The reason Stockman is so down on the US economy is that it's become super-saturated with debt. Typically the private & public sectors would borrow $1.50-$1.60 a year for every $1 of GDP growth. It had been at that ratio for 100 yrs. But by the time we got to the peak in 2006 or 2007, we were actually taking on _$6_ of new debt in order to grind out $1 of new GDP. However, by the time we got to the mid-'90s, we were

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What follows here, initially, is my synopsis, simplification and interpretation of some remarks by David Stockman.   Following that is my interpretation of some remarks by market analyst Charles Biderman, as reported by economist Mike Whitney.

Stockman says the reason he is so down on the U.S. economy is that it's become super-saturated with debt.     He explains:

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth.   It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression.  

However, by the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth.   And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt in order to grind out $1 of new GDP.

People were taking $25,000 - $50,000 out of their home for the fourth refinancing.   And that's what was keeping the economy going -- it created jobs in restaurants, retail, garden care, and Pilates instruction, all of which jobs were not supportable by way of income from the production of essential goods and services.   Why not?   Because there was a grave shortage of such work!   In other words, people were paying for luxuries with money they had borrowed, which was money that was readily available to them because of the expanding bubble in the ever-inflating prices of real estate -- which of course couldn't last.   (But few people wanted to (or did) think about that at the time.)

In any case, this is what is known as a bubble  

It was simply spending borrowed money to pay others to service you in one way or another.   Problem was, the vast majority of the people who were spending this money did not produce anything of fundamental value for others to purchase.   Instead most of them simply borrowed much if not all of the money they needed.   And the Fed created money out of thin air at an unprecedented pace.

Therefore, even the alleged GDP growth of 1.6% (annual GDP growth over the past decade) is overstating what was really going on in our economy, and encouraged blindness as to what is about to happen.   How so?    Because, when a country's citizens are finally forced to stop borrowing at this tremendous frequency (and amount) of borrowing, the rate of GDP "expansion" inevitably stops as well.

Some point out that the unemployment rate is falling and companies in the Standard & Poor's 500 are making more money than ever.   But that's going to be a very short-term phenomenon.   Why?   Look at the data that really counts:   The 130 +/- thousand jobs created each month over the last 12 years -- which are nowhere near enough to get the real unemployment rate back down to an acceptable 5%.   That's barely enough jobs to provide work for all the new members that join the labor force each month.

Another real measure of the health of our economy is the rate of investment in new plant and equipment.   Yet today there is zero sustained net investment of this kind (in our economy).   The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8% -- hardly measurable.   (Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

In other words, this economy is stalled out and stuck

Our 10-year Treasury bonds are yielding about 2% interest, but that's a totally artificial return on investment.   It's purely and simply the result of massive purchases by not only the Fed but all the other central banks of the world.  

What's wrong with that, you might ask.   The answer is that the earnings on a treasury bond don't come out of savings.   It's made-up money.   It's printing press money.   It's money created out of thin air by the Fed.   Understand that when the Fed bought $5 billion worth of US treasury bonds this morning, which it does periodically, it simply creates the $5 billion out of thin air and deposits it in the bank accounts of the several dealers it buy the bonds from.

What are the consequences of that?

The consequences will eventually be horrendous.     Clue:   If you could make the world rich by having all the central banks print unlimited amounts of money, then we would have been making a big mistake for the last several hundred years by expending so much human toil and work.  

How will it all end?

At some point confidence will be lost, and international investors won't want to own US Treasury bonds.   I mean for how much longer, when the inflation rate has been (for the last 15 years), and continues to be, at least 2.5%, would any sane investor want to own a five-year bond that's going to pay less than a 1% return on his investment?!

So, if the central banks of the world ever stop buying, or actually even begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

Indeed that's what has already happened in Greece.

So here's the heart of the matter.   The Fed is a patsy.   It is a pathetic dependent of the big Wall Street banks, traders and hedge funds.   Everything it does is designed to keep this rickety structure-of-their-making from unwinding.   If you had a former Fed Chairman Paul Volcker running the Fed today -- utterly fearless and independent and willing to scare the hell out of the market on any given day of the week -- you wouldn't have half, you wouldn't have 95%, of the speculative activity that we are seeing today.

The bald but largely unrealized fact is that we're facing a financial crisis far worse than the one that followed the collapse of Lehman Bros. in 2008.   When the real margin call, in the not-too-far-distant-future, finally arrives, the carnage will be unimaginable.

So how can investors protect themselves?   In the stock market?   Are you kidding me?   Personally, I wouldn't touch the stock market with a 100-foot pole.  

Some investors argue that the stock market is trading cheap by some measures.   It's valued at 12.5 times expected earnings this year, while the typical multiple is 15 times.   But the typical multiple is based on a historic period when the economy could grow at a standard rate.   Therefore the idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a huge mistake.   It's part of a Wall Street sales pitch.

Capital preservation is what your first, second and third priorities ought to be, in any system that is so jury-rigged, so fragile, so exposed to major breakdown that it's not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK?   Buying stocks or bonds right now is simply not worth the risk.

How to fix the economy.

Taxes are going to have to go up on everybody, not just the rich.   We have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that accurately reflects the risk of holding debt over time.   I think the federal funds rate ought to be 3% or 4%.   (It is now zero to 0.25%.)  

Social Security

It has to be means-tested, along with Medicare.   What this means is that if you're a more affluent retiree, you should have your benefits cut back, and should have to pay a higher premium for Medicare.

Taxes

Let the Bush tax cuts expire.   Let the capital gains go back to the same rate as ordinary income.   (Capital gains are now taxed at 15%, while ordinary income is taxed at marginal rates up to 35%.)   But why this discrepancy?   Is return on capital any more virtuous than some guy who's driving a bus all day and working hard and trying to support his family?   You know, with capital gains, they provide you with this comforting mythology:   "You're going to encourage a bunch more jobs to appear."

But in actual fact, most of capital gains goes to speculators in real estate and speculators in other kinds of assets, who basically lever-up companies, lever-up buildings, use the current income to pay the interest;   and then after a holding period, the speculator sells the residual, i.e. the equity, and gets it taxed at 15%.   What's so brilliant, risky or valuable about that?   Why does it deserve the reward that a lowered tax rate provides, for which working stiffs must make up the shortfall/difference at tax time?   The answer:   it doesn't.

If someone wants to do leveraged buyouts, more power to them.   If they want to have a brothel, let them run a brothel.   But it doesn't mean that public policy -- or tax policy -- ought to be biased dramatically, so as to encourage one kind of business arrangement over another!   And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation, and not enough productive real investment and growth.

Should we realistically be hopeful as to the likely outcome of the debate that surrounds these issues?   Not especially.   Nevertheless, the effort must be made to at least show as many people as possible how economic and financial sanity might prevail if enough citizens lean on their political representatives and newspaper editors.   Will such an effort be successful?   That remains to be seen.  

Authors Bio:

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.