The End Game Ep. 6 — Lacy Hunt
This is a Williams and Fleck Podcast.
Together with Bill Fleckenstein, Grant Williams is interviewing Lacy Hunt of Hoisington Investment Management Company (HIMCO).
Bill and Grant welcome a man who is the absolute epitome of the phrase ‘a scholar and a gentleman’, Lacy Hunt, to The End Game.
The three discuss arguably one of the greatest trades of the century: Lacy and his partner, Van Hoisington’s 40-year bet on deflation.
Lacy talks about staying the course, the methodology they used to simplify their framework and what it might take for them to change tack after all this time.
The perfect counterpoint to Russell Napier’s appearance in Episode 5 of The End Game, Lacy uses his encyclopedic knowledge of econometric analysis, financial history and regulatory frameworks to explain why he remains resolute in the face a rising number of calls for the return of inflation.
The audio version of the podcast you can find on Grant Williams “Things That Make you Go Hmmm…” website or on Itunes and any other podcast app.
Let’s start the Interview!
Grant Williams 0:00
Before we get going, here’s the bit where I remind you that nothing we discussed during the End Game should be considered as investment advice.
This conversation is for informational and hopefully entertainment purposes only.
So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.
And now on with the show.
Welcome, everybody to another edition of the End Game.
Our search continues for the answers.
Joining me as always, Bill Fleckenstein.
Mate, how are you?
Bill Fleckenstein 0:45
I’m doing just fine.
Thank you.
Given that our prior podcast was with Russell Napier, who has a rather radical viewpoint compared to where other folks have been, regarding inflation.
It’s just wonderful to be able to talk to Lacy Hunt who’s been so right on the other side of things.
It’s gonna be great to have these two podcasts sandwich next to each other.
Grant Williams 1:11
Yeah.
Exactly right.
Our guest this week, as Bill just said, is Lacy hunt, who has been extraordinarily right, extraordinarily strident about his views for, to my mind, a couple of decades now.
He’s the one guy — three decades, four decades, who knows.
Bill Fleckenstein 1:31
It’s a one amazing batting average.
Grant Williams 1:34
No matter what arguments have been put up against him and his partner, Van Hoisington, these guys have stayed solid, they’ve stayed firm, they’ve stayed resolute and they’ve stuck to their guns and they’ve been right this whole time.
I think, what Bill and I want to try and find out from Lacy is — Are they still there?
Are they still on that bandwagon?
Do they see any signs that might shake them off it?
If so, what might they be?
As Bill said, what better bookend to our last podcast with Russell Napier, then to talk to Lacy Hunt.
Why don’t we do that?
Bill Fleckenstein 2:08
Let it roll.
Let’s do it.
Grant Williams 2:10
Lacy.
Lacy Hunt 2:12
Hello.
Grant Williams 2:13
How are you?
Lacy Hunt 2:14
Very well.
Thank you.
How are you, Grant?
Grant Williams 2:16
I’m very well and let me introduce you to Bill Fleckenstein.
You haven’t met before, I’m surprised to hear.
Bill Fleckenstein 2:21
Nice to meet you.
I was lucky enough to have beers with Van, Jim Grant and a couple of other guys, I was speaking at a Shad Row conference.
That was a real treat and obviously you guys are on the same page.
I’ve been running money about as long as you guys have.
I remember your firm, back in the 80s and 90s, when Van first started making his calls.
Pretty impressive.
Lacy Hunt 2:47
I’ve been in the business 52 years.
Grant Williams 2:50
Wow. 52.
Lacy Hunt 2:52
I went into the Federal Reserve with my brand new PhD when I was 26 in 1969 and Arthur Burns was chairman of the Fed, I was at the Dallas Fed.
When I left the Dallas Fed to go to Chase Econometrics, to work on large scale models with Mike Evans.
Chase Econometric was a subsidiary of Chase Manhattan, which was run by David Rockefeller, who I did a number of projects for during my tenure there, so, I have been around.
Grant Williams 3:31
Yeah.
You have been around.
The amazing, Lacy, is — and this is something that Bill and I really wanted to pick your brains about — of those 52 years, a big part of that time, you and Van have had this bet on, essentially, which is a rodeo ride that so many people have been shaken off along the way and you guys have what — Bill and I were chatting before this, what we think is arguably one of the greatest trades of the century that you guys have managed to put on and so, I know Bill had a couple of questions that he wanted to ask you about that.
Rather than try and paraphrase, I’m gonna let him ask them himself.
Bill Fleckenstein 4:12
Okay, let’s go.
Lacy Hunt 4:13
I want to tell you all something you may not know.
In the 70s, Van was at Texas Commerce, I was at Fidelity in Philadelphia, which was the largest bank in Philadelphia and I was running the commingled Fixed Income Fund in the trust department, and he was doing the same at Texas Commerce.
Both of us, independently of each other, went into cash equivalents and sat out the bear market in the 70s.
In fact, there have been quite a few articles about the fact that I called the bear market of the 70s and the bull markets since then.
Not an easy thing to do.
Grant Williams 4:51
No.
Lacy Hunt 4:52
Many people don’t realize that there was a 14-month bear market — mini mini bear market — in the late 80s and we sidestepped that as well.
Bill Fleckenstein 5:01
In other words, what you’re just saying is — that was a really tricky wicket to step around, being in cash for the really nasty bear market, and then getting the sideways down stuff in the late 80s and then from 90 till now, it hasn’t been smooth sailing, but one of the things I’m fascinated to try to understand from a money management standpoint is — over that, basically 30 years of being dead right about this, forgetting the sidestepping you did before.
Where there are very many times, along the way, where you guys had to scratch your heads and say:
“Gee, could this be changing?”
Are we still gonna get it right?
Did you get shaken much at all?
Was it pretty easy to just stay with it?
I’m just fascinated to know what it’s like behind the scenes to do something so well so right for so long.
Lacy Hunt 5:55
The discipline was always the same.
The approach was always the same.
What Van and I have said to our clients, repeatedly, is that we’re going to take a multi-year horizon, at least three years or longer.
That we’re going to stay focus on the trends and inflation.
We’re Treasury investors only, duration managers, not many people do that.
We had an advantage that the uninformed don’t understand.
There is no standard measure of value for the stock market.
There are many competing measures, but there is none that prevails.
In the bond market, there is a standard and it’s known as the Fisher Equation.
The Fisher equation, which was developed in his famous book in 1930, Theory of Interest, and it says that the risk-free long rate is equal to the real rate plus expected inflation.
If you’re able to capture the trends and real economic growth over time and the inflationary environment, you’re going to be on the right side.
Over that time period, the real growth rate was coming down, and the inflation rate was coming down.
Now, since 1990, there were 10 years that we didn’t look too smart.
But we had tried to prepare our clients for that.
We’ve said to them repeatedly that if you want us to manage from quarter to quarter, year to year, then don’t hire us.
If the volatility bothers you, don’t hire us.
Do yourself and do us a favour, because Van and I both strongly believe contrary to the prevailing view, that the short term is not predictable.
There are too many extraneous factors, unimportant factors.
In addition, the market looks at all these indicators but does not know how to wait.
That’s extremely critical.
Also, the market does not understand that economic numbers do not come out in a vacuum and that one of the most important points for evaluating the market are initial conditions.
But economies don’t start at the same place every year and so you have to be able to discern the initial conditions and you have to understand the weights.
Van and I both had training in econometrics, together we fit many thousands — functions, consumption, investment, inflation functions, interest rate functions — and so we have an understanding of what’s important and what’s not, but we never lose sight of the initial conditions and we had the standard of the Fisher Equation.
We stayed with it, we still stay with it.
That’s how we did it.
We took 10 pretty bad years.
But they didn’t matter.
They didn’t matter at all, really.
Bill Fleckenstein 9:11
Lacy, was that 10 years collectively?
Lacy Hunt 9:13
For the whole time period.
Bill Fleckenstein 9:15
Right.
You didn’t have 10 bad ones back to back.
Okay.
Lacy Hunt 9:18
We never had more than one bad year.
Bill Fleckenstein 9:19
Right.
Okay.
That’s what I assumed.
Lacy Hunt 9:21
We had never more than one bad year.
Bill Fleckenstein 9:23
I got it.
Was any one of them — given your thought process, that you’ve shared a tiny bit with there — was there any one of those periods trickier than the other where you had to actually wring your hands a little bit or did it not rise to that level?
Lacy Hunt 9:39
Well, we always wring our hands, and we always do our due diligence.
We relied upon our own understanding and I think that we’ve stayed abreast of the peer-reviewed research.
We realized that economics is a social science.
It is not a physical science, but there is very important research that continues at scholastic institutions and other research facilities, and we’ve tried to stay abreast of it.
I would have to say that probably the most important understanding that we had is that we are very familiar with the economic theory.
We also have done a great deal of hypothesis testing to sort out valuable economic theory from economic theory that does not matter and I would say that there were a couple of things that were provided important guidance to us.
Number one, we have felt that, contrary to the conventional wisdom, debt accelerations do not lead to higher interest rates, they may lead to higher interest rates for some transitory period of time but debt accelerations are nothing more than an increase in current spending in an exchange for a decline in future spending unless that debt is productive in the sense that it generates an income stream to repay principal and interest.
We had felt, and you can see this in our writings, that we had rejected the notion of a Keynesian multiplier on government activity.
When I left Graduate School in 1969, there were a couple of propositions that I’ve strongly believed in.
They were both key to understanding monetary policy.
Both of them, together, said that monetary and fiscal policy are powerful.
The first proposition is that there is a powerful government expenditure multiplier.
When I first started studying economics, the expenditure multiplier was between four and five.
Today, even the extreme Keynesian will not argue that it’s much more than one, but I would say, by the late 1990s, certainly by the early 2000s, we felt that the government expenditure multiplier was slightly negative.
In other words, if you engaged in $1 of deficit spending, the government spending goes up by $1 but total private spending declined by more than $1 and that there was nothing to be gained from it other than this transitory boost that occurs for a very limited period of time.
By the way, the boost from the deficit-financed activity, the transitory boost, is getting shorter and shorter, and the multiplier keeps getting more and more negative.
The second proposition that I had believed in when I left Temple University, and this served me in great stead in the 1970s, was that the velocity of money will stay.
In the 1970s, money supply growth was 10 and nominal GDP was 10.
That was the time period in which Friedman was operating and the empirical evidence, that was available to Friedman, said, the velocity of money was stable.
However, in the early 1980s, it broke out of that stable range and we were able to pick that up and we have felt that in highly indebted economies, the velocity of money declines and I will tell you that if you read Fischer’s great article in 1934, because mea culpa, the article that he wrote to explain why he missed the Great Depression, so agrees, one of the things that he said is that he had assumed that the velocity of money was stable but in highly over-indebted economies, the velocity of money falls.
What happens when you become extremely over-indebted?
Monetary policies capabilities become asymmetric.
If the Fed wishes to tighten conditions, the monetary policy still works, but in this circumstance, such as we have today, where the economy is extremely over-indebted, the debt is highly unproductive and we can have objective verification of that, the velocity of money falls, and so, since 1997, velocity peaked at $2.20 and today it’s around $1 to $1.30 and a fraction, it hadn’t declined every quarter certainly and hadn’t declined every year but it’s been in a major secular downturn.
One of the things that we were quick to pick up on is that the other economies of the world, major economies, Japan, Europe, China, are more over-indebted than we are, the productivity of their debt is weaker and the velocity of money is not only declining there, but it is even below what it is in the United States.
For example, money in Europe is not even turning over one time in a year, it’s down to 0.9 times and the velocity of money in Japan and China are both around 0.5 times per year and so we’ve operated on those two propositions.
We actually put forth a theorem that received quite a bit of recognition, in which we said, the government debt acceleration ultimately leads to lower, not higher interest rates, and we have shown people the empirical evidence, not only for the United States but for the other major economies of the world.
Then all you have to do is chart it.
Chart government debt to GDP on the right axis or the left axis and then put the government bond yield on the other and you’ll see that it’s an inverse correlation.
We have a lot of evidence, serious evidence, that when government debt to GDP gets to about 50% of GDP, there is a deleterious impact on economic activity.
When the government debt ratio rises above 65%, it becomes very serious and increasingly so.
Now, what I’ve just described to you is a nonlinear relationship.
That’s important.
Economics is not accounting, let me make that clear.
And more need not be more.
What we were able to figure out, using the production function — the production function says that real GDP economic output is determined by technology and interacting with the factors of production, land, labour and capital.
If you overuse one of those factors of production, let us say, debt capital, initially, the GDP will rise but if you continue to do so, you overuse that factor production, real GDP flattens out, and then it turns down, that’s called diminishing returns, it’s nonlinear.
Now, the academy mind will say, if you borrow and spend $2 trillion, and that doesn’t work, then try $4 trillion.
But if $4 trillion doesn’t work, then try $8 trillion, but they do not understand that the relationship is nonlinear.
By the way, we all have production functions, including the Chinese, the fact that there is a command and control economy, that doesn’t matter, you overuse the factor of production, you’re going to get weaker economic growth.
What is happening, the economic growth rate is coming down very substantially, taking the United States from the founding of the republic in 1790 to the period in which we reach these high overindebtedness levels in the late 1990s.
The real per capita GDP growth was 2% per annum.
Since then, we’re only growing 1% per annum.
As investors see that happening, the growth rates coming down, they’re willing to accept a lower real rate.
That’s part of the Fisher Equation, the real rate plus inflationary expectations.
So the real rates are coming down, and there’s evidence that investors are now even willing to accept an even lower real rate because the economic potentiality is deteriorating, not just in the United States, but everywhere you look, the real rate of growth is deteriorating.
In addition, the inflation rate is coming down.
This is a very powerful influence.
Once you understand that in a general equilibrium model, the Fisher Equation prevails.
It’s one of the pillars of macroeconomics.
Grant Williams 19:28
You know, Lacy, it’s interesting that you’ve boiled down an incredibly long and successful career to something very simple to understand.
Obviously there’s a temptation, these days, to overcomplicate things with the sheer amount of data that we can get, that we can dig out, or we are presented with.
When you pin your flag to that mast, the Fisher Equation, and simplify things and take away all the clutter.
Does that make it easier for you?
Because you have this phenomenal knowledge of history and so I wonder whether that knowledge of history, does that help or hinder, in terms of trying to understand what’s going on now and how the previous parallels might come into play when you’re trying to boil it down to something as simple as, let’s build this around the Fisher equation.
Lacy Hunt 20:22
The economic history is essential.
I was trained in econometric model building and I did first of all built reduced-form models.
They were published in peer-reviewed journals, the Journal of Finance, the Financial Analysts Journal.
Then then I built the first large scale econometric model of the financial market for Chase Econometrics, that was my first book, Dynamics of Forecasting Financial Cycles.
One of the biggest mistakes that I made in their earlier models was that I estimated the parameter over too short of a time period, check all of my early work, all of the early work of Friedman, most of the other economists of my generation, the generation before me, were basically estimating parameters from the early 1950s forward.
By the 1970s, you had 20 years of data and then by the end of the day, you have 80 years.
Where those models went wrong, is that that data sample was too limited.
It became apparent that we needed to look at all of the data.
In part, thanks to Friedman, part thanks to funded research at the National Bureau of Economic Research, we have the monetary data and the outline of the national income and product accounts.
One of the things which we did was to test our hypothesis from 1870 forward and the view was, my view was, that if a proposition is valid, then it should hold up, regardless of whether you have an income tax or you don’t, whether you have a central bank, or whether you don’t, whether you’re on the gold standard, or whether you’re not on the gold standard, or whether you’re on a fixed exchange rate standard or floating rates.
In other words, none of these initial conditions should matter in a model that is truly accepting by the data.
It was important to make sure that our propositions held over the entire sample period.
I would say it became very important and one of the things that that we did, with the help of David Hoisington, who’s worked very closely with me, we engaged in a lot of archival research and we piece together the historical record.
I think that I’m just really not interested in 20/30/40/50 year timespans and people who draw propositions from them, they may be lucky, but they will not be consistently right.
Economic propositions have to stand the entire sample period.
I would say that one of the things that I’ve benefited from very significantly, being trained when I was trained, is that I was taught econometrics, but I was able to study under some professors that still taught economic history and the history of economic theory and so we looked at the European and US economic history.
That was not my major.
My appeals are macroeconomics, international economics and finance and econometrics.
But I took those courses and I had the benefit of that qualitative analysis because it’s very important to understand in my view, economics is tough and reading press releases from governmental agencies or hearing the interpretations in the financial press, people may think that makes you an economist, not in my view, it is a very serious business.
One of the things that a couple of my professors told me when I left Temple University, they said that they had done the best for me that they could do but they reminded me that economics is a science and that hypothesis testing and technological advance will occur.
You have to stay abreast of that.
I’ll just give you one little example.
When Adam Smith wrote The Wealth of Nations, it was a tremendous book, he made one major flaw and that flaw was that price was determined by labour content.
Adam Smith’s labour theory of value.
Karl Marx’s whole system is based on a labour theory of value.
Well, we know that’s wrong.
It was not until 1870.
Smith writes in 1776, it’s almost 100 years later, before William Stanley Jevons, conceptualizes the demand curve, and then it takes another 20 years after that, for Alfred Marshall to say that price is determined by the intersection of demand and supply.
We become smarter.
The tools available to us, the availability of data, people have recreated historical data in a more complete framework.
Our understanding is not standing still.
One of the things that I get really leery of was when somebody starts lecturing me on what they learned in econ 45 years ago, because there are certain things, particularly in microeconomics at whole, but macroeconomics, a lot of the propositions there that are taught in the schools are simply not valid and haven’t been valid for a long time.
Grant Williams 26:20
There’s plenty of people who spent a lot of time trying to figure out analogues, going back in history to where we are now, to try and understand what’s happening and how it might play out.
Obviously, the most commonly cited one, for where we are right now, is the Great Depression.
That’s the one that people seem to continue to go back to, whether it’s the roaring 20s and then the bust or whether it’s the pandemic damaged economy, whatever it is, there seems to be something in that period of time, which gives people something to hang their hat on.
Is that the most sensible period to look at, or if not, which periods are you guys looking at as a potential clue to what might happen from here?
Lacy Hunt 27:03
I think in the United States — this year we’re going to hit a new peak in total public and private debt to GDP, which will eclipse the peak that we reached in 2008/2009.
The peak 2008/2009 was the third secular peak since 1871, one occurred in the early 1870s, then 1929/30 in 2008/2009.
In each of those cases, we were all extremely over-indebted.
The surge in the debt to GDP ratio reflected both, the numerator and the denominator of the equation.
The debt went up, the GDP went down.
In each of the three earlier cases, the result was disinflation, the inflation rate came down unequivocally.
In some of the instances, the fallen inflation was enough to cross the zero bound.
In other words, we not only got a fall in the inflation rate, but it took us into negative territory.
There are no exceptions, extreme over-indebtedness leads to a weak economic activity.
Now, thanks to Fisher’s great article, in 1934, Fischer had not only discussed what happened in the 1930s, but the 1870s and then an earlier case in 1838.
Now, the one in 1838 — We don’t really have hard data, but it was very, very similar.
There had been massive over-speculation in the building of the canals, we started with the Erie Canal but then we built more than 100 other canals and then we built the early steamship lines.
We financed it all with debt.
There was over living, there was overconsumption.
The panic hit in 1838, Van Buren is President, he had no idea.
In the 1860s, after the Civil War, we started building the Transcontinental Railroad.
This was done on debt.
Then we built the feeder lines.
We, first of all, built the central route, transcontinental railroad.
Then we built the northern and the southern routes, feeder routes, the industries that fed the railroads.
There was overconsumption, over investment.
Ulysses S. Grant is president, he is no better equipped to deal with what happens to him in 1873 then Van Buren was equipped to deal with, in 1838.
And then we have 1929.
The economy was even more indebted than in those two previous cases but the consequences were the same.
We had disinflation, and in some cases, the disinflation was severe enough to lead to deflation.
Now, after 2008/2009, contrary to the 1870s, and the 20s, and 30s, we were not able to deleverage the debt and get it back to normal.
We managed to bring it down somewhat and here, the pandemic has hit, and we have now established, within 12 years, a new peak, going all the way back to 1870.
That’s not a good sign.
It’s a very bad sign in my opinion.
Bill Fleckenstein 30:31
Lacy, I have a friend of mine who runs a bond fund.
He is a big fan of yours and your letters, and he has exactly the similar viewpoint that you do, except he has now, potentially concerned about his thesis, which is very similar to yours, although probably not backed up by as much data as you have, that the introduction of government-guaranteed loans to the banks like the PPP here and the one in England, in Germany and also in Spain, might be something to kick the EMS into gear and that concerns him, but he weighs that against the unproductive nature of these deaths.
Can you comment on those two kinds of opposing forces, please?
Lacy Hunt 31:21
Okay.
Okay, so we had a situation back in March and April, in which the private credit markets sort of panicked.
The Federal Reserve came in and they did things that are really not directly authorized by the Federal Reserve Act.
They justified by the exigent circumstances rule.
Personally, I’m not comfortable with what they did, in terms of the law, but no one else seems to object, so we’ll let that pass, but when the Federal Reserve comes in and engages in all of this lending, they’re able to stabilize the markets.
Therefore, firms that would not have been able to stay in business are able to stay in business.
People hail that as an accomplishment but we’ve seen maybe two dozen of these instances in Japan.
We’ve probably seen close to a dozen instances in Europe, where firms really were not worthy of credit, but through heroic efforts, it’s a term that Charles Kindleberger used, a great MIT economist of an earlier generation, the Fed comes in and stabilizes the markets, and that does work over the short run.
However, it blunts two of the most important relationships of the free market economy.
One of them is, it blunts Schumpeter’s creative destruction for economies to grow and to thrive, there has to be failure.
Resources have to be allocated to the up and coming ones that are going, that have the new ideas and new concepts and have the ability to grow rapidly.
It also blunts moral hazard.
The Japanese have now not only extended the operations to credit but to the stock market, but really, the stock market in Japan hasn’t done well.
More importantly, the economy has not done better.
So, the Fed comes in with all of these powerful lending tools and it stabilizes the markets and everyone says hooray, but the job of the economist is to understand the initial effects — the seen and the unseen.
A lot of people don’t want to be concerned with the unintended consequence but what we know from the Japanese, the European and the Chinese experience, that when you undertake these actions, you swart creative destruction and moral hazard.
You’re basically removing two of the most important mechanisms that allow the free market system to outperform the rest.
Now, initially, of course, there is going to be an increase in the money supply and the money supply, year over year, has shot up to 25%.
That is fastest money supply growth, probably, in history, certainly the highest since the World War Two.
However, the equation of exchange doesn’t say GDP equals money.
It says GDP equals money times velocity.
Now, money is a very complex variable, and one has to take into account all of the factors that influence money, but velocity is also very complex.
There are a lot of things going on here.
Now, when the Federal Reserve comes into the system and they lend — When they buy government securities, the net result is, generally speaking, that the average maturity of the federal debt goes down, and the banks are forced to take overnight deposits to fit.
All it does is change the maturity of the consolidated debt of the Fed and the Treasury.
This short term stabilizing effect is very pronounced.
There’s a first-round increase in the money supply.
The banks have tons of reserves and many people assume, that because they have tons of reserves, they will lend it out.
But that’s not what determines bank lending.
The bank lending process is very complex.
The banks, to be able to put reserves to work, they have to have the capital base to take the risk that the loans will not be repaid.
Also, the banks have to price the loan to make a profit, and that includes not only their interest costs, and their various overhead costs, but it includes the risk premium.
Moreover, the borrower has to be able to pay all those costs plus the risk premium.
When we had QE one, two and three, the Fed expanded the balance sheet, money supply went up, people said the Fed was printing money, and there was certainly a large first-round increase in money, not as large as today.
Folks went out and assumed that that would lead to hyperinflation the dollar would decline, commodities would rise.
But what happened?
The velocity of money fell, there was a transitory boost in the economy but it didn’t last that long.
Well, in my view, this is really no different, the first-round increase in money supply is greater, but I think it will be more than compensated for by a decline in the velocity of money.
There is one caveat.
We’ve just seen where the Fed has done things that were not authorized under the Federal Reserve Act.
Now, it says in there explicitly, the Fed cannot buy corporate and agency securities or lend them or lend to those entities, but they did it.
They do have the exigent circumstances rule but exigent circumstances to me don’t imply that you can buy whatever assets you want.
There is a growing risk, that the whole nature of the Federal Reserve Act will be changed and that it will not be the same act that we have operated when the Federal Reserve Act had to be rewritten after we left the gold standard in 1934.
That job mainly fell to Senator Carter Glass of Virginia, who was a pretty smart fellow and he went to the two leading monetary economists of the time, Irving Fisher at Yale University and Charles Whittlesey at the University of Pennsylvania, by the way, Whittlesey gave me my macroeconomic orals, I was getting my MBA at Penn.
What Glass told them is that we want to give the Fed great lending power, but we do not want them to be able to use their liabilities for spending.
In other words, the central bank’s liabilities are not legal tender.
Now, to be money, you have to meet three criteria.
It has to be a medium of exchange, a store of value and a unit of account.
When the Fed buys government securities, once it clears, the electronic deposit stays on the books of the Fed.
The banks are holding on overnight liability.
Those do not circulate, they can lead to a first-round increase in the money supply.
As we’ve seen, currently, it’s a substantial increase in the money supply.
However, it is not legal tender.
There are folks who would like to make the Feds liabilities legal tender.
In other words, have the Fed directly pay the bills, make them a medium of exchange.
I don’t know what will happen there but there is that risk.
If that happens, either by rewriting the Federal Reserve Act or by saying they need to do it for exigent circumstances, then the whole picture would change and in very short order you get very rapid inflation.
Gresham’s law would take effect, bad money would chase out the good.
For the money, to have value — money must have value, if it does not have value, then you get very rapid inflation and we’ve seen this happen in Chiang Kai Shek’s China, in the 1930s, we saw it in Germany after World War One, we’ve seen two great documented cases, one in Hungary another one in Yugoslavia at the end of World War Two.
Before we had banking systems, we had three great empires that became extremely over-indebted — Mesopotamian, Roman and Bourbon.
They basically could not obtain additional loans from moneylenders or what rudimentary banking there existed.
What did they do?
They issued a worthless metallic coin.
Having the Feds liabilities legal tender would be the same equivalent.
That would change the whole.
Grant Williams 40:49
Yeah, it’s a great way to put it.
Lacy Hunt 40:52
We have seen that outcome.
If we stay under the current system of monetary rules of the Federal Reserve Act, then we have a standard to go by from a very outstanding research project, that was done by McKinsey Global Institute in 2010.
You can go on the McKinsey website and you can read it.
They looked at 24 advanced economies for the time, from 1900 through 2008, that became extremely over-indebted.
They followed the buildup in debt and the solution.
What they found was in all 24 cases, the over-indebtedness had to be solved by what they called austerity.
That’s their term, McKinseys term, not mine.
They defined austerity as a multiple-year significant rise in the saving rate.
In other words, if you think of indebtedness as living beyond one’s means, then you have to live inside your means.
What we have today…
There’s no political will to go to austerity.
Currently, we’re trying to basically take on more debt to solve an indebtedness problem.
There’s an inherent fallacy and that concept.
It is not working in China, it’s not working in Japan.
It’s not working…. it’s not working anywhere nor has it ever worked.
So, ultimately, there is some risk at some point in time that you, what I like to call, cross the Rubicon, and instead of confining the central bank to lending operations, you allow them to begin spending or they either usurp the power.
Grant Williams 42:35
Lacy, let me ask you, because this brings up something that came up in our previous conversation with Russell Napier.
We got to talking about inflation and Russell’s point was that the change in the mechanism here by which the government is now essentially going to the commercial banks, getting them to lend and guaranteeing them loans and thereby making those loans contingent liabilities on the government balance sheet.
That it changes the dynamic here, that a lot of those loans are expected to go bad, many of them won’t be paid off.
So, you’ve had this huge credit pulse go into the market.
That’s gonna sit there.
Russell thinks that could be the final moment.
Russell, like you, has been on the disinflationary/deflation train for over a decade now.
But he has seen something that has made him change his mind and started to think that this particular action, taking power away from the central banks and putting it in the hands of the government, may actually be the straw that breaks the camel’s back.
Do you think there’s credibility?
Or, what would it take for you, perhaps to start thinking, okay, maybe we are going to see the end of this deflationary trend and we are going to move towards a more inflationary impulse.
Lacy Hunt 43:50
I consider the steps taken so far to be a relatively small amount relative to the economy and not a continuing framework.
But if you move to the point where you use the Federal Reserve’s liabilities for spending, either to absorb losses for others or to purchase goods or services, the ultimate outcome would be inflation.
I don’t think we’re on that path yet.
But we might be.
I think that the current steps are relatively unimportant, but they could lay the foundation ultimately, but not immediately.
No.
Bill Fleckenstein 44:33
Lacy, I am curious… I want to go back to Japan for a second, if I might.
Obviously, they started their monetization scheme over there when their debt to GDP was probably the highest of the G7 countries.
Now, they’ve managed to absorb half of the JGBs and a bunch of the ETFs.
What’s going to be the end game in Japan?
I assume that the BOJ is never ever going to reduce its balance sheet.
What’s the end game, once you go down that process?
Do you have a thought about that?
Lacy Hunt 45:12
I have, and some pretty smart people have thought about it as well.
I think one of the greatest minds of mankind was David Hume.
David Hume was the mentor of Adam Smith.
Smith knew all the figures of the enlightenment.
He knew Ben Franklin, who was a genius, as we all know, and he knew Voltaire.
He knew them all and he said that Hume had the greatest intellect.
By the way, Hume read Adam Smith’s a wealth of nations shortly before he died, he was in poor health, and he sent Smith a short letter.
He spotted Smith’s flaw of the labour theory of value.
It’s a short letter.
We don’t know whether he ever met with Smith after the letter was written because of his death.
He congratulated him because London was in a very celebratory mood.
Smith is saying, you know, the visible hand is going to make everybody better off, you know, free enterprise works.
London was the centre of free enterprise.
So, London was celebrating it.
But he said, if you were on my fireside, I would say to you, with regard to your labour theory of value, what about the demand for our utility of a good, and tons of people read this letter.
But yet, we don’t have the demand curve until 1870.
Another thing Hume discussed, time and space, and it was that discussion that, according to Albert Einstein, led to the theory of relativity.
My professor said that the Enlightenment could not have occurred without David Hume.
Anyway, Hume wrote this tremendous piece on public credit in 1772.
He said in there:
“If you do not control public credit, it will control you”
And his final conclusion is that, when a state has mortgaged all of its future revenues, the state lapses into tranquillity, languor and (inaudible).
Now we have a lot of examples.
You become weaker and weaker and weaker.
Whether you manage to hold it together with high levels of indebtedness, or whether you try to use some sort of worthless instrument to pay the debt off.
The system really doesn’t work well under it.
What we have here, and really, the thrust of where the modern monetary theory is going.
People are talking about the technicals of MMT.
The real flaw is what creates economic prosperity, wellbeing, advancement, ingenuity, saving, reinvesting — the solutions are not with the government.
What we’re looking for is some sort of easy governmental solution, which is not the way we achieved our prosperity.
That’s the fundamental flaw in MMT.
Government policy has failed and so we’re going back to the government asking for more of the same types of policy, but we’re getting off into areas where the results could be even more catastrophic, in disinflation or even low inflation, it’s not a good system.
If we start making the Feds liability legal tender, everyone’s going to be totally miserable in very short order, people will not want to hold financial assets.
They’ll only want to hold commodities that they consume or trade for consumable commodities.
Productivity collapses, the whole system begins to malfunction.
There are people that are willing to take that risk in order to get beyond the debt problem.
We are moving into a time where the situation could become more volatile, but that is not today.
We’re not there now.
We may be on the path, but we’re not there.
Bill Fleckenstein 49:47
If I could ask a sort of a black and white question, back to Japan for a second, I understand what you just said.
But let’s suppose for a moment that the BOJ goes to the Ministry of Finance and says, look, we’re just going to exchange these bonds for a 200-year probe or some worthless asset, but it’s an asset, now they’ve basically expunged the debt for all intents and purposes.
The next day after they did that.
How would JGB’s trade?
Do you have an opinion?
Lacy Hunt 50:19
No, I don’t.
Bill Fleckenstein 50:20
Ok
Lacy Hunt 50:21
The only way that it would really matter is if they were to default on the debt and they can’t default because even though they’re the main owner of the banking system and the corporate sector and individuals hold a lot of JGB’s
You could eliminate the debt held by the BOJ, since the BOJ is a subsidiary of the government, but you cannot eliminate the debt in the hands of the private sector, you would bankrupt them.
The fact of the matter is, the debt is still active there, which means, that you cannot bypass the law of diminishing returns.
What you’re thinking is that we somehow put it aside, and then we go about borrowing more money to facilitate eco…
Well, if you overuse a factor of production, the growth rate will just get weaker and weaker.
There’s no financial solution.
Everybody’s looking for a cutie tootsie fix.
Grant Williams 51:25
Right
Lacy Hunt 51:25
It’s not there.
Grant Williams 51:26
So, this debt Jubilee idea is…
Lacy Hunt 51:28
By the way, I’ve heard people say to me:
“I’ve been told that you’re a bright fellow. Well, if you’re so bright, why can’t you tell me what the fix is?”
There is no fix.
Bill Fleckenstein 51:43
I love it.
They say:
“Well, if you’re in charge of the Federal Reserve now, how would you solve things?”
You mean painlessly?
Because that’s what you really want to know.
Grant Williams 51:50
Yeah.
Lacy Hunt 51:52
By the way, I don’t get into these policy disputes.
I’m in the investment management business.
I don’t make policy recommendations.
Grant Williams 51:58
But, Lacy, is there anything that would make you change your mind?
I mean, maybe, if we start to see the US Treasury curve turn negative, how would that change your approach to this?
Lacy Hunt 52:15
Okay, so let’s go back to the Fisher equation.
Fisher equation says:
The long Treasury = real rates + expected inflation.
So, let’s say we stay on this path, under the current system, the growth rates gonna grind down, and by the way, if you look at the inflation-adjusted securities, they’re negative, real yields are negative, which is basically a way of investors saying that they’re expecting the growth rate to deteriorate and maybe even be negative for a prolonged period of time.
So, the real rates going to come down, inflation rates going to fall.
The Fisher equation does not have a zero bound.
The thrust of the Fisher equation is going to want to try to push the Treasury rates through zero.
The Federal Reserve has said they do not want negative rates, which to me, is the same thing as saying that they are hoping and praying that we don’t go into deflation.
If the Fed holds the overnight rate, and the inflation rate goes negative, at that point in time, the real Treasury rates will start rising.
We’ll be stuck there, we will be hunkered down close to — so if we still go to 2% negative or the real Treasury rate will start rising.
Remember that the Fisher equation has a counterpart for the corporate yields and the private yields and that is the private yields are equal to the real yield plus inflationary expectation plus the risk premium.
All right, if we go into deflation, the risk premium is going up.
That’s what’s happened in Japan, that’s what happened during the Great Depression.
At the point in time you go into negative inflation rate, the real Treasury rates rise, and the private borrowing rates will rise even more.
Because in a deflationary environment, pricing power will evaporate, and the risk premium will rise.
Well, if you’re working with a general equilibrium model, you’re not going to achieve your equilibrium.
You’ll remain in a perpetual downward spiral.
So, ultimately, they may need to allow the zero bound to be cracked.
Grant Williams 54:38
If that happens, and obviously, we can talk all we want about what they may or may not allow.
But what we’ve seen in other sovereigns, thinking particularly in places like Germany, is a rush for safe assets, take yields negative, nominally, at the market side of things.
Does that present a potential problem for the federal reserve, that the market may take…
We’re very close, when we look at where yields are now, we’re very close to that, to that paradigm being crossed.
If that decision, to go negative, is taken out of their hands, how does that affect things?
Lacy Hunt 55:22
To my way of thinking, the interest rate differentials are not the most important factor with regard to the dollar, but they are a factor.
The rest of the world is taking their rates negative and they’re going even more negative this year, on average, from where we started, which means that, as time goes by, the interest rate differential will work against the US, which means that the dollar will be incrementally stronger.
I know a lot of people that are worried because the dollar has been weak over the last, you know, six or seven weeks.
There are people predicting dollar Armageddon, but I don’t buy those views.
First of all, the rest of the world is more over-indebted than we are and they are doing worse economically than we’re doing.
I mean, look at the GDP numbers for Europe versus the United States.
We had a 32% decline, Europe was down 48% annualized.
Europe weathered this much worse than we did and they’re far more indebted.
These numbers are going to look terrible because they have borrowed a great deal and their GDP has dropped even faster than ours did and their demographics are worse.
The economic fundamentals in the United States, and looking at the production function, the marginal revenue product of the debt and the productivity, the United States has the capability of growing at a slightly better rate than Europe and Japan, which means that the dollar will hold value and if they go negative in their short rates then this will reinforce the strength of the dollar which will tend to shift economic output away from the United States.
I think the discussion in here is misplaced right now.
The dollar is not doing that badly and if you look at the Feds trade-weighted measure, in spite of all of this talk about the dollar collapsing, it is still up on the year, it is higher now than it was at the start of the year and it is outperforming, in other words, this is a psychological episode.
In my opinion.
It is not supported by the fundamentals
Bill Fleckenstein 57:49
I think it’s also a function of positioning.
I think a lot of people got themselves hyped up on a $ shortage thesis because of all the debt in the world and got long and it hasn’t quite played out and it just created some noise and now everyone is taking a modest drop in the dollar as the end of the world, it seems to me.
Lacy Hunt 58:07
We have had several of these episodes.
You’re exactly right, I couldn’t agree more, and for example, when the Fed started with QE1 and Bernanke said the Fed was effectively printing money.
There was a huge surge in the foreign currencies, huge surge in the commodities, the economic activity got a little lift but the reserves of the banks were not utilized, the velocity of money fell, the economy's growth rate fell back and so those projections at the time of QE1, QE2 and QE3 about an inflationary outcome with a weak dollar, well, where are those brave folks?
A lot of them have returned to the same forecast.
As I said earlier, we’re still operating under the same system.
Maybe the system is going to change but we still have the same fundamental relationships as we previously had.
I don’t know why everybody wants to get on the hyperinflation.
Because we’re going to make our people miserable.
Bill Fleckenstein 59:18
Yep.
Lacy Hunt 59:19
We’re going to make them totally miserable.
Hyperinflations are socially disruptive.
They are not helpful.
Grant Williams 59:27
No, I think a nice and modest 3% or 4% will do most people just fine at this point.
Lacy Hunt 59:35
You make the Feds liabilities legal tender, we will go through 3% or 4% to 5% and 10% quickly.
Grant Williams 59:42
Yeah.
In wrapping up, is there anything, as you look out at this landscape, say from the perspective of someone that has had this trade on for such a long time and has had it tested at multiple junctures during that couple of decades.
Is there anything you see, looking out ahead, that has you, if not concerned that this may be coming to an end, but certainly something that you think — I need to keep an eye on that, because if a change is going to come, a secular change in the inflationary environment, here’s a place where I think it might start.
Lacy Hunt 1:00:21
Well, my focus is the production function.
The production function is technology interacting with land, labour and capital.
We know, they’re overusing debt capital.
That’s a major negative via the law of diminishing returns.
It’s going to undermine economically.
Moreover, it’s coming in at a time when our demographics are deteriorating.
Last year, our population growth was about 0.4% per annum.
It was only half that in Europe, 0.2% per annum, it was unchanged in China and -0.2% in Japan, there’s a Brookings study that indicates that we will have roughly 300,000 to 500,000 fewer births next year in the United States as a result of the pandemic and its economic consequences, but it’s likely that that’s going to be a worldwide phenomenon.
We don’t have a study on the rest of the world.
So, the demographic element was very poor.
US population growth last year was the slowest since 1918, which is rather ironic, because that was the Spanish flu, and world population last year was the slowest since 1952.
The advanced economies outside the United States were at multi-decade lows.
We’re going to get a drag from both, the overuse of debt capital and the deteriorating demographic.
What could change that pattern?
Well, we could presumably have a windfall of new natural resource discoveries.
I don’t know what that would be.
But, the natural resource base really hasn’t changed significantly in quite some time.
It probably will not be a factor unless we start harvesting minerals from outer space or something.
I wouldn’t discount that in due course but I don’t think that’s an immediate.
So that leaves the one element of technology.
Bill Gates believes that technology will save us and Bill Gates is a smart fellow and we have to recognize that he holds that view and others hold it.
I would not eliminate technology as a factor, because, I myself, have taken advantage of technological change with regard to staying abreast of economic theory.
But I think the basic pattern here that we’re following and technology was well laid out by Robert J. Gordon his outstanding book, The Rise and Fall of American economic growth.
It’s just a tremendous book.
It’s on the American production function.
Gordon’s point is that during our heyday of growth from 1870 to 1970, what we had were revolutionary inventions that enhanced the demand for natural resources and labour, combustion engine, think of what the combustion engine requires, assembly lines, complex supply systems and then it requires enhancing the road infrastructure and bridges.
The combustion engine meant that we enhance the demand for other elements in the production function.
Think of transmission of electricity, another one of the critical five, building the electric grid and what that took, we knew about electricity since Franklin but Edison told us how we could transmit it.
We didn’t complete building the electric grid until World War Two, that required a lot of things, so did modern sanitation, and communication, and pharmaceuticals and chemicals.
Technology, I think, could bail us out but it’s going to have to be of a revolutionary nature, not of an evolutionary nature.
But what we’re seeing today is that it is changing lives in many, many ways but it’s not enhancing the demand for natural resources and light, but that’s what we have to be abreast of, and I’ll personally tell you, that that’s something that most economists are not that well equipped to deal with.
Grant Williams 1:04:48
I’m guessing that you don’t see TikTok or Twitter as revolutionary technology?
Lacy Hunt 1:04:57
(laughs)
I think I’m alert to technology but I don’t see the revolutionary type of technology that lifts the whole production function upward.
Grant Williams 1:05:07
All right, fantastic.
Lacey, it’s been an incredibly dense hour, as it always is whenever I get the chance to speak to you and I thank you for that.
The beauty of these podcasts, that Bill and I’ve been doing, is that the people listening to them are listening to them three or four times because they’ve all been extraordinarily complex, with an awful lot of information and some really interesting and provocative viewpoints that the people hadn’t considered before them.
Although your work is well regarded and well established, and well-read by many people, I think there aren’t enough opportunities to hear you talk about this stuff.
Lacy Hunt 1:05:43
I appreciate you allowing me to have a window on the world.
Grant Williams 1:05:49
No, look, it’s always a great pleasure and, sincerely, thank you so much for taking this time to share those thoughts with us.
Lacy Hunt 1:05:56
Thank you both for your great questions.
Bill Fleckenstein 1:05:59
Well, more importantly, thank you for your great and in-depth answers.
I could listen to the replay of this and I probably took four pages of notes while you’re talking.
So thank YOU!
Lacy Hunt 1:06:11
Okay.
Grant Williams 1:06:12
Lacey, thanks so much.
I hope we see each other in person again soon.
Lacy Hunt 1:06:15
All right, it won’t be this year.
Grant Williams 1:06:18
No.
It looks that way.
Lacy Hunt 1:06:20
Do you know anybody that has any trip scheduled this year or next year?
Grant Williams 1:06:24
You know, I don’t, I really don’t.
Lacy Hunt 1:06:27
I ask everybody I talk to.
No one does.
Grant Williams 1:06:29
I don’t either.
I know someone that has someone in December, but they put a line through it this week.
Lacy Hunt 1:06:36
All the best of both of you.
Take care.
_____
Grant Williams 1:06:42
And that we thought was that, the interview ended, we finished the recording and then within a couple of hours an article dropped on Bloomberg, which essentially pointed to the exact solution that Lacy said would give him cause for concern.
So, I went back to Lacey and asked him for some thoughts on this article, which was basically a proposal for the Fed, sending money directly to households, and I’m going to read his reply because I want to make sure that you get it in his words, and then Bill and I are going to talk about it for a second, because I think it’s important.
Here’s what Lacey wrote.
“This proposal is not going to pass this year.”
No, I can’t do the southern drawl, just in case you’re expecting me to.
Bill Fleckenstein 1:07:22
Wait, wait, that’s not fair.
I want that, I want the…
Grant Williams 1:07:24
(In southern drawl)
“This proposal is not going to pass this year. “
Bill Fleckenstein 1:07:27
There you go.
Grant Williams 1:07:28
I can’t do it.
“Nor would the recommendation pass quickly in 2021.
To move the proposal along, Powell and the Fed establishment would need to endorse the proposal.
This is not a Fed proposal.
I don’t think that Powell would do this, but the new president gets to appoint his own chair in February 2022.
Hearings have not even been held, so hearings would have to occur first, but that will only happen if the Fed is willing to lead the process.
All of the various other Fed proposals, some equally extreme, would get thrown into the hopper.
This will slow the process down, then the arguing would have to go on, then the bill would need to be drafted.
It would probably go through revisions, and then it would need to pass both house and senate and the President would have to sign it.
I doubt this legislation could only pass before the end of next year at the earliest if Powell and the Fed are on board.
If Powell is unwilling to lead such a legal revision, then the process of changing the law could not change until after the new Fed chair has settled into the job.
Notice that this proposal would likely end currency and force a digital currency, the government would be able to track everyone’s financial record, it will be a great intrusion on private freedom.
At the end of the day, this proposal would put the Fed in the money printing business, it would constitute a major break within our system.
Money would have no value as soon as the money illusion passed and Gresham’s law would prevail.
It’s part of the view that financial transactions create income and wealth, not hard work, creativity and saving out of income.
In other words, it will be the triumph of the free lunch School of Economics, the US will, at that point, have achieved Banana Republic status.
To go along this path would lead to hyperinflation and a widespread miserable condition of the American household”
— Lacy
So, you know, it’s funny, it was the last thing we talked about on the podcast pretty much.
It happened so quickly.
What are your thoughts on that, Bill?
Bill Fleckenstein 1:09:13
Well, I saw that the morning after we’d finished recording the interview, and I was stunned because that was the very thing that he said, was, you could tell, his number one concern.
I think that he makes an excellent point on how long it might take to actually implement that, thus, perhaps it’s not something we should necessarily worry about.
The only caveat I would make, because his reply was so well thought out, is that if we get some economic data or financial market problems, that starts to snowball, we all know that they will change course quickly.
It may not take quite as long as his logic would suggest, though, I’m not really prepared to argue with him.
I just know that these things can happen fast in a sloppy fashion.
I think the more important point is, how serious he takes that possibility and how bad it would be for all of us.
It’s not something any of us would like to see but it would certainly be a continuation of a lot of the wrongheaded policies we’ve seen for a long time and it would finally be the End Game.
Period.
That’s it.
Game over for bonds, stocks, currency, our currency, I mean, not over, but real destruction.
Grant Williams 1:10:46
For sure.
Yeah.
I look at the timeline too, which again, Lacy laid out in a beautifully detailed paragraph, and thought the same thing.
That’s a long way to get through, but unusual exigent circumstances, we saw how quickly they got the TARP through when they needed it through and we saw how quickly that the Fed got into the direct lending business and how quickly they circumvented the junk bond rules.
You know, these things tend not to take long.
I understand that this comes down to the Federal Reserve Act.
One would imagine, at that point, it would be very difficult for any politician to hold this thing up.
That’s what worries me, they’ll talk about the collapse of the system and the end of America as we know it, and when, what they’re trying to get through, to Lacy’s point, is arguably the end of America.
Bill Fleckenstein 1:11:40
Right, right.
Well, it’s perversely, you know, when I see the New York Fed talk about diversity and income inequality, when they’re the engines of it, I mean, some of the perverse irony is obviously lost on these people, but it’s obviously potentially very serious and given the fact that we’re not doing a really good job of being able to get the economy back on track, whether you think we should lock down more or locked down less.
The fact of the matter is, we’ve allowed the politicians to make all the decisions.
They’re the least capable, and now they’re micromanaging every aspect of every business in America.
Then you’ve got the possibility for lawsuits, and whats that’s going to do to business.
All I’m trying to suggest is, the chance for the economy to be really poor for quite a while is there and that would be a precondition to have us get sent down this path and that’s why I think it’s worthwhile to remember that.
Those two things together.
Grant Williams 1:12:41
Yeah, absolutely.
The other part of it, that’s really interesting, obviously, he’s right, this would force a digital currency.
It makes you wonder, obviously, the Federal Reserve refuses to allow any currencies to compete with the dollar.
So, one wonders what would happen to things like Bitcoin and Etherium and other digital currencies at the point where the Fed have imposed or US government imposed its own digital currency.
Bill Fleckenstein 1:13:07
I don’t really see it necessary….
I mean, maybe I’m missing it, but I don’t really see it as necessarily a digital currency, I see it as a digitally delivered currency, which is different.
Our money in the bank is basically digital now and this would just be a faster way to move it around, but we wouldn’t go to the store necessarily and pay in Fed coin, as opposed to green paper.
Grant Williams 1:13:36
But you pay on your credit card.
It would be a cashless society.
Bill Fleckenstein 1:13:40
It would move in that direction for sure.
But, anyway, we don’t need to get into the gory detail now.
That’s for another day.
So far down the road.
Hopefully.
Grant Williams 1:13:50
We’ll get into that another time.
It was definitely worth having this little bit of the podcast.
Unfortunately the article didn’t come out 24 hours earlier, but it was very good of Lacy to take the time to send us his very thoughtful reply.
Bill Fleckenstein 1:14:05
I agree.
Grant Williams 1:14:06
It’s amazing, every time I listen to Lacy I never have a camera in front me, because we’re doing this on Zoom, people are only going to hear the audio, we are seeing us on Zoom.
I actually have the chance to look at my face and I concentrate so hard when I am listening to him because it’s such an extraordinary repository of knowledge and when you talk to Lacy, he’s the guy that makes me realize how complicated economics is, you know, everybody spends their life trying to simplify it and Lacy will tell you what it is rather than what you kind of want to hear.
It’s unbelievably.
Bill Fleckenstein 1:14:49
People like him, that have studied what they study, make economics sound like a legit science whereas most of what we all have heard, that is considered economics, is just pablum.
The weight of the crowd believing the same thing that already happened in extrapolation and when you look at the depth of the knowledge and understanding that he brings to the table, it’s a totally different picture, than most, I mean, obviously, there are other economists in the world that are good at what they do.
There’s a certain rigour there the that I find missing in a lot of things.
I think it was interesting that several times he mentioned the potential for the Fed, to have its charter changed or said differently, turn liabilities into money and he mentioned it enough times that it’s it sounds to me like that’s one worry that’s out there on his radar, for sure.
It seems to me, to Russell Napier’s observation, that if these governments start getting into the subsidization and do the loan guarantees, that’s sort of a backdoor way of turning those liabilities into money, but we’ll have to see how far this goes.
So far it’s a bunch of one-off programs and whether it gathers steam or whether they just go in and rewrite the Federal Reserve Act.
The lobbying effort amongst the liberals is to get the Fed to try to work on diversity.
Start doing stuff like that, then his worst fears, and I guess all of ours collectively, we’ll be realized.
Grant Williams 1:16:20
Well, and the ECB has taken on climate change now as part of there mandate.
This is what’s so fascinating, because the solutions that are required at this point, no matter, you talk to James, you talk to Russell, you talk to Mike Green, you talk to Lacy, the solutions are getting more complex and more dramatic, almost by the day, the things they’re gonna have to do to try and solve this problem now.
Rewriting the Federal Reserve Act is a big one.
I think that’ll be an easy one for them to do, frankly.
Bill Fleckenstein 1:16:51
I think they’ll do that in five minutes.
You know, the next time the market gets busted up badly.
I think that could easily happen.
I think what the search is for, and he pointed out, in not so many words — what everyone wants is a painless solution.
Yes, we’re strung out on heroin and yes, we tried alcohol and yeah some Percocet but now we’re even more messed up.
So, can you make it all go away without any pain?
We’ve been kicking the can so long on so many different…
The simple or not too painful solutions don’t exist.
Grant Williams 1:17:32
It’s a great point, because we all know, there is a very straightforward solution to all this, but that’s the part where people stop think that because we all know that requires immense amounts of pain.
Bill Fleckenstein 1:17:43
You mean we should let the markets clear?
Grant Williams 1:17:45
Yeah, well, God forbid that should ever happen again.
It’s fascinating to talk to Russell and Lacy back to back.
Two guys with an extraordinary weight of intellect.
Bill Fleckenstein 1:17:56
It would be fun, in a while down the road, if it looks like the landscape is changing in some way, to see if we can control the two of them to come on together.
Now that would be something to listen to.
Grant Williams 1:18:11
I give us a fighting chance we will be able to convince them to do that.
I think that’ll be interesting.
Well, mate, we’ve reached the end of another episode.
We’re wrapping up now and each one is more thought-provoking than the last.
I’m loving this series.
Bill Fleckenstein 1:18:25
Yeah, me too.
This has been extremely educational for me.
Grant Williams 1:18:29
All right.
Well, listen, thanks.
Thanks to you, for sticking with us and listening to this series.
I’ll make my usual plea.
If you wouldn’t mind taking a couple of minutes to write and review for us on iTunes.
It would really help us.
Between now and next episode, if you don’t follow us already on Twitter, you can do that.
You’ll find me @TTMYGM.
Bill Fleckenstein 1:18:48
And I’m @fleckcap
Grant Williams 1:18:49
Yes, he is.
He will be there tomorrow at the same name as well.
Thanks for listening.
We’ll see you next time.
___
Nothing we discussed during the endgame should be considered as investment advice.
This conversation is for informational and hopefully entertainment purposes only.
So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.
___
Transcribed by Felix Häffner
Newsletter — If you want to receive an email notification when a new interview transcription is published, please click here
