What is deflation? U.S. Treasuries expert Lacy Hunt explains how money's buying power changes.

Vance Crowe [00:00:02] As the crow flies on the Vance Crow podcast, Dr. Lacey Hunt, welcome to the podcast.

Lacy Hunt [00:00:13] Nice to be with you.

Vance Crowe [00:00:14] So we're speaking with you. You are down in Texas, is that right?

Lacy Hunt [00:00:19] Austin, Texas, yes.

Vance Crowe [00:00:21] And I called you because I have had a long standing debate with several of my friends and people I respect about the pressure that will be created on our financial system with the amount of money that has just been injected into the economy because of Coronavirus. And one of the people that I respect most in the world, a man named Fred Barton said, you could do no better than talking to Dr. Lacey Hunt about what he thinks are gonna happen to us treasuries and how that impacts either inflation or deflation. So here we are today, sir, how would you describe your fund and what you do as a day-to-day living?

Lacy Hunt [00:01:00] Well, I'm in the investment management business. I'm not in the mind changing business. I'm a McElroy economist by training. I have three degrees, including the PhD in economics, which I earned in 1969. My fields were macro economics and, and international economics and finance and econometrics specialized in contra econometric model building. In the early part of my career. After after graduating from Temple University in Philadelphia, I went to the Federal Reserve Bank of Dallas. William McChesney Martin was Chairman of the Fed. Not many people remember his name. And when I left Arthur Burns was chairman. I'd had some success building econometric models. And I was offered a position with Chase Econometrics, which was the econometric subsidiary of Chase Manhattan. And Stacey Econometric was run by Michael Evans, who was co-author of the Wharton Econometric model with Lawrence Klein. I worked closely with Evans built the first large scale econometric model of the financial markets based on monthly data.

Lacy Hunt [00:02:33] And that was published in dynamics of forecasting financial cycles in 1976. That book was reviewed very favorably on the editorial page of the Wall Street Journal. I had an opportunity to do some work for the great David Rockefeller, who was running Chase Manhattan. And from after I left Cha Chase, I was the chief economist for the largest bank in Philadelphia. And then for 15 years, I was the chief US economist for the HSBC group and its predecessors. And I joined Hoisington Investment Management Company in 1996. Native Texan. And I, I enjoy being in the investment management business. Hoisington management probably has the, the best record in, in fixed income management for whatever time period you want for the last 30 years and the latest 12, 12 months, our standard fund, the Wasatch Washington Treasury Fund is up over 50%, which means we were positioned for this big decline in rates that took place with a long duration.

Lacy Hunt [00:04:09] We had substantial capital gains that augmented our coupons. And so we, we manage funds for institutional clients, but individuals can invest with us through the fund for which we are the sub-advisor. The fund is really a relatively small portion of our business.

Vance Crowe [00:04:32] So when you say you do fixed income, you're talking about US treasuries, things that aren't moving around.

Lacy Hunt [00:04:39] We, we only invest in the treasury portion of the fixed income market. We don't do agencies or corporates or municipals. We're strictly duration managers. We want to be positioned and long maturities when we think interest rates are coming down. And we wanna be positioned in short maturities when we think inflation and interest rates are going up.

Vance Crowe [00:05:01] So when I look at the news and see $2 trillion is being injected into the economy. My overly simplistic model of the world is you did not create more goods. You didn't create more services, you just added more dollars chasing around those goods and services. So it seems apparent to me that inflation is obvious, but I'm told by several people that that's not the way to view the world. What do you think?

Lacy Hunt [00:05:28] Well, it is not the, the Federal Reserve undertook very similar programs to what they're doing now. Back after the great financial crisis in 2008 and 2009, it was called quantitative easing. And the Federal Reserve bought a large quantity of the federal debt. It was supposed to accelerate economic activity lead to higher inflation, cost a collapse in the dollar, especially since the federal budget deficit was also simultaneously rising very rapidly. However, that's not the monetary, the monetary economics is very complicated and the, the Fed can buy government securities agency securities. But when the transaction clears, essentially what happens is the, the sellers of the treasury debt give up on average a seven year maturity obligation. And when this clears and goes through the banking system, the banks then have a deposited Federal reserve overnight deposit. So the principle effect is really just to lower the average maturity of the consolidated government balance sheet. When you consider the, the, the Fed is a part of the US government, the banks do have reserves which they could convert into loans, and this would lead to an acceleration in the money supply.

Lacy Hunt [00:07:15] However, for that to happen, you, you've gotta meet a lot of hurdles. Number one, the, the banks have to have the capital to put their reserves at risk, and they also have to be able to make a determination that putting those reserves at work in the form of lending that the borrower is going to repay. And since they don't know for sure whether the borrowing is gonna repay, they have to price in the risk premium that the borrower will default. And by the same token, the borrower has to make a rather complex decision as to whether they wanna put their capital at risk by borrowing additional funds and whether they, if by borrowing the funds, should they not be able to repay it, will that cause that firm to lose its viability become bankrupt. So the bottom line is this debt is an increase in current spending in exchange for a decline in future spending debt take on debt, current spending goes up, future spending goes down, unless the future debt generates an income stream to repay principle and interest. If you generate income streams to repay principle and interest, it's all good.

Lacy Hunt [00:08:49] Unfortunately, the debt that we're taking on, while it's politically popular, humane necessary because people are hurting, what we're basically doing is we're we're financing day-to-day living needs, we're keeping business afloat that would've otherwise failed. This does not generate an income stream to repay principal and interest. So I don't know if you ever studied economics, but one of the most important concepts is the production function, which says that that, that the GDP or our output is determined by technology interacting with the three factors of production, land, labor, and capital. And if you overuse one of the factors of production, such as as borrowed funds initially, GDP will rise. And if you continue to overuse that factor of production, GDP flattens out. And if you still overuse it, it turns down diminishing returns. And what has happened is we've long since passed the point of diminishing returns. In the case of government debt, we have, there's a lot of very serious econometric work that indicates that when, when government debt gets to about 50% of GDP, there's a deleterious impact on growth goes to 60, the deleterious effect is greater, the negative repercussions are greater.

Lacy Hunt [00:10:26] At 70, 80 and 90, the econometric studies indicate that growth against trend is, is lost, is is reduced by about a third. In other words, if you were growing at, let's say 3% in real per capita terms, you'll only grow two. Now we were at 107 before the coronavirus hit, and by the end of this year, we're going to have a government debt to GDP ratio of something somewhere around 125 to 130%. Totally unprecedented. The diminishing returns is non-linear. It's a parabola. You cannot think in linear terms. And a lot of people don't want to do that. They think this is business, this is accounting, it's not accounting. If I were a physicist told you that you had to grapple with non-linearities, you would say, okay, well I understand that things can be elliptical or parabolic, but that's what happens. Now, we have a lot of, a lot of cases that have occurred historically. And if you, if you pursue the high debt road, what what happens is economies get weaker and weaker and weaker. And as the growth gets weaker, then the, you get disinflation, inflation falls to very low levels, and then eventually you get deflation.

Vance Crowe [00:11:54] What's the difference between disinflation and deflation?

Lacy Hunt [00:11:58] Disinflation is when the inflation rate falls. Deflation is the point at which the falling inflation rate takes you through what's called a zero bound. In other words, you cross from, from some small degree of inflation to a situation where prices actually fall. And here's the difficulty that we have currently. We came into 2019 with the world, a hundred trillion dollars more in debt than it ever was heavily over overindebted. And the global economy was doing very, very poorly, very poorly. Germany, Italy, Japan were either in recession or very close to it. China's economic growth in 2019 was the slowest in 29 years. And the only reus, and it was the lowest in 29 years, is that's all the data they have. It was, it was doing very poorly. And perhaps one of the best metrics of why the global economy was in such trouble is that in 2019, the volume of world trade declined by about a half a percent. And that's only the third annual decline in world trade volume since 1980. It happened during the deep recession of 82 and the deep recession of 2009.

Lacy Hunt [00:13:32] And historically, world trade volume grows faster than GDP. Normally, world trade volume grows at five and GDP at two and a half and it's the, it's the globalization that pulls you forward. But last year, because of the problems of the global economy, world trade was declining. The coronavirus hit at a very inopportune time. The, the domestically we were over indebted. All of the major economies of the world were extremely over indebted. The global economy was over indebted and the emerging markets were over and did it. And so what, what the world has been trying to do for a long time is to solve this indebtedness problem by taking on more debt. Now then we get hit by this event that comes outta left field. And what are we forced to do? We're forced to go further into debt. And so the, the steps that are being taken, while they're necessary politically mandated popular, they help people in dire times, what they're going to do is they're going to actually make the potential for economic growth much weaker. So as a consequence, once we contain the coronavirus, and I don't know when that will be, but when it, when it's contained to a reasonable degree, we will get a sort of a pin up demand recovery and economic activity, but it won't last very long.

Lacy Hunt [00:15:09] And then the economy will struggle domestically and globally. We're not, we're not going to have a v-shaped recovery. It's gonna be very difficult because all this new debt that we're taking on is gonna weigh on our ability to grow. And if you go back to the production function there, so member production function has technology inter interacting with land, labor and capital land has been neutral for a long time. The demographics, which are an important fundamental contributor to growth, have actually been deteriorating quite substantially. Not just in the United States but globally. The population of the world last year grew at about the slowest pace in seven decades in the United States. In 20 18, 20 19, our population growth was, was about 0.48%, which was the lowest since 1918. And that of course, ironically was the year of the Spanish flu. Our population's been coming down because, because birth rate has fallen to the lowest on record. In addition, immigration has fallen legally and illegally. And so we're, we're growing at 0.45% before the coronavirus hits.

Lacy Hunt [00:16:46] Population wise, Europe is only growing at 0.2. China's population actually declined Last year. China, if you'll recall, had the one child per family, and then they didn't, they didn't want the girl babies. So they got a 100 million gap between young boys. They want to get married and childbearing women

Vance Crowe [00:17:19] In international relations terms, they call that bear branches. And it, it's the start of a lot of civil unrest because men that can't get married don't settle down. They get in a lot more trouble.

Lacy Hunt [00:17:32] Well, I am not able to comment on that, but it, it's, it's certainly not conducive to having babies, is it? No. And and then in Japan, population is declining by about, by about four 10% per round. And moreover, not only are the population growth rates coming down, the average age of these major economies is getting older. We're the youngest, the United States is the youngest, which is helpful to us. Japan is the oldest, but the Chinese economy is getting old very rapidly. Our average age is about 38 plus. And in China it's 40, but in two years it'll be 41 every two years. Their average population is, is getting a year older. And older economies are less vital. Babies are very expensive. You get, you get a surge through the youngsters. And so, so the, so this coronavirus is hitting when the global economy was stumbling all around the world. And when all of the world is extremely over indebted, and now they're being forced to take on more debt to try to solve the problem, which actually over the longer run, it may get us through the short run, but it's gonna make us weaker, not stronger.

Vance Crowe [00:19:03] And when you and I were talking beforehand, off camera, you had mentioned that deflation, you, you imagine that prices will actually go down. And when I'm sitting here as somebody with money in a savings account, it would appear to me that, that the price of things going down would be really good. Now my money can go further.

Lacy Hunt [00:19:24] If, if you, if you have, if you are a net holder of financial assets, you'll be be you'll be better off you, the debtor will be worse off. Let me just give you a couple of parameters with, on what I'm talking about. If you look at the three worst post-war recessions in the Lord since, since 1945, from the peak of inflation in or before the recession to the trough in inflation to the trough, after the recession, the, the best measure of inflation dropped an average of about 430 basis points. In other words, if it were seven, it went to three, something like that. Okay. So and that's the average. But this time we're starting when the inflation rate is 1.7, we don't have a high inflation rate. We have a very low inflation rate. And moreover, one of the wildcard in the inflationary story is what happens to the most critical of the raw materials, which is energy. If you look at these three terrible previous recessions, the oil price was actually unchanged. It went up in two of them and it went down in one. And the oil is, oil is kind of plays to its own tune.

Lacy Hunt [00:20:57] It's it's based on supply and demand characteristics and so forth. But what we are looking at right now is a record setting percentage decline in oil prices, which is the, is the largest of the commodity prices. It's not a term of inflation, but it it adds to this, this disinflationary. So the, the risk is that we're gonna go from, from 1.7% rate of inflation down to minus two. It's, it's a mild deflation. It's not serious like it was in the, in the Great Depression. But the risk is that it's going to be persistent. It's gonna hang in there. And, and there are a couple of reasons for that. Number one, we have these deleterious effects of all of his death that we're taking on that are mandated by the circumstances. We have no choice other than to try to help people through the matter. Okay? So moreover, once, once we get our pen up demand recovery and economic activity right after, after the coronavirus is contained, we're going to have tremendous amounts, actually I should say unprecedented amounts of what economists call of the output gap, which is the, the amount of redundant resources that we have in labor and capital.

Lacy Hunt [00:22:33] And because of this huge output gap, unprecedented output gap, and the fact that we're gonna struggle out, it's going to take us six to nine years to shrink this output gap and get it back to where it was in 2019.

Vance Crowe [00:22:55] Now when you say the output gap, do you mean that because we're gonna have such high unemployment, we're gonna have people that aren't working and then you're gonna have capital assets that aren't being used or, or a machinery that you're not actually putting to use. So e even if you had people that wanted to buy it, you don't have enough to be able to get that suppliers?

Lacy Hunt [00:23:16] That's precisely what I'm talking about.

Vance Crowe [00:23:18] Okay.

Lacy Hunt [00:23:18] The two main components of the output gap are labor and capital resources. They just won't be needed. And so when you, when when there is a lot of extra resources, then the, the whole, the owners of those resources are forced to sell their services, their, their product at lower prices creates a margin squeeze. It puts downward, downward pressure on the inflation rate. And so the, the significant risk here is that is when we go to deflation, the output gap suggests it will be staying with us. And probably we will see something that most people are not familiar with. Wages will actually fall. They won't have to fall dramatically, but they will, they will be persistently downward. Well, that's what what firms who managers who know nothing about measuring deflation are going to have to grapple with. And the employees don't know about having wages cut. And so it's going to create a, a very, very challenging situation. So in deflation, what you, you, you don't wanna be a debtor because let's say you borrow a dollar today and we have a 2% deflation rate a year from now, you're gonna have to pay back in purchasing power dollars that are worth a dollar and 2 cents. And the other aspect of deflation is that although the treasury rates come down, the corporate rates go up and the private borrowing rates go up because in, in, in, in deflation, it will, it will raise the risk premium that the non-governmental borrowers will be able to repay.

Lacy Hunt [00:25:12] And so you are gonna have an ironical situation. The government yields come down, but the other yields don't really, and, and so it will be a, a difficult process.

Vance Crowe [00:25:28] Why is it that you can't, if if deflation is the problem, and we watched in a place like Zimbabwe, their inflation went wild because they just turned on the printing press and there were so many more dollars out there that it brought the, the price of things back up. Why is that not the solution for, for this potential depression? Or why couldn't the Japanese just print their way out of deflation?

Lacy Hunt [00:25:53] Okay, well, in the case of the United States, we are governed by the various acts of the Federal Reserve. There, there are several acts that are critical. The Federal Reserve was set up in 1913, but there were critical acts when we went off the gold standard and under the Federal reserve under law, the, the Federal Reserve cannot spend to pay for the treasury's bills. That's not prohibited. I mean, that is prohibited. Now, you, you could rewrite the Federal Reserve Act and give the federal Reserve the ability to pay directly the treasury's bill bypass the banking system. But it's what we in economics call making the central bank's liabilities legal tender. And that has been done in many cases. It was, it was done by Shang Kai, China in the 1930s by the Germans in the 1920s. There was Yugoslavia and Hungary did it at the end of World War ii, two well-documented cases. There's a famous case in Bolivia in the 20th century in the United States, and there are other cases in Latin America. And it's basically what was done without a banking system. In the final stages of the Roman Mesopotamian and Bour empires, they became extremely over indebted and they couldn't pay their debts with, with, with, with, with gold coin.

Lacy Hunt [00:27:36] And so what they came upon, the idea was instead of giving gold to pay their mountain of debts, they asked folks to take a worthless metallic coin. And of course, what happens in that particular case, if you start printing money or issuing worthless metallic coin, then the price level begins to rise very rapidly, all Zimbabwe. And what would happen in that case is that that will make virtually everyone's lives totally miserable. Because, because if you, let's say we decided to give everybody $10,000 that was printed, not financed, but printed then by the, by the time the last folks got their $10,000, it wouldn't be worth what it was to the folks that got their checks first in Shang, Kai sh China. They, they began to learn that the, the, the fund, the end that they were getting were depreciating so rapidly in purchasing power that they demanded that they be paid first. And so what, what, what what holders of money do is they will not wanna hold money and the only thing they will want to hold are commodities that they can use or trade. It's what, what we in economics call Gresham's law.

Lacy Hunt [00:29:11] The bad money chases out the good money. And, and so if you resort to the printing money, you, you can, you can then get the hyperinflation. But let me tell you, everyone will be totally miserable because you see it, if everybody's holding commodities and unwilling to hold paper, there's no role for the financial intermediaries. And so to, to then obtain something you need, you have to go around and find someone else who has a double coincidence of wants to your own. Now, in the old days when, when, when we saw these instances of money printing, we were not nearly as specialized. And so you could go into your local town and you could find someone that produces eggs and another person that produce meat and, and bread. And let's say you produce candlesticks. And so you could, you could have some capability, but we all have specialized skills. So it's, it's very interesting when, when Chairman Powell introduced his latest measures on the 9th of April, he held a brief webinar, which is well worth listening to. And he made it very clear that the Federal Reserve has the power to finance it does not have the power to spend.

Lacy Hunt [00:30:51] And we, we just saw an instance in which a major central bank is engaging in money printing. The, at the same time that Chairman Powell said, the Federal Reserve does not have this authority to spend the Bank of England advanced roughly a half a trillion dollars directly to the British Treasury. Now they said it was temporary, but to it had, nevertheless, it is a crossing of the Rubicon. It is a crossing of the red line. And obviously there are exigent circumstances because of the, of the difficulty. And it, it is conceivable at the present time that you might even be able to get away with it for a little while because there are gonna be a lot of excess resources. But ultimately hyper hyperinflation would ensue, economic conditions would become turbulent. And in the past you've had social unrest. So the, the printing of money is, is really a desperate measure. Very, very desperate measure.

Vance Crowe [00:32:07] I think that maybe one of the fundamental mistakes I've made, or one of the oversights I've had is that I never recognized that there was a difference between printing it and just injecting it into the economy and financing it through the banks in that it is the expectation that that will be paid off and that's how it's different. So you can run an interest rate and be potentially making money off of it. Is that, is that an under, is that right?

Lacy Hunt [00:32:33] That you, you, you basically got it. The, one of the critical writers of the Federal Reserve Act was a Virginia Pollio politician by the name of Carter Glass. I don't know if you know, he also was responsible for the Glass Stegel Act. And when, when the fellow reserve act was being written, he went to the two, a leading monetary economist at the time, Irving Fisher, Yale and Charles Whittlesey at the University of Pennsylvania. And he said, we, we want to give the Federal Reserve the ability to create liquidity, but we don't want to be able to give them the ability to spend, we don't want to allow the US Central Bank to become like a Banana Republic Central Bank. And so the, and under our system, the treasury sells the debt, then the Fed can buy from the treasury. So initially the public buys the debt from three month bills out to 30 years, average maturity of seven years. And then so they swap a seven year maturity government security for a one day deposit at the Federal Reserve for which they receive a very minimal minuscule rate. Those deposits at the Federal Reserve do not circulate freely. They can be used to make loans, but as I described to you earlier, making of the loans involves the banks putting at risk their capital and also the borrower putting at risk his capital.

Lacy Hunt [00:34:20] And one of the things that has happened in here is that these circumstances have greatly undermined the, the financial stature of our banks. We're going to see a lot of loan loss reserves, a lot of loan losses as a result of this disruption. And the banks will have to charge that off. And so their capital is going to be eroded. Moreover, the borrowers are going to see that they do not need new plant, nor do they need as many employees as they needed before. And so consequently the likelihood that the banks would be reaching a deal with their customers to make additional, additional loans and money are not likely. So initially there's a spike in the money supply, which we're seeing right now, but that is the first round effect. It occurs in the first instance. And then the deposits that the, the banks receive from the Fed are just sitting idly at the Federal Reserve. That is, unless of course you take the, of allowing the Federal Reserve to directly fund the treasury. Now this, this has been advocated before in the United States. There was during the administration of, of Franklin d Roosevelt, something called the Reconstruction Finance Corporation, the RFC.

Lacy Hunt [00:35:58] And their original idea was to send their accounts payable ledger to the Fed and have the ped pay the bill. But the, the courts ruled that that was a violation of the Federal Reserve Act. And there been various other proposals. And as Governor Powell reiterated in his recent webcast, the Fed does not have that. And by the way, for my money, we do not want them to have it if, if, if we give it to them in some sort of emergency situation than what we will have, we'll be much worse than what we have now.

Vance Crowe [00:36:34] So it's one thing for you to be managing treasuries and people's assets and trying to figure out what's going on over the long term. What about your family? Are you telling them, Hey, be careful about how much debt you're taking out now or have cash at your house? Like how are you in, in a time of chaos instructing those that are closest to you?

Lacy Hunt [00:36:58] Well, it, we, we at Hoisington management eat our own cooking. In other words, we don't do one thing with client money and something else with our own money. So, so we have been heavily investing in longer term, longer term high quality debt. But I have been recommending to, to my children and to friends that this was not a time to take on debt. And unfortunately our corporate sector has done exactly the opposite. The corporate sector is more heavily leveraged now than they've ever been. And last year we saw a, a record increase in corporate debt, and by the way, capital spending in real dollars was unchanged. So we had a huge increase in debt, but no increase in capital spending. And what they were doing is they were buying their shares back. They were actually leveraging the balance sheet. And

Vance Crowe [00:38:06] Can you explain what that means? So I worked at a company where they did that a lot, but a lot of people don't understand, I mean, because it buoys the stock price. So if you're holding shares, people feel like you're making money that way.

Lacy Hunt [00:38:19] They do, but it does, it makes the bank, and by the way, the argument was that their earnings were secure and that their, their cost would be low. Well, their earnings are not secure, as we've seen, the coronavirus has severely shaken the income stream for many. And in addition, as you, as the risk of deflation has emerged, the treasury rates have come down and the corporate yields have risen. And so one of the great names in corporate finance said that the key to sound financial management of a corporation is to sell more of your shares when the share price is high and to buy the shares when the shares are low. But what were firms doing the last several years, they were buying their shares at a high price and issuing debt. And that the man that said that was the late Benjamin Graham, who was the father of investment analysis, the key to sound financial management is to sell your shares when the price is high and then to buy the shares back when the price is low. They did exactly the opposite.

Vance Crowe [00:39:38] And this was heading into coronavirus that they were not in strong financial positions. So when, when this goes on, then how does that, how does that play out then what, what happens to a company that's taken on that debt?

Lacy Hunt [00:39:51] It made them very vulnerable. Now the corporate sector is very vulnerable and, and they're going to find that they're, the cost of borrowing is going up to them rather than down. And in addition, what they're going to find is that their earning stream and their cash flow stream is much weaker, weaker than they had assumed this was an event that came out of left field.

Vance Crowe [00:40:17] So if you're investing in treasuries that are seven years out, I mean, who, who was it Khrushchev that

Lacy Hunt [00:40:23] We've actually been, we've been out out longer than that. We've been out close to 30 years. That,

Vance Crowe [00:40:28] And I was looking up your numbers. I mean, as far as I can tell you guys have returned over and over and over again, positive returns doing very well. When you look out and you're buying treasuries that are 30 years out, Khrushchev wouldn't even look more than five years out for his plans. How do you have confidence in that distance of time?

Lacy Hunt [00:40:50] Well, we, we, we don't, we we, we only have confidence in the next several years. In other words, our investment strategy is for the next three to five years. And so we're not buying them to hold maturity, we're buying them as long as the inflation rate is going down. The bond market has a very important fundamental relationship that explains the movement of long treasury rates. It's called the Fisher Equation. It's one of the pillars of macroeconomics. It says that the risk-free long rate is equal to the real rate plus expected inflation. Now what's happening here is the real rate is coming down, the growth rate is getting weaker. This was the, this was this expansion that we went through was the worst since the end of World War ii. And by the way, I'll just give you a number. From 1790 to the period of high indebtedness in the late 1990s, the economy grew 2% in real per capita terms, which means the standard of living grew 2% per annum. Since then, the last 20 years, the economy in real per capita terms has only grown about 1.1%. We've lost one third of our growth rate during this period of high growth. And so the, we, we saw the real rate coming down and we saw inflationary expectations declining.

Lacy Hunt [00:42:24] Now, now if you think about that equation, the government bond yield is equal to the real rate plus expected inflation. The recession is gonna make the real growth rate lower. So one of the components of the Fisher equation is gonna be pushing downward, the inflation rate is gonna go negative into deflation, which suggests to us that the entire treasury yield curve is going to press down on the zero bound and that it's gonna be stuck there

Vance Crowe [00:43:00] For years.

Lacy Hunt [00:43:02] It's the way it looks at the present time. But as I said, we're in the investment management business, we're gonna look at everything that's being done. One of the things that is being advocated right now is that the country engage in money printing something called modern monetary theory, which is neither modern nor theory. It is, it is usually using a worthless item to pay for existing bills. And so we we're in a difficult situation here. Deflation is a risk. And so there is a, a clear possibility that the Federal Reserve Act could be rewritten. And as I said, the Bank of England has already stepped into the Rubicon.

Vance Crowe [00:43:54] And so when you look at the idea of, of individual citizens getting a check, you know, we just $1,200 out to people making under, I don't know, $120,000 a year and then, and then potentially now 2000 more dollars coming in next month per taxpayer. What does this do to the economy when you're taking money and you're giving direct payments to directly to consumers?

Lacy Hunt [00:44:21] The problem it allows the consumers to get by. Well, but the here the government issues, the debt, the debt will not stay at 107% of GDP. It's on the way to 125 to 130. And if you overuse a factor of production, you get less output. For example, we had a two do a $2 trillion stimulus package in 2009 shovel ready projects. You remember that?

Vance Crowe [00:44:51] Yeah.

Lacy Hunt [00:44:52] And it was, it was, it was gonna be financed by the Federal Reserve quantitative easing. We were told it was gonna lead to higher inflation, lower dollar, stronger your economy. Did any of that happen? No. Made the weakest recovery since the end of World War ii. So what this does, it allows those families that have lost income to continue spending, but the debt is still there. And the debt will, will, will, it will serve as a overhang on growth.

Vance Crowe [00:45:29] Yeah. That current spending didn't result in better producing in the future. It just kept you alive.

Lacy Hunt [00:45:36] It, it, all it did is replace what would've not been spent. It allowed people to pay their bills. That's why I said it was popular. Why it was humane. It almost gave no, there, there's no doubt that it should have been done, but the net. But, but I as an economist have to analyze the longer term consequences. So I, I acknowledge that it was politically popular. I acknowledge that it was humane, it was the thing to do, but it nevertheless has a negative economic consequence on grow.

Vance Crowe [00:46:10] So I've worked in the biotech sphere and, and agriculture where there are people that have wide ranging opinions about how things ought to be done. And one of the things that I find very interesting is if you find a person that is clearly very well read on something, a good question to ask them is, who is someone that you really respect? But you completely disagree with somebody that is a high caliber, but they, they view the world very differently than you do.

Lacy Hunt [00:46:38] I'm, I'm just not in the mind changing business. And I don't, I don't go there. I just defend my own statements.

Vance Crowe [00:46:46] Okay.

Lacy Hunt [00:46:46] I'm not looking for any fights.

Vance Crowe [00:46:49] Then maybe the last question, and this is something I've asked all of the, all of the people that have been on, is, what do you think the world will look like in two weeks?

Lacy Hunt [00:47:01] Well, I'm really, I'm not a short term person. I really, I, to me, markets over the short run are very irrational. They're influenced by psychology and a whole host of heuristic trading methods. The fundamentals only exert themselves over time. If I were to be asked to write a book on the factors that influence the bond market over the short run, it would be a very, very long book. But the short term influences are not important. What is important for the bond market? The government bond market is the fisher equation, which says that the, the yield is equal to the real rate plus expected inflation. And as an investor, not a trader, I keep my eye focused on that fundamental relationship.

Vance Crowe [00:48:00] Well, Dr. Hunt, this has been a wild ride and I am very grateful that you were willing to be so patient and explain these ideas to me. If people wanted to learn more about your fund and your work, where would they go?

Lacy Hunt [00:48:13] They could write me@laceyathoisington.com.

Vance Crowe [00:48:16] Alright, well thank you so much for your time and we'll check back in with you later.

Lacy Hunt [00:48:21] Okay.