Economist Lacy Hunt Returns! Disinflation, the velocity of money and where the economy is headed

Lacy Hunt [00:00:00] We take on too much debt, it slows economic activity. And the only solution that anyone can come up with is to take on more debt in the hope that somehow, that this, the debt will be behaved differently this time than it's been been behaved. And so you get further and further into the detriment.

Vance Crowe [00:00:18] Hi, I'm Dan Crow, a small business owner living in Central Illinois, and you're listening to the Vance Crow podcast. Welcome back to the podcast. I'm glad you're here. Lacey Hunt, the famed economist, has returned to do another interview. Many of you'll remember that Dr. Hunt came on the show during the middle of Coronavirus so we could talk about what happens if the government prints a whole bunch of money and then starts injecting it into our society. At the time, it was April of 2020, we had no idea how big the stimulus packages would get and how many times they would come, but if you go back and listen to that interview, I think you will be like me, which is straight up shocked at how accurate Dr. Hunt was in his predictions. And mostly those come in the form of explaining how economics works. This particular interview is one of the most fascinating conversations I've ever had the privilege of having. All of these concepts that I've learned in economics throughout my years of college and graduate work never all came together in one single unitary idea. And for me, this conversation brought together ideas that I had heard but didn't fully understand. I think everyone will be in for a rather wild ride. And if you're like me, by the time you're done, some of your thoughts about where this economy is headed probably will change because of how convincing the explanations Dr. Hunt offers.

Vance Crowe [00:01:53] So we are really honored to have him as a guest. Many people have commented on the last show that we had a living legend on and we're deeply grateful he was willing to dedicate his time while you're here. If you're the type of person that enjoys having conversations like this about thinking about things deeply, and you wanna find a community of people that are also having conversations about how the economy is going, where should you be placing your attention and your energy? What kind of skills can you be building so that you can have the type of life that you know you could have if you just had a path to get there? That's the Articulate Ventures Network, and we would love to have listeners of the podcast join. We have about 70 of us now ranging from physicists to farmers to young upstart college students and entrepreneurs, people working on things like a writer's workshop or a business dojo where they practice out their ideas and show how their businesses are working. Or maybe you just want to come for the conversation in the newsfeed. If you're interested, know that you are always welcome at Network dot Articulate Ventures. We'd love to have you, and we'd love to have you contribute the conversation that you uniquely can bring. And there's a whole bunch of other people that love the podcasts and the guests and the conversation. So there'll be people that you'll probably get along with pretty well. Alright, without further ado, let's head to this interview with Dr. Lacey Hunt. Dr. Lacey Hunt. Welcome back to the podcast.

Lacy Hunt [00:03:23] Well, thank you, man. So

Vance Crowe [00:03:26] Here we are a year from when we spoke the first time, the last time we spoke, it was the very beginning of coronavirus. Nobody had any idea what was gonna happen in the world. But when I went back to listen to our original interview, it is spooky to me how accurate all of your predictions have been so far to the extent that I'm a little bit like, I hope he doesn't say anything, negative's gonna happen because that means it will happen.

Lacy Hunt [00:03:54] Well, so

Vance Crowe [00:03:54] To to start off, tell me, what do you think the state of the US economy is in May of 2021 right now?

Lacy Hunt [00:04:03] Well, right now we are in, in the vicinity of the peak growth for the year, and then the vicinity of the peak inflation for the year. The growth will remain relatively good for a while longer, but it's, it's already in the process of flowing. And by the fall, I think it'll be apparent that the, the trend line in, in economic activity, that was a apparent at the end of 2019, that when we get this rebound by the end of the year, we're gonna be well below the trend line. And we're, we're clearly in experiencing inflation presently. And a lot of people are saying, well, we have inflation now. And they're extrapolating that into the future as well. But I, I think the, as the economy slows and we resolve the supply chain problems, the inflation rate will also come down. Well,

Vance Crowe [00:05:31] That, that seems to be a real challenge right now because people are watching prices go up and up and up. So it makes them want to jump in. I know I personally am like, Hey, I better get these housing projects done right now because it's gonna cost me, you know, 25, 30% more if I wait. But you think if you wait till fall, those prices will likely fall.

Lacy Hunt [00:05:51] Well, I'm not an expert in housing, but I I think that if you look at home prices relative to household income, or if you look at home prices relative to rent, which is a substitute for, for buying a new home, the housing market is now more overvalued than it was in the SI mean, this is a very overvalued situation. It's, it's a result of the fact that the Federal Reserve has been buying $40 billion of mortgages a month. And they have, they have created a bubble. They've created a bubble. And by all characteristics, and for people that wanna study that better, what they should do is read the great book book, Manus Panics and Crashes by Charles Kendall Berger, tremendous economist taught at in MIT for a long time. He was the, he was the key professor of, of Dr. Rool at Harvard. And that's, that's the situation there. And of course, because of the surge in home prices, there's been a surge in a lot of items that go into building all lumber and so forth, copper, what have you, cement. But it's a very dangerous time. Now that's, that's looking at it on a national basis.

Lacy Hunt [00:07:22] There's obviously regional differences. I, I'm not, don't, I don't study regional differences, but I think that, I think there's already some indication that the housing process is cooling off. I'm, I'm sure that your viewers notice that they're much weaker than a much larger than expected decline in home starts in April, and mortgage applications for home purchase have come off about 24% from their peak levels in January. And so we're, we're, as we always do, when you, when you get an unsustainable rise in prices that outstrips income or outstrips competing services like rent. So it housing's in a and I think in a precarious situation right now,

Vance Crowe [00:08:24] Yeah, it seems to me that all the people that we're gonna go out and buy a house have gone out and done it. And what, what we were watching houses go up on the market and be gone in two days, you're starting to see that slow a little bit. Maybe they're on two weeks, maybe they're on three weeks.

Lacy Hunt [00:08:40] One of the, one of the things that typically happens in a recession is that there's a lot of pen up demand. People suppress buying for big ticket items like homes. In this particular case, we're supposed to be starting our sustained recovery and there's no pen up demand in housing. It's all been effectuated. Now, housing housing is not that important. It's less than 3% of economic activity, even if you take in the indirect effects where it's just not a major sector, but it, it's, it's out of position with the normal cyclical pattern, let's put it that way.

Vance Crowe [00:09:20] So let's talk about the things that are much bigger on the economy. I'm watching commodity prices like corn go through the roof. There are a lot of farmers saying the Chinese are buying up everything they can. You're watching wheat and soy go way up. What I would assume that would be a larger part, a portion of our GDP.

Lacy Hunt [00:09:39] Well, I, I I individual prices are not aggregate prices. And when I try to assess inflation, I use the general equilibrium analysis, and I'm interested in, in what's happening to aggregate demand and aggregate supply. And so if you'll remember from your macroeconomics, the aggregate demand curve is downward sloping. And when, when there's a major debt financed federal program, such as we've, we've had two this year, we, we had nearly a trillion dollars that started the year, but through by the outgoing administration. And then we add another 1.9 trillion. So when you have one of these major debt financed activities, the deme, the demand curve, which is also GDP shifts upward. And so it catches, as it ships up upward, it catches the aggregate supply curve at a higher price level, also a higher level of GDP. At the same time, there were a lot of supply side disruptions from the pandemic, the low cost producers in the world, or not in the United States. They're, they're in Asia and other, other foreign countries.

Lacy Hunt [00:11:10] And, and so when the pandemic hit the, the low cost producers in Asia were not capable of sending their products into the United States. And as a result, the high cost domestic producers were able to gain market share and, but they sold at higher prices. But people were willing to pay because that was all that was available. Now, however, we, we, we, we've had a very bad situation on the western porch. The container ships were backed up, A lot of goods were stocked on the, on the, on the docks. The container ships are being unloaded, the docks are being cleared. They're still not, not normal, but, but as time goes by, as the, as the low cost Asian goods come in, those producers are gonna wanna regain market share. Now, the domestic producers that had a windfall from the pandemic, the the pandemic did more for the domestic producers than Trump administration tariffs, because the pandemic blocked all kinds of goods. The tariffs were just on a limited number of goods. And so, so as time goes by, the low cost agent producers will come in with their product and they will cut prices to regain market share.

Lacy Hunt [00:12:49] And the domestic producers will try to hold, and I think we will, we will see the inflation rate come down. And moreover, the, this transitory benefit from the upward shift in the demand curve due to all of nearly, nearly $3 trillion of borrowed funds that have been pumped into the economy, that will begin to fade. When you borrow a lot of money, the demand curve shifts outward, but very shortly thereafter, the velocity of money turns down. But, but GDP or aggregate demand is the same thing as money, time velocity. And so as that happens, the ag, as the supply curve shifts outward, shifts outward, the aggregate demand curve will shift downward, and we will see less pressure on prices, less economic growth, and the situation will resolve it. Let me, let me give you a couple of examples. If you go back to 2009 and 2010, we had what was known as the shovel ready projects. Those were debt financed that gave us one really good quarter and another quarter it was pretty good, not as good as the one, the first quarter, the Fed was en engaged in asset purchases at the time.

Lacy Hunt [00:14:24] And a lot of people said that the Fed was printing money and, and there was an upturn in inflation then not as, not as, not as big as the current one, but there was an upturn in inflation interest rates rose, there were expectations that inflation rate was gonna move on. But the, the benefit of the shovel ready debt finance projects was very lived. And then I'm gonna give you another example. In 2018, we had tax cuts debt financed. Well, the second quarter of 2018 was a great quarter, but the third quarter of 2018 wasn't quite as good. Okay? And then the growth rate started decelerating and it decelerating all the way through 2019. In fact, it was decelerating so much that the Federal Reserve was repeat cutting interest rates throughout 2019. And so the benefit played off, and I think it's important for, for folks to remember that inflation and also long-term interest rates are lagging economic indicators. The, the pioneering work on what we call coincident lagging leading indicators was done by Wesley Claire Mitchell and Arthur Burns, who also founded the National Bureau of Economic Research.

Lacy Hunt [00:16:04] Arthur Burns later became chairman of the Federal Reserve. And the, and their early work, they classified inflation and long-term interest rates as lagging indicators now. And, and there's a very good reason why inflation and interest rates have to lag. So, so you go through a recession, and keep in mind, last year's recession was the worst since then of World War ii. It wasn't a normal recession. So if you, if you go through a recession and you start a recovery and inflation immediately begins to rise, well then what happens? Number one, interest rates rise. There've been some increase in interest rates, and that retards the interest sensitive sectors in inflations wages rise faster than prices. And so will wages begin to fall. And in a, in an upturn in inflation, people are incentivized to buy cheaper cost imports. And that's a subtraction from economic activity. So there's a very valid reason why a recovery does not coincide with an upturn in inflation. In fact, the average lead time between the start of a recession and the low point inflation is 16 quarters.

Vance Crowe [00:17:27] Whoa,

Lacy Hunt [00:17:28] 16 quarters.

Vance Crowe [00:17:29] That's, that's four years. That's like if you're trying to fly based on the inflation, you'd be, you'd be four years behind. And

Lacy Hunt [00:17:38] There are some other factors that are going in after deep recessions. The rebound in productivity is quite large. Productivity always rebounds after a recession. But at, we had deep recessions that ended in 49, 58 and 82. In those three cases, productivity rebounded 5%, and unit labor costs were unchanged. Well, productivity's already rising for now. The right now it's not able to compensate for the impact of the transitory boost we're getting from the debt financed activity are the supply chain disruptions. But in time the productivity will be beneficial. But, but my, my thinking is that, is that that productivity will, will probably do even better this year than 5%. Because when, when economies go through crises such as pandemics, what happens is that in innovations in the future are pulled into the present, the old statement that necessity is the mother of invention. And, and we've changed a lot of things in Europe, this con this conference, you know, you're I having

Vance Crowe [00:19:13] The podcast right now, we're talking because of that. Yeah, exactly. Yeah.

Lacy Hunt [00:19:17] So, so I think that we'll, we'll have larger gains in productivity. And so what we're experiencing now, which is being extrapolated into the future in my opinion, is, is I wouldn't do that. I wouldn't go there. And I think that the situation will be considerably different. Now, there's, there is a another aspect of fiscal policy that people are banking on. It's supposed to be a $2 trillion tenure year infrastructure program. And then there's $2 trillion of corporate and high income individual tax increases. Right now, we don't know what's gonna happen there. I mean, that's, that's up to the political and it, it does veer to be a little bit bogged down right now to me. But I mean, it just, politics is fluid. But let, let's talk about that. Okay, well, it is a two, it is called a $2 trillion infrastructure program. But the way I count the numbers, the infrastructure is only about 300. The rest is, is really social programs and they're phased in and so forth and so on. Now, I've seen a lot of infrastructure programs over the, over time, and they don't really have any sort of immediate impact on the economy.

Lacy Hunt [00:20:50] First of all, you, you gotta line up the state and local governments because they have to participate. You gotta do your architectural and design work, you gotta clear the environmental, and then you gotta let the contracts. And so really that's a very, very slow process. But then there's, the other aspect of the proposed legislation is there's $2 trillion in corporate tax increases and upper income individuals. I wanna tell you a lesson from history that I could give you lessons from Japan in the last 30 years in Europe in the last 25 years, where we've, we've tried similar packages of debt financing combined with tax increases, and they haven't worked well. But, but the, the most cot example from the US was in the 1930s. Now, I'm not saying that this is the 1930s, a lot of differences, but the policy response in the thirties should be remembered. The Great Depression had two components, one from 1929 to 1933, and then another component from 19 20 35 to 1937. And really the economy, although we technically came out of the recession in 37, was remained in pretty bad shape all the way up until the time that Germany invaded Poland.

Lacy Hunt [00:22:33] And we started selling goods to, we were non-combatant at that time. We got a benefit, you know, from everybody fighting. But, but it, in, in the mid 1930s, the Roosevelt administration pushed through a massive corporate tax increase. Well, the corporations tried to raise prices, but they couldn't. And so what they did is they let go of their employees and they cut back on capital spending. And that hurt the economy. You, which is illustrative of you. You can, you can lay taxes on the corporate sector and ask them to collect them. But, but the incidence of corporate taxes largely falls on the people, on, on households and individuals. So if, if the corporate tax increases go through, firms will rate prices if they can, I suspect they won't be able to, they will hire fewer people or pay them less. Or there's shift operations overseas. In other words, the corporate tax increase is a contractionary event. And it probably

Vance Crowe [00:24:01] At the exact moment

Lacy Hunt [00:24:02] When you're looking while bank goes on, is actually stunting, beginning to stunt acceptance of future projects. Now let's talk about the tax increases on upper income individuals. Now, we all know that a lot of folks did very well in the last several years, and income discrepancies have increased. I I think that's a result of federal reserve policy. Whether that's true or not is, is debatable, but that's my view. Okay. So we tax the upper income FDR actually taxed the upper income individuals in three successive stages. And in, in those cases, the upper income individuals did not really change their standard of living. They reduced their saving. Well for the aggregate economy, physical investment in platinum equipment must equal saving out of income. Well, those upper income individuals do about 90% of our saving. So if you, you hit them, they have less saving, then we get less investment. And what ended up happening is the same thing as the corporate tax hike. The incident falls on the ordinary folks. And so the current fiscal programs have been transitory beneficial, but that benefit is at its peak, it's gonna fade very quickly. And the other packages that are in Congress are actually, in my view, contractionary,

Vance Crowe [00:25:36] You know, you, we talk about the contraction in people not having jobs. I think for a lot of people right now, that is almost inconceivable because every restaurant you go to, every store you go to, there are signs. I mean, I've never seen a sign before in a restaurant that says, now hiring, we'll hire on the spot can start working today. And, but that's what's going on all around us.

Lacy Hunt [00:25:58] What's, what

Vance Crowe [00:25:59] Do you think is going on with the labor market?

Lacy Hunt [00:26:00] Well, that's, that's, it's, it's just, as I described it, there was a temporary upward shift in the demand curve from the, from the $2.9 trillion of debt finance activity. And then, then the other factor was the deterioration in supply that arose outta the pandemic. I, let me say that these, these supply side disruptions, which were currently evident do not last very long because of the law of supply, which is all has never been disproved, says that as the price of a good or service goes up, producers will produce more. The only times that their supply disruptions have, have really lasted for a long time is when a cartel, like the, the oil monopoly withholds products. Now oil is any lasting good. And so there're really not many good substitutes. But for most things there are substitutes for one of the substitutes that you can do is if you see the price shoot up, for example, of billing materials or homes or so forth, is you can decide just to wait, see the, does the 16% increase in prices in the last year? Is that a good time to buy or do you step back and and wait to assess the situation? And, and so I, I think that that everything that you're saying is absolutely correct, and that's what we have right now.

Lacy Hunt [00:27:41] Another thing that has exacerbated the supply unintended consequence of the federal legislation is there were very significant unemployment supplements paid. And so you could, for a lot of people, they can earn more by collecting unemployment benefits rather than returning to work. Well, you collect the unemployment plans in earn more, but you don't have to work. What are you gonna do? You're

Vance Crowe [00:28:18] Certainly not gonna go to work. Yeah,

Lacy Hunt [00:28:20] But that, but that process is changing because 21 of the states now, according to my account, including the big states of Texas and Florida, have said that they will no longer pay the supplemental benefits. So the, the federal legislation actually incentivized, took people off the market, but in time that will pass. And so the intense price pressures that we're seeing today are a reflection of the transitory fiscal benefit and the supply side disruptions, which I believe will pass. So, but what will not pass, what will not pass is the record level of debt that we have, which is a major restraint on economic activity.

Vance Crowe [00:29:10] You brought that up last time where, and you said like, this is what prompts disinflation and, and deflation overall, right? Where all of a sudden you don't wanna spend that money because the value has, so it's, it's, you, you think prices might continue to go down. And I can remember when you were saying that, me being like very suspicious of what you're saying, but now I I can see very clearly it's one of the first times you, that economics has moved quickly enough for someone like me to be able to perceive it just one year of time what's happened? And I can see a scenario where all of a sudden supply catches up and people are done spending, they probably overspent if they were spending money. And so now, now you've got a real problem with where do, where does the price of future goods go? But up until this year, I had almost thought of deflation as a, as a magical unicorn thing that doesn't really exist.

Lacy Hunt [00:30:04] Well, well said Vance. The world is in what I would call a debt drought. We've been experiencing weaker growth. We, from time to time have problems in response to the weaker growth of the pr of the problems such as the pandemic. The solution is to take on more debt, but the debt makes us weaker and undermines the growth. Well, last year we had a record rise in debt to GP globally and in the United States and in Europe and in Japan. So we're trying to solve an indebtedness problem, but taking on more debt, it's a major structural impediment. And when you take on more debt, the amount of GDP created per dollar of debt declines that economists call that the marginal revenue product of debt. And so as the, as you take on debt basically to support spending, it doesn't generate an income stream to repay principal and interest. And so consequently, the velocity of money falls and that's why the demand curve or the GDP curve shifts up in response to the first round of the debt financed activity. But as the velocity of money falls and so does the marginal revenue product with debt, then your velocity declines. We also have another major structural problem, not only in the United States, but worldwide.

Lacy Hunt [00:31:35] That is very disinflationary and that is horrific demographics, very poor demographics. Worldwide population growth is the slowest since the 1950s. The United States, since 1918, population's not growing in China. The birth rate is collapsing in Europe. The birth rate's weaker in China than it is in the United States.

Vance Crowe [00:32:04] Oh, and they're trying everything they can. They're throwing the sink at trying to get birth rates to go up and it's just not happening. This is

Lacy Hunt [00:32:11] No, because they pursued the one child per family for too long and they have a major mismatch between women and men. So in the United States, the average age is 38 years. You're pulling the average down. I'm pulling, but in China, the average age is over 40. In Europe, it's over 50. In Japan, it's over 60 in, in China, every 12 months that goes by, the average age goes up six months.

Vance Crowe [00:32:53] So let's talk for the listener just a little bit. Why does it matter?

Lacy Hunt [00:32:57] Go up, you, lemme lemme make my final point. So the people may say, well, doesn't fewer people and more older people mean that we have a sufficiency of bodies. Isn't this gonna be inflationary? Well, if you look at the record in Japan and Europe, places where they have weak demographics, they get lower inflation, lower economic growth. But the problem is that when you have poor demographics, you collapse investment, household investment in business investment. Think of the cost of having babies, raising a family.

Vance Crowe [00:33:29] I'm going through it right now, send them

Lacy Hunt [00:33:31] To college. But think, but think of the investment needed by business firms. Think about the investment needed by the community or the government sector, schools and so forth. And so the demographics is a major impediment to growth. Some people, some people say that this will be the Roaring 20 as well, the roaring twenties. We had tremendous demographics to start at the start of the roaring twenties. We were lightly indebted, we were heavily indebted by the end of the twenties. But we have these two major structural problems, dead overhang and the debt trap. And then we have deteriorating demographics, we're getting older, not enough babies, not enough family formation. And that's suppressing investment.

Vance Crowe [00:34:23] I've heard Tyler Cohen talk with Matt, I glacia about, well, why don't we just, if we, if the birth rate keeps falling, why don't we just do a massive immigration project in the United States, let a billion people in. And that might be tongue in cheek, but what do you think about radically increasing the amount of immigration if you can't get birth rates up?

Lacy Hunt [00:34:45] Well, the Nobel laureate, Milton Friedman said that immigration worked well for the United States. When people came to the United States for economic opportunity and they immediately came and they went into the workforce, they were creative and they helped expand. If they come in and they're basically young people coming in, many call 'em refugees or what have you, then what happens is that we have to borrow more money to finance them. And so it actually increases the debt load. You just can't, you just can't pull the immigration lever by itself. You have to fund it somehow. And we would've to fund it by debt, which would not work in my opinion.

Vance Crowe [00:35:45] You talked about have all these countries around the world are, do using debt in order to be able to make things move forward. I've heard people say, well, as long as the US' debt to GDP doesn't outpace the other countries, it doesn't really matter how much money we print because as long as they're printing more, we're gonna be just fine. How does that argument sit with you?

Lacy Hunt [00:36:10] No, that's not right. There are a lot of very serious peer reviewed scholarly research that indicate that our debt levels became excessive in the late 1990s. 1997 was probably the, the inflection point where the debt became deleterious. And we saw after that point in time a major decline in the marginal revenue product of debt from 1870 to 1997. The real per capita GDP grew about 2.2% per annum. That's your standard of living. Since 1997, we've only grown 1.2% per annum. So at the end of last year, the real per capita GDP per person was about, in round numbers 56,000. If we had been able to grow at 2.3, we would've had 25% more. We would've had 60,000. The debt is death by slowest strangulation. That's what it is. It grinds you down. And so the, what is, what is happening is Europe is more indebted than we are, and Japan is more indebted than Europe.

Lacy Hunt [00:37:43] So if you look at US growth relative to Japan and relative to Europe, starting in 1995, when the Euros formed in 1995, we were 4% larger than Europe in real terms. And we were 98% larger than Japan. Now we're 37% larger than Europe and 200% larger than Japan. In other words, it affects us all. And this is confirmed by what's happening to the velocity of money. In 1997, $1 of GDP resulted in $2 and 20 cents, $1 in money resulted in $2 and 20 cents of GDP. And now it's about $1 and 20 cents. But in Europe, money turns over only 85 cents. In other words, every dollar of new money in Europe only creates 85 cents of GDP. And in and in Japan, it's, it's less than 50 cents.

Vance Crowe [00:38:54] So you really start running outta steam. The the more you do, the less it actually propels you forward.

Lacy Hunt [00:38:59] Yeah. The the people assume that taking on the debt, if that were a real problem, that it would lead to some sort of blow up, a bang point or some sort of immediate calamity. But it, it's, it's death by slow strangulation. I, I would quote the poet, yes, Elliot, did you ever read the Hollow Men?

Vance Crowe [00:39:27] No.

Lacy Hunt [00:39:28] In that famous poem, he said, how does the world end? And he says, not with a bang, but with a lumper. In other words, the debt just grinds you down. That's what this, that's what a debt trap is. So we, we, we took on a lot of debt last year. You can say it was politically popular, socially necessary, but the fact of the matter is it's now a problem for us.

Vance Crowe [00:39:51] So what is the way out if it's a slow whimper, because it's a little bit like the water being turned up on the frog, right? Where eventually you're in boiling water and you, you, you know, you didn't realize it as you were going, it seems like it would take an abnormal or or unnatural form of government to come in and, and start making these really hard choices. What is the way that a, that a, is there any economy that's ever gotten out of this debt trap?

Lacy Hunt [00:40:17] Well, there, there's, there, there was a very fine study by McKenzie Global Institute. In fact, you can go on their website and get the study. They're the think tank of McKenzie. And the study was published in 2010, and they looked at, at 28 advanced economies that became over indebted in the time period in between 1900 and 2008. And McKenzie wrote that in all. And after their extensive study is an outstanding study, very well documented that in all 28 cases, the over indebtedness had to be cured by a sustained period of austerity, which they defined as a significant rise in net national saving. Well, who, who in modern democracies in favor of austerity. Now, usually what has happened in, in these 28 cases is they, they occurred because of some fortuitous reason. Like for example, a country that was a major producer of certain good whose price rose and the debt. We, we went into World War II as a very, very heavily indebted economy, massively indebted. And people think that it was the deficit financing of World War II that got us out.

Lacy Hunt [00:41:50] And we did have to run deficits that were 13 14% of GP In fact, until 2020, we never had a deficit in, in terms of net national savings that was as large as during World War II until last year. But, but there was, there was a side event that happened in World War ii. We had mandatory rationing. In other words, you, if you wanted 10 pounds of sugar, you couldn't get it. If you wanted four tires, you couldn't get them. You might get one or something. And so the household saving in World War II went up to 25% of net national savings, which covered the federal budget deficit of 14% of GDP. And so we paid off the debt of the 1920s, 1930s Britain at the end of World War II was very heavily eb. They had taken on the World War I debt and the heaviest proportion, they had debt from the roaring twenties. They had the heaviest proportion of World War II debt. The, the world community, the world financial markets would no longer lend to the British because they thought Britain was a bad credit. Well, it had a bad balance sheet. So what Britain did is they went into 10 years of austerity, not because they wanted to.

Lacy Hunt [00:43:23] They constantly changed political parties. No one was happy. They had to continue rationing all the way to 1956. They had to jettison their empire. Now, there were nationalist movements, but they had always been able to overcome the nationalist movements by their military. But they could no longer fund the military. So they gave up Indian Pakistan. Remember what Winston Churchill said about the British Empire by in the sun.

Vance Crowe [00:43:49] Oh, that the sun never sets on the British Empire.

Lacy Hunt [00:43:51] That's correct. Well, so they, the British, the British were a case of forced austerity. And so, so in the current environment, austerity is not really doable politically and in a democracy, unless of course someone forces it on you. But since we're all over indebted, who is to be the enforcement agent. And so what we do is we just keeping, taking on more and more debt. And what's amazing to me is that people think that if we just take on a large enough amount of more new debt, that will somehow kickstart the economy into a higher trajectory. And what we're gonna find out is this 2.9 trillion that we borrowed this year was a very fleeting benefit.

Vance Crowe [00:44:45] And so what is the shelter from the storm? I hear people like Peter Zhan saying, Hey, the US because we had vaccines out first, we're gonna have our economy started first. We're gonna get out way ahead of everybody else, and that's gonna be great for us. Is that a big enough shelter from the storm? How, how in the world does anybody that says, I see what, what Dr. Hunt is saying and I wanna get out of, of this trouble? Or are we just all on this Titanic together?

Lacy Hunt [00:45:14] Well, we, we did get a head start. We, we, we were the first out with major vaccination. And that gives us a, a marginal benefit. And, and keep in mind, both Europe and Japan, the client economically in the first quarter, I mean, that's already evident. Their numbers were down. We got a gain in the first quarter. The the but, but that, that benefit will pass. And some people say, well, productivity will save us. That will, the productivity will come along. That's what Bill Gates believes. But I don't, I don't think that productivity will save us. And I, I'll tell you why. And, and the, I'm influenced by the, the work of Dr. Robert Gordon Northwestern, who wrote a fantastic book called The Rise and Fall of American Economic Growth. And what Dr. Gordon points out is that in the heyday of American economic growth from 19, from 1870 to 1970, we had what he called five revolutionary inventions. The combustion engine was one of them. Transmission of electricity, modern sanitation, modern communication, pharmaceuticals and chemicals. Now think about the combustion engine.

Lacy Hunt [00:46:47] Think about how much demand that created for the other factors of production, labor and natural resources. I mean, you, you need to build the assembly line and you build highways and bridges and supply chains. So, so those revolutionary inventions in our heyday of growth enhance the demand for labor and raw materials. Today, what Dr. Gordon is saying is that innovations are more evolutionary. For example, if you register with a scanner, you get rid of some people, but you don't really require any more in the way of, of resources of, of land. In other words, the, these evolutionary types of, of technology don't enhance the demand for the other factors of production. And we're seeing this on the assembly line and we're seeing it a lot of different ways. And so technology could, could do that. But I I I think that right now we don't have that type of clear technology available to us.

Vance Crowe [00:48:14] That's fascinating. And it makes total sense to me. Like everything we see going on right now, if you make a computer faster, right, all that means is maybe you need less people or the amount of time it took you to do something goes down. So if you're paying hourly workers, that's, that's going down as well.

Lacy Hunt [00:48:29] That's Dr. Gordon's point. Exactly.

Vance Crowe [00:48:32] And, and I think like that's something that we haven't really been talking about. It's almost been completely ignored. As you look out on the horizon, you know, I often say the news doesn't tell us what to think. It tells us what to think about. And that the best thing you can do is not be guided by what the news tells you to think about. But what do you think is important, what do you think are the, the signals in the market that people should be paying more attention to that, that are not often talked about?

Lacy Hunt [00:49:03] Well, I, I think that, I think that the markets themselves only provide very limited information about what the economy will do in the future. I, I think that there was a time when the stock market was something of a leading economic indicator, but I don't think that's the case anymore. And I, the reason I say that is that as a result of, of becoming so heavily indebted, we're getting this pronounced decline in the velocity of money. So if the Fed increases the money supply 20%, which is what it's done this year, the last 12 months, the, when the velocity of money falls, the liquidity is trapped in the financial markets. And so this liquidity bids up the price of financial assets, forces down their rate of return turn. And it, and, and the corporate managers are forced to put more of their assets in financial assets rather than real assets.

Lacy Hunt [00:50:38] But growth doesn't come from financial assets. Growth comes from physical investment implication, investment of new technology In economics, one of the most fundamental relationships which universally applies is that investment, physical investment must equal saving out of income and saving out of income has three components. Private saving, government dis saving, and then net foreign saving, which is the inverse of the, of the trade exit. Alright? Since 1929, the net national saving was 6.5%, which means that real investment, 6.5%. Well, last year the household saving and private saving went up, but the government de deficit went down and deteriorated. And so net national saving was, was not much above zero. It's historically 6.5%. And so if you, if you look at the historical record, the current level of net national saving is only worse during oh eight and oh nine and during the 1930s. So when, so when you're taking on this debt, you deploy, you absorb your net national saving and there are no funds to go into physical investment and that undermines your growth.

Lacy Hunt [00:52:16] This is another mechanism there, there's another mechanism that, that undermines your growth here. When the government borrow a lot more money to, to support, you know, people in distress because of the pandemic or solve problems, they they do, they do so with the best of intentions, but intentions have nothing to do with whether the policy is helpful or not. And, and so as the government debt goes up, the government share of economic activity goes up. But that means the private share goes down. In other words, you, you keep moving toward a more governmentally oriented economy. Well, you, your income and wealth doesn't come from the government sector, it comes from the private sector. And so what we're basically doing is we're the folks that run the DMV and the post office are getting bigger and bigger and the private sector is getting smaller.

Vance Crowe [00:53:27] Man, that's a, that is a scary, scary thought, right? Because once those bureaucracies grow, it's almost impossible to ever shrink them. So that's like permanent

Lacy Hunt [00:53:35] Impossible. That's, that's why the BS developed this term debt trap. You take on too much debt, it slows economic activity. And the only solution that anyone can come up with is to take on more debt in the hope that somehow that this, the debt will be, behave differently this time than it's been been behaved. And so you get further and further into the debt.

Vance Crowe [00:53:59] So the question that I see on everybody's minds, particularly over the last year is the rapid rise of cryptocurrencies, particularly things like Bitcoin. How does this factor into the models? Because it's a, it's a seemingly a totally new thing. Is it new to you?

Lacy Hunt [00:54:17] I'm not really an expert there and, but I'll, I'll just give you, I I don't know whether where it's going, you know, and I really can't offer any advice, but it, it seems to me is, so the, so we've had a 20% increase in the money supply, alright? The velocity of money is falling, so the money's trapped in the financial markets. So financial asset prices are being bid up, right? It's obvious. Obvious. And housing, which is really more a component of the financial markets than the real 'cause it's so heavily financed, is also bid up. Alright, well, the, the, the net result is that as the financial asset prices are bid up and the returns are bid down, bid down, people are casting about for something that may have more value, but they're motivated by the excess liquidity and the low perspective returns that are available in what we call normal assets. But, but from an economist standpoint, and I don't, I don't mean this to be an endorsement or non endorsement because this is not, my field to an asset, to an economist must have net present value, number one.

Lacy Hunt [00:55:50] In other words, you gotta have a stream of future earnings and we need to dis discount that future stream to today's stocks net present value. Well, I don't, I don't see a stream of earnings with, with the, with the bitcoins. Okay. The other possibility is that you have something that's a permanent store of value. Now to an economist, a permanent store of value would be something like gold, silver, or platinum. Now we know that gold, silver, and platinum don't always retain their value over short periods of time. They're very volatile, determined by the marketplace just as is Bitcoin. But we do know that over the long sweep of history, they've maintained their value. So the the thing that I would, I would recommend to people and that are investing, they need to think about it in terms of, of this issue of the traditional assets need to have net present value or permanent store value. And that's, that's just about as much as I can do, as I can do for you.

Vance Crowe [00:57:12] I think that's fantastic. I, I've, I had to ask people about Bitcoin all the time, and that's the most novel explanation I've heard. And one that makes sense to me. As you were talking, I was imagining all of the innovation that has happened around the, around the Bitcoin space. For example, I know a guy up in Alberta that has started capping gas wells that normally just burn off the natural gas as they're pumping the oil out and turn them into Bitcoin miners. But that's nothing like the automobile where, where the innovations were roads and bridges and rubber factories and things like that. It's nowhere close to what that was.

Lacy Hunt [00:57:48] No, no, not at all.

Vance Crowe [00:57:50] Well, Dr. Hunts

Lacy Hunt [00:57:51] Highly different category.

Vance Crowe [00:57:52] This has been a pleasure. I am so glad we can do this. I hope we can do it once a year. I have to say that this was the largest economic lesson that I've ever gotten was listening to you talk last year and, and really getting like, I, I, I mean, to be totally honest, I thought you were a little crazy the last time we talked, and now I'm like, oh man, he's right.

Lacy Hunt [00:58:14] I know. Well, you're very kind. I, I had a lot of help along the way, you know, I had some great professors, three different universities, you know, was in the fed, some big organizations exposed to some very bright people, and they gave me a helping hand. I get this by myself,

Vance Crowe [00:58:36] You know, and that actually gives me a, a good way to tie up this thing. You and I were connected with a man named Alan Dorsey, who was an excellent man. He passed away not long ago, but how in the world did you ever come in contact with people like Alan, who were out there making exceptional investments? Very, very broad-minded thinkers.

Lacy Hunt [00:58:57] Alan was one of the finest men I ever knew. And he was, he had a tremendous sense of investments in the world, and he was a stock investor. He was my pleasure to manage money for him for a long time. And I got to know him, his wife Susan, and he, he was, he, he, he, he, he was able to find use for, he, he basically specializes in trying to find unique situations in the high technology sector. But he, he found my macroeconomic perspective of some value to him. It's one of the greatest privileges that I had, that I had that association with Allen. What a fine man, who we will miss him. He was one of the, he was one of a kind,

Vance Crowe [01:00:02] I i, it was a crazy coincidence that we both knew him, but he spoke very highly of the interview that you and I did together. And my dad, who knew Alan always said he was so generous in sharing what he knew, but he never, he never pushed it on you. He just said, Hey, these are things I'm thinking about.

Lacy Hunt [01:00:20] Very nonjudgmental.

Vance Crowe [01:00:21] Yeah, very. And so I, I thought it would be worth

Lacy Hunt [01:00:23] Extremely well

Vance Crowe [01:00:24] Read. Yeah.

Lacy Hunt [01:00:25] Most, well, well, well read, well read men that I've known in my lifetime.

Vance Crowe [01:00:31] Well, with this Dr. Hunt, I am grateful that you came on and maybe we'll get to talk again next year. I, I know your time is very valuable, so thank you for coming on.

Lacy Hunt [01:00:40] My pleasure. All the best to you.