Lacy Hunt Has Some Old Dogma He’d Like You To Consider

Lacy Hunt Has Some Old Dogma He’d Like You To Consider

“Investing in a 30-year US Treasury bond at a paltry yield of 2.4% on December 31, 2019, appeared to be a poor investment choice, particularly since it was the lowest year-end yield since the inception of the 30-year bond in 1977,” reads the first line of Hoisington’s latest quarterly review and outlook.

If you know anything about Lacy Hunt, you can probably guess where it goes next.

“However, in a short 12 months the 30-year US Treasury realized a 20% return compared with a 18.4% return in the S&P 500 and a 7.5% return for the Bloomberg Barclays Aggregate Bond Index,” Hoisington went on to say.

They’re still bullish on bonds. That’s hardly surprising.

Even if you knew nothing about Hoisington, you could make the argument. Bonds are surfing a four-decade bull market, so why throw in the towel now? Especially when the pandemic added a slew of new deflationary risks to an already powerful set of structural disinflationary forces.

I often find myself in a somewhat odd position vis-à-vis commentary from Hoisington. I’d venture that scarcely anyone writing daily for public consumption has been more vocal about the prospective “scarring” effect of the pandemic than I have.

I’ve spilled gallons (upon gallons) of digital ink lamenting the structural damage caused by COVID and elaborating on the read-through for the economy from the massive debt incurred as a result of efforts on the part of governments and the C-suite to cushion the economic blow and shore up balance sheets, respectively. The slideshow (below) offers a comprehensive visual tour.

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“The massive void in economic activity and destruction of wealth created by the virus and related shutdowns of businesses in the US and abroad will take years to fill,” Hoisington wrote.

No arguments there. Below is another excerpt that’s worth a quick read, even as it’s just a recitation of factoids Hoisington plucked from various publicly available sources:

Government benefits now account for nearly 20% of total personal income; one in four households haven’t been able to meet their monthly bills since March; one in 15 homeowners are in some sort of loan forbearance relief plan; 75% of the government stimulus went to debt paydown and saving; one in three households dipped into savings or retirement accounts over the past year and one in six has borrowed from a family or friend to cover bills. Additionally, it should be noted that the National Multifamily Housing Association found that over three quarters of households made full or partial rent payment for the month ending December 6th, down almost 8% versus last year. Specific industries are reporting catastrophic declines as typified by the National Restaurant Association warning that “more than 500,000 restaurants are in free fall.” The same might be said of other entertainment venues and service industries. The severity of the downturn has decimated many small businesses and they may not survive in their former state. As is also the case for office buildings, shopping centers, convention facilities and airlines.

Again: Far be it from me to downplay any of that. As even the casual Heisenberg Report reader will attest, I’ve personally written more on each and every one of those subjects in the past three months than most mainstream media outlets. Most asset managers won’t write as much in their lifetimes as I write in a week — even those with PhDs.

So, as smart as Lacy is, there is nothing (not a damn thing) he can tell me about this narrative. I’ve got it down cold. I can recount it in my sleep. If I were still allowed to imbibe, I could regale you in the crispest of terms even after a dozen Hendrick’s gimlets.

The point is: I’m on board with the deflation case. Which is precisely why I’m also on board with the fiscal stimulus case.

And this is where I get annoyed (for lack of a more eloquent way to describe it) with folks like Hunt. It’s not that he’s wrong about the economy. And it’s certainly not the case that he’s been wrong about deflation or bonds. He’s been the opposite of wrong — namely, he’s been right.

The problem with folks like Hunt are statements like this one (also from Hoisington’s latest):

Government funding is derived from taxing and borrowing from their citizens. This process reduces the resources of the private sector which provides productivity growth expanding the economic ‘pie.’

That isn’t true. It’s a pernicious canard. An old saw that serves to stymie progress and (conveniently for folks like Hunt) perpetuates myths about government finance that are ultimately conducive to slower growth and lackluster inflation outcomes.

The US government does not “derive” its “funding” from “taxing and borrowing from citizens.” Congressmen and women perpetuate that myth for a number of reasons, not least of which is that it provides cover to leverage deficit debates for political gain.

But ultimately, the US government “derives” its “funding” from the fact that it is the sole, legal issuer of US dollars on planet Earth. It doesn’t “need” to “borrow” your dollars or tax them away from you in order to fund itself. In case you couldn’t surmise that by the fact that the Pentagon doesn’t solicit you when it wants to buy an F-35, it became abundantly clear in 2020 when, instead of taxing you, the government deferred your obligation to pay taxes and sent you free money instead.

Now, you’ll say that the government “borrowed” to do that, just like you’ll say the government borrows to buy fighter jets. That’s kind of true, depending on how you conceive of the word “debt.” Is something really “debt” if both the principal and interest are denominated in a currency that you issue? Not really. Which is why Treasurys are better conceived as interest-bearing dollars, not “debt.”

Further, Hoisington’s (Hunt’s) contention that public sector deficits “reduce resources of the private sector” has it backwards. The public sector deficit is a private sector surplus — by definition. It cannot be otherwise.

“Fiscal surpluses rip financial wealth away from the rest of us, leaving us with less purchasing power to support the spending that keeps our economy going,” Stephanie Kelton wrote, on page 111 of “The Deficit Myth” for those who still haven’t read it.

I cite Kelton not necessarily as an “authority,” but as an economist who speaks to the public in common sense terms that are based on facts, not theory. And that’s one of the great ironies of the term “Modern Monetary Theory.” It’s not really a “theory” at all. It’s descriptive.

None of that is to say that deficits are always “good,” and it’s certainly not to say that deficits necessarily produce desirable, let alone equitable, economic outcomes. Here’s Kelton again:

Fiscal deficits have the potential to lift millions of small boats, but too often the benefits of Uncle Sam’s deficits aren’t spread widely enough throughout the economy. Tax cuts that go disproportionately to the biggest corporations and the wealthiest people in society funnel riches into their buckets, while millions of families struggle to keep their boats afloat. If the goal is broadly shared prosperity, then we need fiscal deficits that channel resources more equitably. For example, investing in health care, education, and infrastructure won’t just benefit the medical professionals, teachers, and construction workers who get paid to do those jobs, it will also benefit the patients, students, and drivers who benefit from better public services. And, when fiscal deficits help low- and middle-income families, those dollars aren’t hoarded in off-shore bank accounts. They get spent back into the economy, helping to lift the boats that belong to families like theirs.

Notice how that has a kind of “well, when you put it that way,” feel to it. That’s why I quote Kelton.

The days of the public being lectured about what’s “best” for the economy by ostensibly well-meaning folks like Larry Summers or regaled with the same quarterly letters over and over again by folks like Hunt, are over. People — regular people, I mean — have had enough of it.

It’s not that traditional economists and asset managers aren’t smart. And it sure as hell isn’t that they aren’t successful. They’re both. That is: They’re smart and successful. The problem is that they simply refuse to countenance the idea that times change. And soft sciences have to adapt. If anyone should know that, it’s people like Hunt. If a deflationist doesn’t know that something’s gotta give, then who does?

This story is just ironies piled atop ironies. People like Hunt claim dominion over “facts.” While Kelton presides as the “chosen one” over “theory.” In reality, Hunt is presenting theory as fact, while Kelton is presenting facts as theory (although she clearly knows that what she’s saying is factual).

But don’t be fooled. Hunt can read the writing on the wall. There is one caveat to his ongoing bullish call on US Treasurys, for example. Here it is:

Provided there are no major changes by Congress to the Federal Reserve Act we believe it is prudent to expect that long dated US Treasury rates will eventually gravitate to lower levels as inflation continues to recede.

What do you think he means by: “Provided there are no major changes by Congress to the Federal Reserve Act”?


24 thoughts on “Lacy Hunt Has Some Old Dogma He’d Like You To Consider

  1. Thank you for injecting a few common denominators into this post … It really helped to clarify this ongoing issue that some people (LOL) have with the MMR (R stands for reality ) posts we have all ingested in spite of certain ideological mental roadblock… That’s what makes this blog unique… Respectful repetition…

  2. Hm. Yes and no, inasmuch as it also depends by what Hunt means when he says “derives funding” or, maybe better for my case, the more ambiguous “public sector deficits “reduce resources of the private sector””.

    If you accept MMT as factual, you accept the only true limit to our spending, both public and private, is capacity utilization. If government mobilizes a lot of it for its needs, there’s less for private use.

    Now, capacity isn’t fixed for all times but, at the scale of a single year or even a couple, it essentially is.

    In short, at some point, you got to choose between a tank and a tractor. Or between a tax cut for your rich buddies and a highway for the MidWest.

    What we used to call “guns and butter inflation”…

        1. Hahahaha. Well put.

          Look, I was half-joking, being a bit specious. I also follow the Mauldin Economics free letters to remain aware of ‘conservative’ economic thinking. They are certainly concerned with long term deficits, though Mauldin had the good sense of not declaring 2020 the year where we should implement austerity and actually supporting both fiscal and monetary action.

          But one thing I disagree with you when you are writing about MMT is that you don’t remind readers that there are physical limits to what can be done. i.e. even if both the Fed and Treasury were run by MMT-ers, we still can’t all have yachts. There are resources/industrial set-up constraints.

          Maybe when we get robots?

          1. Is your feed different than mine? I’ve learned about MMT from H and then on to Kelton. To me it’s perfectly clear we can’t all ‘have yachts’.

          2. Yeah, I’ve never said anything about everyone having any “yachts.” And the contention that I don’t “remind readers that there are limits” just isn’t true. I’ve discussed the limits on too many occasions to count.

            I mean, I know this commenter is a regular reader, so I know he/she didn’t mean it this way, but at the same time, this is the problem with the internet. People can just say whatever they want, irrespective of whether it’s true. In this context, “Heisenberg has never mentioned the limits” is just as objectively false as the statement “Hugo Chavez rigged the Georgia elections.” While it’s true that the first statement is harmless while the second statement is anything but harmless, each of those statements is equally false — namely 100% false.

            So, I don’t even know how to respond to that kind of comment. Obviously, we’re not going to send 330 million people a check for $45 million when the economy is booming just to see what happens. Nobody has ever suggested anything like that.

            When you want to debate the limits of someone’s position, you can’t use wild hypotheticals. Or, actually, you can, but if you do, that’s where the conversation stops, because you haven’t just exaggerated the other person’s position, you’ve blown it so far out of proportion that it no longer makes sense to have the discussion.

            Note that as late as a dozen years ago, this kind of thing wouldn’t fly even in an undergraduate course at a decent state university.

            I suspect the situation is different now, because standards have deteriorated further according to folks I talk to in academia, but generally speaking, you can’t just say stuff that’s objectively false and toss out straw man arguments and pretend like everything’s fine. Only on the internet can you do these things.

            And it gets frustrating because, in an academic environment, what you’d get is this: “You need to go read XYZ’s peer-reviewed journal article, and then after that, you need to read XYZ’s book, and after that, you’ll need to demonstrate that you understand the actual arguments via a written exam.”

            On the internet, you can suggest that people go spend a month reading, but they won’t do it. As a professor, you can say “Well, you’ll either do it, or you’ll fail the course and there goes the $1,500 you paid to take it. Your choice.”

          3. @ therealheisenberg, I don’t think that fredm421 was trying to posit a ridiculous straw man or wild hypothetical to attack MMT as a concept. As I read it, he seemed to be employing clear hyperbole as a rhetorical device. When discussing MMT, it can be challenging to know where to draw the line. Is the idea of sending everyone $10k ridiculous? What about $20k? How about $100k over 10 years? Over five? Different people have very different ideas about what constitutes “absurd”, and there are real debates to be had about where that line should be drawn.

            When I fredm421’s remark, I felt it was clear he wasn’t suggesting that you, or anyone else, was sincerely proposing giving everyone a yacht and therefore MMT was unworkable. Rather, he was using an example of something that was clearly absurd to underscore the point that there are limits, in a way that wouldn’t devolve into, “actually, why can’t we just pay people $25k/year for the rest of their lives?”.

  3. Hunt is right on inflation prospects……should switch to deflation shortly…….double dip coming……Covid rollout too late for this winter…..just my opinion.

  4. Finding inflation outside of necessities like food is very likely to be very hard unless stimulus goes off the charts… even then there’s plenty of household debt to fill in before people start buying anything that meaningfully moves inflation. Heck you could print 14 trillion and you’d still have some work to do.

  5. This is all part and parcel to the” Gold is real money” mindset. Judging from the gold bugs new found disdain for blockchain, we may only be decades away from people realizing the way it really is.
    New Math.

  6. This is an important article. I’ve followed Hunt closely in great admiration, and while he is right about so much, including the detailed mechanics of monetary policy that still confuse almost everyone, I have been convinced for a while now that he doesn’t/refuses to understand “MMT”. It breaks with some of his most closely held theories. Hunt essentially advocates austerity, which to me at this point is almost laughably blind to its malignant effects since 2008. We are entering a new theoretical regime; we have to enter a new regime. Last week shows the risks of the old guard not being able to change its theories. Yes, Larry Summers is partly to blame for creating the economic conditions that led to a violent attempted coup ten years later. The sooner we admit it, the sooner we can maybe find solutions.

  7. Well, the effects of government deficits or surpluses are a little more nuanced. In a booming economy if you run big government deficits that are not due to long run investmentt soft or hard, then you will eventually have a tax on people in the form of inflation. That sure is not the case right now. In a falling or stagnant economy if you insist on running government surpluses (see Germany until recently) you will slow the economy and hurt the private economy. And you will aid and abet disinflation or deflation. There are other situations of course. That is what makes smart policy so important.

  8. ” If the goal is broadly shared prosperity”–this is a very important assumption to question. I would say this is not the goal of the Republican party, though different Republicans have different reasons for rejecting this assumption. Many Democrats probably do make this assumption, but many are focused on other objectives, and there have definitely been times, e.g. during the Clinton presidency, when Democrats were closer as a party to a focus on “equal opportunity” rather than “shared prosperity.” Ultimately, I don’t think the concept of shared prosperity is really an American ideal. We would rather be broke and be able to dream about becoming a millionaire, than to live comfortably in a modest house with a modest pension, and have no chance of becoming a millionaire. Or at least that’s what’s been sold to us.

  9. Ultimately, like everything, it’s just a ponzi scheme right? If the masses benefit, “they” fear they can’t and won’t. To defend their immortal Zombie status and so among their peers, using big words “they” brainwash the masses with an intellectual as opposed to de facto meritocracy, a jig that could be up, a short squeeze a la wallstreetbets, if you will. Some spectre of UBI seems inevitable and “they” keep slamming on the brakes, but is there really any fluid/flow left after 50-or-some-odd years? Apparently, some robots can already build each other for little more than the cost of materials and some energy, i.e., without us, or inflation. Technology the exterminating angel (maybe once self-aware), could in a heartbeat provide far more efficient and equitable wealth growth and distribution than a smaller and smaller handful of “people” fearful of governance, feeding on each other in the irony bubble of a [Z]illionaire’s exclusive dining club of organic food.

    Put another way, if we buy the American “dream,” then do we exchange/sell our soul for the doctrine that most people can’t/won’t get made, only the few, the brave, the proud, who “earned” it? Which begs the question, can you stop the oncoming wave of human nature by propagating rhetorical devices, for-ever-ever? Is this not our current War of Reality — human sociology vs economic theory, hard or soft… which one?

    Anyway my feckless tribute in simple jest, that I love reading this blog (and the comments). Thanks H, for encouraging human brains!

      1. I earned my living for 40 years encouraging human brains at the university level. Instead of being thanked for this effort, we who have done this, or are still doing it, outside of minor lip service murmured at us, have been verbally assaulted for doing something most folks see as totally useless. “Don’t send your kids to college, it’s a waste of money, etc.” goes the rhetoric even from our legislators and citizens who don’t want to pay to see their children’s brains go to work. Just thirty percent of the US workforce has earned a college degree and from my experience, far fewer than that have actually gotten the education they paid for. One of my colleagues was fond of observing that college students are the only class of consumers who willingly take less than they are entitled to for what they pay — like buying a car with only three working wheels and an engine with two broken pistons. College students cut classes, don’t buy the text because they aren’t interested and if they do they can’t wait to sell it back at the end of the semester. They regularly cheat on their work (at my school more than 70% of the students surveyed one year self-reported having engaged in serious cheating) and if they get caught their response is, “So what are you going to do about it?” The masses in the US really don’t like or respect education and the “educated,” whom they believe are some kind of “elites” who seem to be getting breaks they don’t deserve. The truth is that those who go to college and get an actual education generally do very well compared to their peers who thought college was just a waste of time. My daughter majored in Anthropology at a small liberal arts college, the most criticized group of all, and twenty-five years later she makes a solid six-figure income as a senior director supervising 250 people in a respected data warehouse cloud server business. She got the education I paid for and has been able to succeed in five seemingly unrelated areas of medicine and business because of her ability to think, continue to learn and adapt. In today’s world those who would rather not encourage their brains are the kind of folks who stormed the Capitol of our great nation last week because they hate those who they see as the “elites” who are conspiring to keep them down. Mostly they did that to themselves.

  10. What do you think he means by: “Provided there are no major changes by Congress to the Federal Reserve Act”?

    he means that if the Fed Res Act is changed to directly monetize debt (MMT). If you start to hand out money to everybody on an ongoing basis monthly you will have excess dollars chasing the same amount of good and services. The price of everything then rises. The Fed Reserve is prohibited from doing this but if they change the law…

  11. Dr. Hunt doesn’t even touch on the knock on deflation from technology. Maybe we print 10k each and still don’t have inflation? Maybe savers save, spenders spend and the deficit is carried away by robots.

  12. Money is a vehicle and by definition an exchange of value. And that exchange is created by the extension of credit by banks with some form of collateral to facilitate a counter party risk parity. To say Government creates dollars is misguided as it supposes it is the only medium of credit creation without a counter party at risk. Governments do though tax and spend and often reallocate resources often without efficiency.

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