobs without benefits. What matters for the economy is the value added, the income produced – not some headline number that’s put out by the BLS…

When the bubble breaks, that will be the time to come in and say, “We spent five years destroying savers with zero-percent interest. We spent five years taking the balance sheet up by roughly $4 trillion. That’s just monetizing the debt. That’s fraud, that’s what that is. We spent five years allowing the gamblers to have huge windfalls and thereby tilting the distribution of income and wealth even more completely towards the top 1%… And what did we do for Main Street? We did very little for Main Street, because the amount of what I would call full-time, bread-winner jobs is not even back to where it was in 2007… And the cost of living has gone up…”

When the bubble bursts, there will be a politician who will come along who will talk about the destruction of savings, who will talk about the coddling of Wall Street and the gamblers, who will talk about the failure of this policy to generate any real traction…

[A generational change] is the only real hope you have. The mainstream establishment has gotten so hooked on what I would call “the free lunch.” We can run deficits, we don’t have to worry about financing them. We can have the Fed print the money, hold the interest rates towards zero, and hope it’s all going to work out for the best. That’s what the mainstream narrative is today. It isn’t sustainable. As I said, until we get a major dislocation, we’re not going to have a different regime…