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Chris Martenson:    Welcome to this Peak Prosperity podcast. I am your host, Christ Martenson. You know, as tensions between the West—by which I principally mean the US, the UK and Europe and Russia—ratchet ever higher, so do the stakes. Now, listening to Western mainstream media will leave you worse off for your efforts because too much essential context is almost always missing. The Ukrainian war did not start in a vacuum a few months ago. Now, despite a lot of complexity and the enormous risks of poking sharp sticks at a potentially dangerous bear the US and Europe have been doing just that; blaming Putin personally, targeting people close to him for sanctions, and now levying economic sanctions on all of Russia.

Today we are speaking with a guest I am especially keen to interview on this subject: Mr. David Stockman, economic policy maker, politician, and financier. As I'm sure you know, Mr. Stockman served as the Director of the Office of Management and Budget in the Reagan Administration and was the youngest cabinet member of the 20th century. Since then he has held executive positions in many of the most influential banking and private equity firms including Blackstone and Solomon Brothers. He is the author of The Great Deformation, which if you haven't read it you really should. It came out in April 2013. It's blunt. Sometimes delightfully and deservedly scathing of the various fiscal and policy blunders that have degraded our current and future hopes for prosperity. Welcome back to the program, David.

David Stockman:    Very happy to be back with you, Chris.

Chris Martenson:    Well, we're going to discuss Ukraine today so let's start with this: I have to confess, I didn't believe President Obama when he recently said that the most recent sanctions against Russia were about "standing up for the rights and freedom of people around the world." So the question is: What compelling US interests are at stake over which flag flies over Crimea, or even Eastern Ukraine?

David Stockman:    Well, I would say none at all, but I think as we look at this you need to have wider context. I would like to suggest that I believe if you look at all the entire radar screen of things developing both domestically and internationally that we are indeed plunging into a perfect storm of policy failure. The American Empirium is collapsing. There is blowback everywhere. The wreckage of prior policy mistakes of our interventionist foreign policy is coming home to roost and the Ukraine is one area of ground zero for that.

But secondly, monetary central planning is now coming to a dead end. It inflated the third financial bubble of this century and the Fed is now clueless as to how it manages to unwind this massive balance sheet expansion that has been undertaken. And third, the fiscal doomsday machine continues to crank on; Washington is ignoring the fact that we are six years into a business cycle expansion and we are still running massive deficits and there is no cushion for the next upset that comes to the economy. Now why is all of this important? Because I think the foreign policy failures—the collapse of the American Empirium as I call it—is at the center of this and it will push all of these things in the wrong direction.

We are now becoming much more aggressive in our foreign policy than ever before. We can't afford it by any means, and the potential for this to create black swans—to roil or dislocate these very fragile financial markets that have been created by this massive Central Bank balance sheet expansion and liquidity provision—makes what is happening in the Ukraine or what is happening in the Middle East on the Gaza or in the collapse of Iraq even more dangerous in terms of what it could trigger. So we are in a real pickle here and I think it is compounding by the day.

Chris Martenson:    I certainly agree, and there are extraordinary risks. I want to get to those in a minute. First, I want to rewind the clock a little bit and give people the appropriate context for the story. I think much of the story begins in 1989. James Baker, then Secretary of State, was sitting down with Gorbachev. They are trying to carve out a mutually agreeable diplomatic solution to the conundrum of how to go about removing USSR troops and influence out of East Germany so that reunification could go forward. What happened then? What was said? What was promised and why is that important?

David Stockman:    Yea. I think that is a very important inflection point. In simple terms, Baker said that in return for Gorbachev's and Soviet cooperation in withdrawing from East Germany and permitting the unification to go forward, the US would pledge that NATO would not expand by a single inch. That was a solemn commitment. And, frankly, that made sense because If the Cold War was drawing to a close, if the Soviet Union was in the final throes of its collapse—which by then was becoming more evident—then the very purpose of NATO had passed. And the right thing to do at that point going into the 1990s was to figure out how to shrink and dismantle and eventually eliminate NATO, just as the Warsaw Pact was being dissolved on the other side.

Well, history took us in exactly the opposite direction to a mindless expansion of a military alliance that was obsolete after August 1991 when the Soviet Union literally dissolved. We had—at that point in time there were 16 nations in NATO and today there are 28. We have added all of these tiny microstates and have encroached deeper and deeper into Eastern Europe until eventually we were on the doorstep of Russia. I think that is what has precipitated this unexpected and very precarious or dangerous confrontation that we have at the moment over the Ukraine.

Chris Martenson:    Well, this is important—Ukraine was pretty much the last game piece on the table. NATO had pretty much expanded pretty much all around all of that. As we shift forward in time, former President Yanukovych—there was another key pivotal moment. He was kind of sitting on the fence last fall, as I have the story. In fall of 2013—I think it was November—he was supposed to sign the European Association Agreement, which is an economic agreement, which he most famously did not. I think he showed up to the conference and basically punted at that point. Did not sign that. Instead he turned back towards Russia. I'm thinking that tweaked a few noses at the State Department.

David Stockman:    Yes, it did. And it also was in the context of the huge mistake that Obama made in August last year when they proclaimed that the chemical weapons that had been used in Damascus had been launched by the regime. There was no question about it. It was black and white. And that he was on the verge of launching the air strikes, as you remember. At the last minute withdrew. Putin stepped in, came in with a much better solution, and that was the ultimate disposal of all the chemical weapons by the Assad Regime. I think that really stirred the neo-cons and what you might call the expansionist foreign policy network in Washington into action. You can look at the news over the period after Obama was forced to retreat. And it was a good thing that he did. It would have been a total—a mistake to start lobbing bombs into Syria, a situation that's totally combustible and unstable and really none of our business.

In any event, after that the drum beat began to get louder and louder about Putin and Russia and the situation in the Ukraine. I think clearly the evidence is that US agents were heavily involved in the street demonstrations and then, effectively, the coup d'etat that occurred in February. A new government was installed. The constitutionally elected government was thrown out. The elected president had to flee. You brought into power some pretty unsavory people in terms of an ideology which is almost neo-fascist in its history and in its posture and it created enormous tensions in the Ukraine because the Eastern side of Ukraine is Russian speaking and has been oriented to Moscow for decades if not centuries. It created another possibility of ethnic clash and ethnic cleansing, which began to mobilize the resistance, the rebellion on the eastern side of the country in the Donbass region. One thing led to another. We didn't show any sensitivity to that in Washington and the State Department. Instead treated the Ukraine as a sovereign country that had the right to go in and put down a rebellion. We have encouraged them to do that. And so now you have the arm-clash in the Donbass region today right on Russia's doorstep.

What I'm saying is in the big picture NATO shouldn't have been expanded. In more recent times there was no reason why the elected government of the Ukraine couldn't decide to try to do a deal with Russia that it found more attractive than one with the West. When it came time to clash on the streets and a challenge to the government we shouldn't have been there encouraging and enabling and facilitating that destabilizing event. When the new government took power, obviously it was not sensible for us to egg them on, to encourage them, to enable them to begin a major military operation against several million people in the Eastern regions of the country.

I would say this crisis was not made in the Kremlin, as the mainstream narrative wants you to believe, but it was generated—gestated—in Washington, both over the longer term because of mistakes that we have made since the end of the cold war and in the near-term because we jumped into a civil conflict in a country that has never been stable or had consistent borders for centuries and is not really our business to try to manage and direct.

Chris Martenson:    I think that's all very well said. I am wondering how much getting our nose out of joint by being out foxed by Putin who, by the way, all he did was prevent us from going in and unnecessarily bombing a sovereign nation and ostensibly trying to take out its leader, Assad, over evidence that turned out not to be painting the narrative we wanted.

I just want to set the stage a little bit more because in our press I have seen these – the people in the Eastern part of Ukraine described as separatists, generously; terrorists ungenerously. And I want to note that they are all Russian speakers. There are a couple of parties that are in power in Kiev in the Western part of the state right now. One of those is Yulia Tymoshenko's Fatherland party and she was caught on tape saying the way they should deal with the 8 or 9 million Russian speaking citizens is to "nuke them." There are a lot of reasons why Russian speaking people would believe that they would not get a fair representation, at best, but might even be at threat, at worst, should some of the powers that are angling for power in the west rule their lives. Is it fair to say that these are people who have a legitimate concern over the kind of people that seem to be propped up in the west?

David Stockman:    Yeah. Absolutely. And the narrative that we have going here that these are terrorists—that somehow they're equivalent to what we have dealt with in the Middle East or in Afghanistan—is just so far from the truth and so inaccurate that it is astounding. There has been ethnic conflict in the region of the Ukraine for centuries. And in more recent times during the Soviet Empire there was a huge reshuffling of populations that were done in classic form by Stalin when a lot of Ukrainians were moved out of the east, the Donbass, the Pittsburgh of the Ukraine if you will—the steel, coal, industrial and machinery center. Russian speakers were brought in because Stalin was the great paranoid who didn't trust the Ukrainians after the uprisings of the early '30s, and for good reason—you know all about the liquidations the Kulaks and so forth.

The country today is enmeshed in a tremendous, convoluted, difficult, bloody history that we are ignoring entirely. But the point is, when nationalistic and neo-fascist oriented Ukrainians seized power in Kiev, that was a dramatic signal to the Russian speakers that huge trouble is ahead. The clash that has happened on and off over decades and centuries was about ready to get red hot, and so they did organize themselves and they did arm themselves and they did attempt to form a breakaway republic because they didn't want to be part of this unconstitutional regime that took power in Kiev.

Obviously, the Donbass region has been part of the greater Russian economy and polity going back centuries. It is not something that the leadership of Russia can just totally ignore and I don't' consider what they're doing an indication that they are bent on world conquest or that they are going to march all the way through Eastern Europe into Poland and the Baltics and to the doorstep of Germany. All of this is just paranoid and delusional. They're concerned about the industrial region on their border that is historically an integral part of their economy and that is populated with Russian speakers with whom they have a great affinity. And they are extremely nervous about the agitation of Washington and the west in Kiev and the machinations of the new government. It is all pretty understandable and plausible if you just sort out the facts and look at a little history which today the Obama administration and the leadership of the Western European countries just can't' seem to do.

Chris Martenson:    Oh, David. It is such a breath of fresh air to be talking with you about this because this is all information, it is all facts. There is some context here that is really important. This brings us more or less to the present moment. We had this tragic situation with Flight 17 being shot down. The initial knee-jerk reactions of John Kerry, Obama, Hillary Clinton others in the State Department, our UN representative and others were that Flight 17, that incident was all Putin's fault, which was swiftly followed by a complete lack of evidence that has not yet been made available. Here is the question: Am I wrong in assuming that if the United States had the sort of evidence that supported the current narrative, we would have released it by now?

David Stockman:    Yes. Absolutely. And if we haven't—it is totally implausible that we wouldn't release it. I think the only fair judgement is that we have no clear case. The larger point is there is an armed clash going on. There is a serious, broad-ranging civil war occurring in the Eastern region—in the Donbass—and obviously in the context of a raging civil war it is possible that either side accidentally shot down that Flight 17. The point that I think we need to remember is the civil war is unnecessary. The civil war was provoked by Kiev in terms of the anti-Russian policies that it announced when the new government was formed by some of the events—occurrences—that have happened since then where Russian populations have been under military assault. The point is the civil war could stop today if the White House would simply tell the government in Kiev, "Stop or the aid is going to stop flowing."

The government of the Ukraine is bankrupt. They have been promised $35 billion in aid from first the IMF 17 then a bunch more from the EU then there is some from the United States on top of that. Without that massive umbilical cord of financial aid from the west the government couldn't pay its bills tomorrow. Therefore they are undertaking this broad-ranging military operation and prosecuting this civil war only because of the aid that is coming in and only due to the acquiescence of Washington and the west. The point regarding this tragedy of Flight 17 is the civil war could have been stopped before it started. It is unnecessary that it be prolonged. That if we had any common sense we would tell them to stop, to have a cease fire, and to organize a conference to figure out with Russia and the warring parties how either a federation can be formed that both sides can live with or how the country can be partitioned into more viable entities.

Now the idea that you are going to partition a country or separate the Eastern region of the Donbass from the rest of the Ukraine shouldn't be so shocking if we would just look around and remember what happened elsewhere in Eastern Europe. Czechoslovakia was created in 1919 at the Versailles conference. It was a mistake. It wasn't viable. It went through 80 years of various convolutions but they ended up parting and now you have the Czech Republic and you have Slovakia. Yugoslavia has been divided now into seven separate smaller states because obviously the Catholics and the Muslims and the Serbs and the Albanians and all the rest of them couldn't live together. There is nothing wrong with having a partition and a separation of these regions within the Ukraine, which could be done through some kind of negotiated process. Why we continue to encourage and try to enable a military solution to what is a long-standing historic, ethnic, and regional schism is really very hard to fathom.

Chris Martenson:    It is very hard to fathom. I am not clear really what the game is, but here we are. I'm looking at covers that say things like "Putin's Missile," Economist has Putin on the cover with "A Web of Lies" as their main title. Newsweek has got a very, very dire looking picture of him with mushroom clouds in the reflection of sunglasses with the words "The Pariah." All of this really seems to be boxing Putin particularly—Russia generally—into a corner.

So here we are. Russia is heavily marginalized. Does this escalate further or does it begin to de-escalate from here?

David Stockman:    Well, you would hope it would begin to de-escalate but I'm amazed that it has gone this far, that Putin has been demonized to the degree he has. That the very complex situation has been turned into this silly black and white caricature that almost reminds you of the Yellow journalism, the Hurst Newspapers 1898, the prosecution of the Spanish-American war. Just think about this: Putin has been in office or power since 1999, 15 years. Dial back even three or four years ago—no one was characterizing him as some kind of power hungry mini-Hitler bent on conquest and expansion and that has to be stopped at peril to the West. There wasn't that he wouldn't cry. There wasn't that caricature. Yes, there were differences along the way and there were certain flashpoints like the Georgia conflict in 2008. But the whole imagery that has developed that you described in those cover stories is really made out of whole cloth in the last six to 12 months. I say it was really crystallized and catalyzed when Putin essentially stepped into the breach in the Syria event in August and September and helped the world move in a more constructive direction.

Basically, the war machine in Washington—I call it the Warfare State—couldn't abide that. There are just too many people that operate in the Devil's Workshop. Which is to say, we have all of this capacity, we have all this machinery of war-making and of intervention and of global empire that is obsolete, unnecessary and yet it is manned by people who want something to do. Who need to justify budgets. Who need to pursue and prosecute missions. That is what I think is happening at the present time. It is just the warfare state machinery has gotten itself activated into motion and it is drastically simplifying the real facts that we face and creating a narrative that is really preposterous in terms of what our real national security and what the safety and security of the American people really requires in this circumstance.

Chris Martenson:    Very well said. A quick aside, I didn't intend to go here, but you raised it and it is very important to me. The fourth estate—where is our press? I thought after all the mea culpas, gosh we were so badly misled in the Iraq situation. Look we helped spin propaganda and lies out of the Office of Special Plans, Feith, Perle and Rumsfeld's special little cook chamber there where they came up with falsified WMD information on Iraq. I thought after that that we might have seen a bit more circumspection and maybe investigation on the part of journalists. I am not seeing it. Not in the Washington Post, the New York Times, none of them. They are just going straight out with the main narrative. Do we have a fourth estate that's useful anymore in the mainstream press?

David Stockman:    That's a great question. I think it just reveals the degree of partisanship that prevails in the fourth estate in the mainstream press, notwithstanding all of their protestations of non-partisanship and balance, "fair and balanced," and so forth. So what we have now is the conservative press, the FOX News, always looking for an opportunity to have a confrontation, to flex muscles, to mobilize the machinery of the warfare state. So Putin makes for a wonderful new target of attack.

On the other hand, the middle-of-the-road in liberal press—let's say CNN and MSNBC, if we want to talk about the cable channels—are so focused on currying favor with the Obama Whitehouse that they're essentially repeating the talking points that are sent over from the State Department or the White House or DOD. They are literally re-broadcasting talking points and are unwilling to challenge the incumbent administration. Essentially, both sides of the press—the so-called conservatives and the so-called middle and left—are neutralized and we are getting no serious digging into the complexities or history of these situations, and instead the kind of silly presentations we are getting nightly at the present time.

Chris Martenson:    You want to talk about silly, let's talk about a very serious allegation that was made. It was the assertion that Russia had fired across its border with both artillery and rockets into Ukraine and caused damage and death. That's a very serious allegation, and the substance for that allegation, which CNN repeated quite breathlessly for a number of days, was a series of images that came not from US spy satellites or intelligence services. It came from a private company called Digital Globe. It was a couple of images, so we don't know the actual timing or provenance of those. And they were tweeted out across Geoffrey Pyatt's Twitter account.

David Stockman:    Yeah. The Ambassador to the Ukraine, right. Exactly.

Chris Martenson:    Didn't we used to have –

David Stockman:    And besides that if you look at them they were indecipherable. They were essentially cartoon caricatures showing big arrows coming from one fuzzy spot on the picture to the other. And who knows at what point in time those were taken, what really was on either end of those arrows, I think it is a lot of nonsense. It isn't even close to the kind of intelligence we really have, and if they had it, believe me, they would be de-classifying it and making it public. You can't even get facts such as these. The BUK Systems, so called anti-aircraft system launcher, is being blamed for bringing down Flight 17. Maybe that is going to prove to be correct after real evidence comes in, but what they don't tell you and they say that is a Russian made system. Therefore, the viewer is left to judge "well Russia must be behind that." No. The entire Ukrainian military equipment is Russian because the Ukraine was an integral part of the Soviet military machine until the Soviet Union finally ended. The Ukraine to this day has 60 BUK anti-missile systems and maybe the rebels got their hands on one or two when various units of the Ukrainian military defected. But you don't get the facts that there are 60 of these units under the control of the Ukrainian military. That apparently according to the data that was presented in the press conference by the Russians last week, four of these systems were brought very close to the battlefront before Flight 17 was shot down.

So I think it is totally unclear at this point how this tragedy happened. But the simple solution that it was probably a BUK missile and they are made by Russia and therefore Putin is behind it is unbelievably superficial. But it is essentially the narrative you are getting from the cable news today. And particularly, I would be especially critical of CNN. You might as well label it "The War Channel." Their coverage is just shockingly superficial and one-sided.

Chris Martenson:    You know, David, I particularly thought that for the number one purveyor of arms systems in the world, which is the United States, to say that you bare responsibility for whatever happens with those systems regardless of how or who uses them in the future seems to be kind of a dangerous slope to wander down. You know, as you mentioned there are a bunch of these systems. We don't know who used them at this point in time. We don't' know if it was accidental. We don't know if it was intentional. But a very serious question that Russia raised is the fact that they had, and released evidence, photographs, showing that there were multiple BUK 1 missile systems in the area, and further that the radar was operational on July 15, 16, 17th and then went quiet on the 18th after the shoot down. And that all of these were under the control of Kiev. Well, seems like a good investigation would say, "We have some questions there."

This just goes to show and raises a point here for me, which is I think Russia has actually been demonstrating considerable restraint so far. But now we have just had this next layer of sanctions come down from both Europe and the US. You might say listen, they are not all actually that severe, but it is another layer of sanctions. I would like to get your point of view on—let's talk about what Russia's response might finally be when they do have one, and what the consequences of those responses could be.

David Stockman:    Well, first of all the sanctions are really stupid, number one, and a joke, number two. As far as I can remember we have never isolated individual members of a regime by name and attempted to put them on double probation, so to speak. The sum and substance of much of what we are doing is picking fights with Putin's inner circle and even his outer circle and maybe even some people he doesn't know. The first thing is: This isn't very serious. It is kind of kid stuff. It is people sitting around in Washington trying to come up with a response, but not wanting to go too far with real confrontation and so they invent all of these games, which do nothing but cloud the situation and intensify the conflict between the two sides, but are not going to have much real impact. Some of the Russian oligarchs are not going to be able to buy another $60 million high-rise apartment in Midtown, New York, but that is not going to cramp their style in the long run.

Now, they are trying to move to something more serious right now, but even when you look at what they have proposed it is more form than substance. We are not going to allow military exports to the Soviet Union, except that only applies to new contracts. So therefore, everything that is in the pipeline right now will continue; spare parts and repair parts for any systems that have been bought in the past can continue to flow. Or we are going to restrict the export of high technology oil field equipment, but it is only oil field, not gas, interestingly. And it is only offshore, when the massive—as you well know—resource of Russia is onshore in the vast tracts of Siberia and all the other oil fields.

This is just the machinery run rampant looking for ways to prosecute a case that is wrong headed from the beginning, but it is going to trigger reactions—it already is—from the Russians and understandably so. So they are going to apparently restrict chicken imports from the United States and we are going to have the chicken wars going again. I don't think any of this represents the work of adults. I think it's sort of juvenile delinquency run loose in the corridors of Washington DC.

Chris Martenson:    It feels petulant to me too. It does not feel of the statesmanship of a George Cannon or James Baker who understood that diplomacy is about interests that are being balanced against consequences and that there is history both before and after this moment in time. It feels rather like we want our way, we want it now. The confusing part to me that perhaps you can shed some light on is the degree to which Europe has been following along. They have the most to lose in this story, of course, just because if somehow war or sanctions somehow lead to the loss of gas flows—natural gas—from Russia, Europe is in a world of hurt. Why do you think they are really hewing to the US policy at this point in time?

David Stockman:    Well, I think they have been very reluctant participants in this. They have been until Flight 17 dragging their feet. But I think the emotional impact on the public in Europe when this flight went down and it was mainly Europeans who were on the flight, has allowed politicians to become a little more aggressive and a little bolder and therefore more willing for the short-run and for the moment to acquiesce to the demands from Washington for an escalating level of economic sanctions. This is all in the immediate, emotional aftermath of this airline tragedy. And, one: I'm not sure how long that will last. Secondly, it's clear that what the Europeans is doing is so riddled with loopholes that that will become increasingly evident as regulations are written and more facts come to the surface. But third, the European economy is in a very fragile state as we all know and this could be just a trigger—a catalyst—to tip it over into a new relapse into recession. Obviously, before any of this really heated up, the German central bank was saying that the German economy is basically going to flat line in the second quarter. Italy is going to be negative. Spain is barely creeping along. France is clearly unraveling. So therefore it comes at a very delicate moment economically that has all kinds of ramifications that we could get into including calling Draghi's bluff on the "whatever it takes" quote. Because if the economy relapses again as a result of the events that are occurring on the Ukrainian front, what is he going to do? Is he really going to try to do QE proper and if so, is the Bundesbank going to acquiesce? There are huge questions here. There has been an enormous amount of speculation in the debt of the peripheral countries based by the fast money who took Draghi at his word. They will reverse those trades as fast as they put them on if any doubt begins to arise.

As I said at the beginning here, I think we are headin