Submitted by Taps Coogan on the 2nd of November 2018 to The Sounding Line.
Hoisington Investment Management’s Lacy Hunt recently spoke with CNBC’s Rick Santelli about why the US national debt is growing considerably faster than the budget deficit would suggest, and what the outlook for the economy and interest rates are.
“Just over the last 12 months, federal debt has (increased) $1.27 trillion. But here is an interesting fact, while that occurred the actual deficit is only up $804 billion. Why don’t you explain to viewers that discrepancy.”
“Well, there’s a deficit in off-budget items of more than a half-a-trillion dollars. So the actual deficit is $780 billion and then there is $500 billion or more off the budget (deficits) for a total increase of one-and-a-quarter trillion. That’s the answer, pure and simple.”
“How nervous should we be over the size of the (debt) issuance of the last handful of years? It doesn’t seem to be showing up. Interest rates actually seem rather well behaved though at loftier levels.”
“The main determinant of the… long treasury rates is inflationary expectations, defined by the Fisher Equation, and the inflation rate, in our view, has peaked for the year and is turning down. There has been a major deceleration in bank credit and money supply growth. The Fed is draining liquidity from the rest of the world. The dollar is basically at an all time high expect for a brief episode in the early 2000. This serves as a deflationary pump. We have a synchronized monetary deceleration going on around the world. The inflation rate is heading lower and ultimately that means that the bond yields will be heading lower not higher. Supply is not a major issue other than for very short term periods because the increase in federal debt works with a negative multiplier, not a positive multiplier. It’s debilitating the economic activity and this will actually reinforce the restrictive monetary policy that’s underway…”
The idea government debt supply is only a short term issue, that it reduces overall credit creation, and that inflation is headed lower is a somewhat contrarian view at this point, and certainly worth contemplating. There is more to the interview, so enjoy it above.
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