Taps Coogan – May 7th, 2021
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Hoisington Investment Management’s Dr. Lacy Hunt is the mind behind one of the best performing actively managed treasury funds in the world. He is also known as one of the most articulate treasury bulls, having correctly called the overarching trend of falling interest rates and growth over the last 35+ years.
Having being largely silent over the past year, many have been wondering whether the current environment of rising inflation has changed Dr. Hunt’s outlook for interest rates.
As the following interview with ‘The Financial Quarterback‘ reveals, the short answer to that question is ‘no.’ While Dr. Hunt concedes, as he always has, that monetary and fiscal stimulus can cause transitory increases in inflation and economic activity, exactly as we are currently witnessing, he believes that debt driven stimulus is fundamentally a deflationary policy in the long run. Accordingly, he remains a strong believer that increasing debt levels and aging demographics will ultimately push interest rates and growth lower. As he puts it, the debt crisis ‘ends not with a bang but a whimper’ of ever lower growth.
For what it’s worth, Dr. Hunt notes that if the Fed were to make its liabilities legal tender, i.e. go from buying debt to simply printing money, he would change his outlook.
His prescription for getting out of the debt spiral: a politically impossible period of austerity where we start living within our means again as a nation. In other words, abandon all hope.
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“For what it’s worth, Dr. Hunt notes that if the Fed were to make its liabilities legal tender, i.e. go from buying debt to simply printing money, he would change his outlook.” I don’t understand. When the Fed “buys” government debt isn’t that the same as monetizing it? If the Treasury sells debt to the Fed, (usually indirectly through the “private” banking system), doesn’t the government then spend trillions of new currency created out of the newly issued bank credit? In other words, the government is printing money, and the Fed is enabling it through deliberately convoluted modern money mechanics.… Read more »
The difference between printing money and lending it and printing money and just giving it way is that the first is inflationary only while the Fed is expanding its balance sheet and even then, in diminishing returns because an ever larger portion of the new monetization is just going to repaying old debt and doesn’t really represent new spending. Plus, when the Fed stops expanding its balance sheet you’re just left with a highly indebted economy which is deflationary.
Printing money and giving it away on the other hand is pure inflation.
OK in theory and a sensible argument for rationalising central banking but in practise WHY would the fed stop expanding its balance sheet (over the longer term)?
EVERY TIME it ‘tries’, it has had to swiftly reverse course choosing the ‘lesser’ of the twin evils, inflation over deflation.
https://tradingeconomics.com/united-states/central-bank-balance-sheet
Well that’s the heart of it. For exactly that reason virtually everyone, including the Fed and Dr. Hunt seems to be seeing inflation rising in the short term (months to a year or two) But the Fed isn’t so reckless that they are going to completely ignore massive inflation overshoots for years and years and don’t forget the diminishing returns part of monetization. They have to keep accelerating the expansion to overcome the deflationary impact of ever more debt. And as we’ve seen, long term rates have started to rise all by themselves. Whenever the Fed takes its foot off… Read more »
The fed has literally created USD7trillion since 2008 in keeping interest rates low to stop the financial system from the exact deflationary debt implosion you seem to be predicting. WHY would they reverse course and exacerbate the problem they have tried so hard to avoid. Quite the opposite, I think inflation is desirable and hyperinflation moreso as the only long term solution to eliminating all this debt. I don’t believe the fed can ever permanently reduce its balance sheet. But it is interesting to consider both perspectives and which way the knife will fall from its edge. Time will soon… Read more »
Great comments. This is the trillion dollar question. I share interviews warning about inflation all the time and there is no doubt that inflation is higher than the Fed says. But generally speaking people have been making a similar prediction about looming high or hyper inflation since 2008 and interest rates have kept falling to new lows every couple years and inflation has happened, and its worse than the Fed reports, but its hardly been hyper inflation. IMO, the reason Hyperinflation didn’t happen (at least prior to now) is because of what Dr. Hunt describes and the overarching dynamic still… Read more »
Whilst reading this article a little late, I enjoyed the intelligent, reasoned & polite exchange of views..(if only politics could be so: indeed, if only life could be so..)