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Lacy Hunt: The World Economy's Terminal Case of Debt Sclerosis

In danger of dying from too much debt
Sunday, August 24, 2014, 10:54 AM

Today, the world economy is in uncharted territory.

Never before has the developed world carried this much debt. Never before have the central banks of those same countries expanded their balance sheets so much. Never before has so much sovereign debt been outright monetized. Never before have major financial institutions been officially designated as “too big to fail” and thereby been granted special license to assume gigantic risks.

Dr. Lacy Hunt, economist and current executive vice president of Hoisington Investment Management Company, expects the macroeconomic situation to get worse from here:

The main problem is that we have too much debt. We have too much of the wrong type of debt. That’s not very well understood.

The great Austrian economist, Bohm-Bawerk, said that Debt is an increase in current spending in lieu of a decline in future spending. Fisher modified that a bit and he said that it ultimately depends on whether the debt is productive or not. If the debt generates an income stream to repay principal interest, then you're OK, you don’t have a down cycle later on. But unfortunately as the debt levels have risen higher, more and more of it has become consumptive in nature or financial speculation; neither of which will generate a sustaining income stream to repay principal and interest. That’s the difficulty: there’s a light side to credit and debt, and there’s a dark side.

Now it’s been emphasized that business loans and consumer loans are going up this year. There have been articles about how credit standards are being lowered to make mortgages and automobile loans. The banks have confidence. And the percentage of subprime automobile loans has returned to the peak of a decade or so ago. The problem is that there’s a dark side. Martha Olney at California Berkeley wrote a book a number of years ago called Buy Now, Pay Later. You take on debt to buy now, but you have to pay later. Many presume that you never have to pay later -- but that’s a faulty assumption. That’s the difficulty that we have, and we’re trying to solve an indebtedness problem by taking on more debt.

Not only is that the problem in the United States, but it’s also the problem around the rest of the world. We’re all trapped in this debt sclerosis. U.S. public and private debt is about 346%; it’s been rising now for three quarters, we no longer de-leveraging here. And the Eurozone, in all in the 17 countries there, the debt figures are a hundred percentage points higher; higher still in the UK. And then in Japan, public and private debt is about 650%. What’s significant is that the countries with the higher debt levels are performing the worst, which is very consistent with the academic studies. I mean Europe is in the process of triple dipping. Japan remains mired in difficulty; their economy declined in the first half of the year.

Over-indebtedness is the basic problem. And we don’t really have a way out of it because monetary policy is not really suited to address such a problem.

Click the play button below to listen to Chris' interview with Lacy Hunt (44m:14s):

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, and today we are going to talk economics; big, tasty, macroeconomics with one of the world's very best economists. Why macroeconomics and why now? Because we are in such uncharted territory—landscape so thoroughly unexplored that we need to study the outlines of the big maps to have any hope of divining where we're headed. Never before has the developed world carried this much debt. Never before have the central banks of those same countries expanded their balance sheets so much. Never before has so much sovereign debt been outright monetized. Never before have major financial institutions been officially designated as "too big to fail" and thereby been granted special license to assume gigantic risks. On our show a few months ago, you heard Stein Jacobsen make the call that German ­­­bunds were going to 1%, in stark contrast to most other bank economists; but the bund certainly did go to that level.

Today we have on our show an internationally known economist who's making a similar call about U.S. treasuries; they are going a lot lower. Our special guest today is Dr. Lacy Hunt, executive vice president of Hoisington Investment Management Company; a firm that manages over five billion dollars for pension funds, endowments, insurance companies and others. Nearly all of that money is in long term U.S. bonds. Lacy Hunt is the author of two books. His articles have appeared in Barrons, the Wall Street Journal, New York Times, among other places. Among his previous roles, Lacy was the chief U.S. economist for the HSBC group, executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas.

Lacy, we first met at a Casey Conference and I have been looking forward to having on this show ever since. Welcome.

Dr. Lacy Hunt: My pleasure to be with you, Chris.

Chris Martenson: Well let's start on the outside of this cake and nibble our way in. By the numbers, how is the U.S. economy doing?

Dr. Lacy Hunt: Very poorly. Both so far this year and in longer term perspective. In the first half of this year, the economy grew at only a 0.9% annual rate. You strip out the inventories, we gained at a 0.6% annual rate. If you express it in per capita terms, GDP was flat first half of the year, which means standard of living stagnated. But from a longer term perspective, from the start of the Republic in 1790 or close to the start, the economy has grown about 3.9% per annum. Since the debt levels moved above 275% of GDP—that's public and private—the economy has grown less that 1.9% per annum. The growth from 2000 forward thru the first half of the year is not as bad as the 1930s but it's not that much better either. So it's been a very difficult standpoint. We've clearly downshifted; it's been long and coming, and I think our people are suffering from it.

Chris Martenson: Well if you were going to diagnose the principal cause of that slow and maybe even slowing GDP growth, what would that be?

Dr. Lacy Hunt: I think the main problem is that we're excessively—we have too much debt, we have too much of the wrong type of debt. Debt's not very well understood. The great Austrian economist, Bohm-Bawerk, defined it. He said that debt's an increase in current spending in lieu of a decline in future spending. Fisher modified that a bit and he said that it ultimately depends on whether the debt is productive or not. If the debt generates an income stream to repay principal and interest then you are ok. You don't have a down cycle later on. But unfortunately as the debt levels have risen higher, more and more of it has become consumptive in nature—finances, speculation. Neither of which will generate a sustaining income stream to repay principal and interest. That's the difficulty yet. There's a lot of ways of saying it.

There's a light side to credit and debt, and there's a dark side. Now it's been emphasized that the business loans and consumer loans are going up this year. There have been articles about how credit standards are being lowered to make mortgages and automobile loans, the banks have confidence, and that the percentage of subprime automobile loans has returned to the peak of a decade or so ago. The problem is that there's a dark side. Barbara Olney at California Berkeley wrote a book a number of years ago called Buy Now. Pay Later. You take the debt on, you buy now, but you have to pay later. Many presume that you never have to pay later, but that's a faulty assumption. That's the difficulty that we have, and we're trying to solve an indebtedness problem by taking on more debt.

Not only is that the problem in the United States, but it's also the problem around the rest of the world. We're all trapped in this debt sclerosis. U.S. public and private debt is about 346%; it's been rising now for three quarters. No longer deleveraging here. In the eurozone, the 17 countries there, the debt figures are a hundred percentage points higher; higher still in the UK. And then in Japan public and private debt is about 650%. And what's significant is that the countries with the higher debt levels are performing the worst, which is very consistent with the academic studies. I mean Europe is in the process of triple dipping, Japan remains mired in difficulty. Their economy declined in the first half of the year. And the United States, although we are doing very poorly by long term historical comparison, we're not doing as poorly as the countries that are more indebted, and that's the basic problem. We don't really have a way out of it because monetary policy is not really suited to address such a problem.

Chris Martenson: Well it sounds like you're almost saying that if you live beyond your means for a while that eventually you have to live below your means, and is this not exactly—that's one of my diagnoses. When I look at total debt to GDP, starting at about 1980 just to round off, you see that figure start to climb. Meaning we were increasing our debt at almost twice the rate of our real GDP growth. Doesn't that, by definition, point to the fact that it's the wrong kind of debt that you were talking about? That is, if we were taking on debt that was really productive debt, that we would have seen not that large of a gap occur between those two figures?

Dr. Lacy Hunt: That's a very well taken point. We're taking on some productive type of debt. We're investing in oil and gas exploration, we have some investment in plant equipment, new technologies; we have some infrastructure expenditures that we're financing with debt. The problem is that the consumptive type debt, the speculative type debt, is three or four times greater than the debt that we know will generate a cash stream to repay principal and interest. The difficulty that we have here is exactly the problem that occurred during the 1920s. We lived far beyond our means; we took on a lot of debt. It was the extreme over-indebtedness which set up the 1930s. It was the extreme over-indebtedness of Japan during the 1970s and 1980s that led to their panic year in 1989. It's extreme over-indebtedness in the U.S. in the first part of this century, and in Europe as well, that set up their difficulties. Once you go through this period of over accumulation of debt or under saving, you can look at it in either terms, then the negative outlook is basically baked in the cake. That's really where we are and we don't have a will to get out of it. We have to rely on tough fiscal policy decisions and strong political leadership, and that's just not an option in the U.S., Japan, Europe or anywhere.

Chris Martenson: It's interesting, I noted as many did, that—the crisis erupts in 2008. I think the principal cause was we had just taken on too much debt. It was time for some of that fiscal leadership. It was time to deleverage and bring the balance sheets back down. It was time to switch away from nonproductive debt and start to heavily weight towards productive debt; but even as we saw private debt fall, public debt just sky rocketed. It seemed to me as if our political leadership said, "We have to keep this debt bubble growing no matter what." How would you characterize that—the many, many trillions of dollars of public debt (I'm talking federal debt) that's been taken on? Would you characterize that—in terms of the productive / unproductive ratio—what kind of a ratio would you give to it?

Dr. Lacy Hunt: I would say that approximately 85% to 90% of it is consumptive type debt, it's not productive, it's not going to generate a cash stream. The demographics are going to force that kind of debt even higher. There's a pretty great economist at the University of California, Berkeley by the name of Barry Eichengreen, who wrote a significant book a few years ago published by Oxford University Press called, Exorbitant Privilege. What Dr. Eichengreen points out is that without changes in Social Security and Medicare, federal outlays—which right now are abound 23% or so of GDP—in 25 years they're going to be 40%. This is going to go for consumptive type debt; it's coming, it's heading our way.

Another problem: interest expense is consumptive type debt; it doesn't generate an income stream. Last year we paid interest, net interest, on about 12.3 trillion dollars; total debt was over 17 trillion, it's higher now. There were some securities that are in government trust accounts at the federal reserves, so we were paying net interest on about 12.3 trillion dollars. In a decade from now, instead of paying interest on 12 trillion we're going to be paying interest on about 24 trillion. Which means that even if market rates of interest are flat for the next decade, the interest expense at the federal level will double. In 2024, if interest rates were to rise 1%, then that would add 240 billion dollars a year to the interest expense. And so the trends are not really good now and they're going to become increasingly unfavorable without fiscal reforms; and the fiscal reforms are not really doable in the current political environment.

Chris Martenson: Now what you're describing though, this idea of rate normalization where we would get back to some normal set of rates, is not really actually—it's not possible, in the sense that if it happens it will be highly destructive. I've heard numbers bandied about that if Japan's rates went to somewhere between 2% and 3%, that 100% of their government income from taxes would then be applied to debt service interest payments alone; meaning that Japan would go into that nuclear feedback state and just meltdown economically if their interest rates normalized. Are you saying that interest rates cannot normalize at this point?

Dr. Lacy Hunt: They cannot, no. Many people forget that interest rates are a barometer of economic activity and inflation. The reason that interest rates are depressed in the United States and globally is because business conditions are poor, there's no inflation, there's some transitory inflation from time to time because of the vagaries of food and fuel, and extraneous governmental policies related to issues such as healthcare. These intermittent inflationary spikes are all drowned out because economic growth is too weak. So the trend globally and domestically is downward in inflation. As long as that's the case, your short term interest rates are going to be hovering close to zero; and your long term rates are going to continue trending downward. That's the situation that we're dealing with. We're not able to lift the economy into a normal trajectory.

We took on a lot of debt in the 1920s. We drew down the saving rate but in the 1940s we had a tremendous surge in the saving rate; the saving rate went up to 25%, it remained high after the post-war period. We paid the debt to GDP ratio down, and we were able to have the great post-war boom. But unfortunately, unlike what happened in the late 1940s and the 1950s, we're trying to take on more debt and take on more of the wrong type of debt. Debt—it's not just a matter of borrowing money and spending it and making the economy better. Some will say, and I think it's terribly misleading—you cannot just borrow money and spend it. There's a short term benefit but there is a long term negative. You have to borrow the money wisely, and if you don't do that then you make economies weaker and weaker. This is a process that is, I think, very well identified historically.

There was a San Francisco Fed study published in late 2012 by three authors, one of which was Alan Taylor at the University of Virginia, who's a Harvard Ph.D. The title of the study is When Credit Strikes Back. They looked at 223 different cycles over 140 years in 14 different advanced economies. The conclusion of their study—and econometrics is quite elegant—is that recessions are greatly influenced by the degree of reliance upon credit in the expansion. We didn't deleverage to any significant degree, we didn't improve the saving rate to any significant degree during this expansion. Now we're drawing the saving rate down, we're taking on more debt. So what we've achieved here is through more credit extension, which means that even though this expansion has not been good—it's been quite poor by any historical standard—we're setting up for a difficult time period.

We cannot rely on more credit, more debt to try to restore the economy. The policy makers here are in a bit of a dilemma. We can't move forward on fiscal policy, the decisions are too tough, too ­­­­­­­­onerous for too many people. No one's willing to have shared sacrifice. So we rely on monetary policy with all of its flaws and its negative consequences. And so the economy, in a very important structural sense, is fundamentally weaker now than we were a decade ago, or two decades ago, or three decades ago.

Chris Martenson: Fundamentally weaker, simply because of, structurally, the flavor of debt, or is there more to it than that?

Dr. Lacy Hunt: The aggregate size of debt and the composition of the debt; the two factors together. And the fact that we have not tried to resolve the indebtedness problem. We have tried to solve the indebtedness by moving further in the direction of increased debt and increased _____ [Inaudible 00:18:28] composition of debt.

Chris Martenson: Well Lacy, that's very interesting. You talk about monetary negative consequences. I would argue that there's a strain of convention "wisdom," and I have air quotes flashing when I say that word "wisdom", that says it really is different this time. Some people say, and I've heard this articulated directly, that we can safely ignore history and assume that these are really uncharted waters and the central banks are going to do whatever it takes to prevent us all from ever experiencing losses again. What's your view on that point of view?

Dr. Lacy Hunt: Well Draghi made that statement, "We'll do whatever it takes," and rallied the stock markets in Europe and the U.S., and there's considerable optimism. But the proof of the pudding is in the eating. Europe is now triple dipping. They got a temporary lift. When you take on more debt and you spend it, that's an increase in current spending up cycle. But then the debts come due. If they don't generate the income stream, then you get the down cycle. So we've seen numerous episodes in Japan where they've had massive rounds of central bank action, and you can produce the short term effect, but then it's swamped by the longer term problems of the over-indebtedness. That's where Europe is; they're more advanced in this process. Their debt sclerosis is at a higher and more advanced stage than the U.S. Japan is higher than Europe, but we're moving along that course, and the outcome is not going to be different.

But let's look at it from a longer term perspective. One of the greatest minds in mankind was the enlightenment thinker, David Hume, who mentored Adam Smith. My professor said that the Enlightenment could not have happened without David Hume. Hume was a complete man; his greatest work of course, A Treatise of Human Nature, in which he talked about a lot of subjects including time and space. Einstein gave him credit for generating the thoughts that led to the theory of relativity. But Hume, the great historian and complete man that he was, in the early 1750s wrote a paper of public finance. He looked at all of the situations of countries that became extremely over-indebted. Now he didn't have the quantitative data that we have, it's been pieced together by the archivists since then. But he was able to look at the outcome, and at the end of the article he wrote, "When a county has mortgaged all of its future revenues, the state by necessity lapses into tranquility, languor and impotence." Languor, of course, is where we derive the term "languishing." There are many notable examples. In 1781 the greatest military power, economic power in the world is France. They've just achieved their great victory at York Town. We would call it "our" victory at York Town, but the fact of the matter is it was French fleet that blocked the British fleet which prevented the evacuation of Cornwallis; it was French funds which paid our soldiers and the French soldiers that were there. The forces were co-commanded by French and the French General Rochambeau and Washington. But within ten years the Bourbons of France are dissolved. The thing that brings them down is all the debt that they took on to finance the French and Indian Wars, then the American Revolution, then lavish living; it's a story that's well-known.

The great Roman Empire is the same story, the Mesopotamian Empire, and many other lesser cases. The path toward extreme over-indebtedness is something that is well documented by history. I would suggest that if you want to get a qualitative feel for this, an extremely well written book is to read The Ascent of Money, which was a best seller book a few years ago by the eminent Harvard economic historian, Niall Ferguson. But it all tells the same story. This is an outcome that we know and that's the path that we're on.

Chris Martenson: So this is a very interesting point. You mentioned earlier that you think that rate normalization is not really in the cards because if it happens, it is going to really wreck things. In the most recent Hoisington Quarterly Review and Outlook, which by the way is a great read for anybody listening, I read it religiously; in there, you noted a relationship between nominal GDP growth. You started out earlier telling us about the 0.9% real growth for the first half of the year, but nominal GDP growth, you had a relationship there between that and bond yields that's really driving some of your outlook around bonds. I found that interesting. What is that relationship?

Dr. Lacy Hunt: The relationship between bond yields and nominal GDP is what economists call the Wicksell effect. Wicksell was a Swedish economist; he was born in 1851, died in 1926, contemporary of _____[Inaudible 00:24:05] also born in 1851. What Wicksell said, and there's a lot of validity in it and it's been confirmed by more contemporary studies, is that the key to monetary policy is to look at the relationship between the market rate of interest and the natural rate of interest. If the market rate of interest is above the natural rate of interest, that will depress economic activity; because you'll have to take resources from the income stream and put it into the financial stream. Otherwise, if you get the market rate of interest below the natural rate of interest, then you can take resources from the financial stream and divert it to the income stream. Now probably the best measure of that for the market rate of interest would be something like the Baa rate. The Baa is the lowest investment grade rate. So you've got all types of credit out there and the natural rate of interest would be nominal GDP growth rate. Well we have this relationship, you can look at the date since 1930, and what you see is when the market rate goes above the natural rate, you get recessions; when it goes below, you get expansions.

The market rate went above the natural rate during the 2007-2008 period and in spite of the Fed's efforts, the market rate—the Baa—rate has stayed above the nominal GDP growth rate. The only way that you can possibly deleverage this system is to create the other situation. My way of thinking is that our central bank policy's inability to activate the Wicksell effect is a symptom of the extreme over-indebtedness in the same way that the low inflation rate subdued economic growth, the growing deterioration in demographic fundamentals in the U.S., Europe and Japan are all occurring. These are symptoms of the over-indebtedness. The root cause of the problem is too much debt, too much of the wrong kind of debt and trying to solve an indebtedness problem by taking on more debt.

By the way, there's another new book on the subject called, House of Debt by Mian and Sufi. Mian is professor of economics at Princeton and Sufi is professor of economics at the Booth School at the University of Chicago. Clever title, House of Debt; it's a play on the term "house of cards." What they do is they pull together all of the historical, theoretical and empirical evidence and they show what happens in these situations. They clearly document the disastrous consequences of trying to use more debt when the problem is already excessive indebtedness. So the evidence is continuing to build and unfortunately that's where we are. We're not willing to try to address the fundamental problem; we try to deal with the symptoms with the wrong solutions.

Chris Martenson: Now are you saying that monetary policy maybe has hit its limits? The failure of the Fed to activate the Wicksell effect is not for lack of trying, I would argue. They've done everything they can to force people to chase yield wherever they can find it. I assume in the Baa rate among all the other crevices they're targeting. Or is there more, do you think, that can and will be tried by the Fed and other central banks if and when another recession strikes? Where are we in this story? Are they about out of bullets or is there more they're going to do here?

Dr. Lacy Hunt: Well I think the evidence is that the quantitative easing failed, both one, two and three. The ten and 30 year yields were higher when the phase down of quantitative three was announced than before quantitative one began. And the academic studies, which are impressive, indicate that the large scale asset purchases actually had a counterproductive effect.

Here's the difficulty, and I think it goes back to over reliance on Keynesian economics. Keynes, before he died in 1946, developed a concept of an underemployment equilibrium in which the U.S. economy would remain mired with excessive unemployment and this was baked into the cake. Unless the government ran large deficits when World War II ended, and that was the only way out. Now remember that Keynes' interpretation of the 1930s was that there was insufficiency of aggregate demand; there was not enough of consumer spending. I think that Keynes was correct in arguing that the Great Depression was due to an insufficiency of demand. But where Keynes failed is that he did not understand that the insufficiency of demand in the 1930s was baked in the cake once we had taken on the excessive debt of the 1920s. What the modern Keynesians do not understand is that the underperformance that we are experiencing today was baked into the cake by the big run-up in debt in the 20 years leading up to the 2008, possibly the 30 years leading up to 2008.

The reason that Keynes' paper on the underemployment equilibrium is so important is that he was wrong about us having an underemployment equilibrium. We had a great post-war boom. The unemployment came down; there was tremendous prosperity. Standards of living were lifted, we provided new housing and a whole host of other benefits to the American middle class. What Keynes did not understand is that the problem of the 1920s had been rectified by the high saving rate and the debt pay down that occurred during World War II and in the aftermath of World War II. The reason that we have not been able to regenerate the immediate post World War II boom is that we have not corrected the balance sheet imbalances; and as long as they persist, we are stuck in this situation.

Chris Martenson: What you're saying is there is a basic cause and effect misdiagnosis going on; that Keynes was right, that there was a reduction in aggregate demand that was important, but it's an important symptom. So the doctor would not—

Dr. Lacy Hunt: It was baked in the cake by what happened in the 1920s, basically.

Chris Martenson: Right, so then the cause is the excessive debt that was already baked in the cake. Are you saying then that the Federal Reserve currently is repeating the same mistakes that were made back then, in diagnosis?

Dr. Lacy Hunt: Yes, because we're trying to solve—this is why the Mian and Sufi book is so important; because we're trying to solve the indebtedness problem by taking on more debt, getting people more leverage. That's not the pathway to stability. It can produce these intermittent bouts of recovery but they quickly fizzle out.

Chris Martenson: And this gets me to the central question that I've really been hoping to get to is, you mentioned the word "stability." Given that this is the path that we're on, we're attempting to remedy a predicament that came about by too much debt by applying more debt, what sorts of systemic risks, if any, concern you at this point in time?

Dr. Lacy Hunt: Well there are two. First of all, as you become more indebted and you have more of the wrong type of debt, the first effect is that you see this long slog downward in a country's growth rate. As growth rates get weaker, there are consequences. Number one, you get a widening income and wealth divide because the pie is growing so slowly. So the government is asked to do more, the central bank is asked to do more to help, but what they do is in fact make the situation worse, which exacerbates the income and wealth divide. They're motivated to act because people are hurting, there's underperformance, but this process of a slow downward grind in the growth rate is only a prelude to the point at which you hit the bang point. Now the bang point does not occur quickly, it's off in the distance; but it's at that point in which you lose the confidence of the markets and you're unable to rollover your existing debt. At that point in time, you have chaotic conditions but the bang point is not what we're facing, in my opinion, certainly not in the United States immediately, but we're facing this slow downward grind in economic growth. Japan is interesting because they're much more advanced than we are and it will be interesting to see when they hit it. In the meantime, because the U.S. is less indebted than the rest of the world, the dollar retains its value. It's not that we're doing anything right, but it's our debt sclerosis is not as advanced. And so the dollar in a comparative sense holds its value, holds its bid.

Chris Martenson: So the bang point—we'll probably see this play out in other markets. Japan obviously with their debt to GDP ratio, plus they're attempting to stimulate aggregate demands through monetary policy in a country with a falling demographic and an aging demographic, which seems like a couple of headwinds that I'm not even—I haven't seen anybody in Japan even remotely address that particular gap. So I agree—

Dr. Lacy Hunt: That's one of the big problems for them, but keep in mind that in 1989 their demographics were not that good, but after 30 years of deteriorating economic conditions the situation, the demographics have gotten worse and worse. And the demographics have been deteriorating in Europe and now the demographics are deteriorating in the U.S. Our demographics are not nearly what they were five to ten years ago.

Chris Martenson: Right.

Dr. Lacy Hunt: The weakening in the demographics are a symptom of the extreme over-indebtedness.

Chris Martenson: So for an average investor then, someone who might be with a typical brokerage where they might have a 60/40 portfolio, 60% stocks, 40% bonds with, let's imagine the bonds are held along a spread of credit ranging from safe to junk, what should they be thinking about at this point in time?

Dr. Lacy Hunt: Well, I'm not in the business of giving advice to individual investors. I'm in institutional fixed income management. I will tell you that we can operate anywhere on the treasury curve that we want. We're given that mandate by our institutional clients, and right now if they want to track one small piece of our business is the Wasatch Hoisington Treasury Bond Fund, which we are a sub advisor. But we manage it like our institutional accounts. If you look at that, which is in the public domain, you'll see that it has a 20 year duration; not maturity, duration. And we're positioned on the long end of the curve because we think that the environment is going to bring inflation rates lower, that economic growth is going to be depressed, and while we acknowledge that interest rates can rise over the short run for any one of too many factors to mention, we don't think that interest rates can stay up. They can rise, but they cannot stay up in this kind of environment. So we're positioned in the long end of the treasury market.

Chris Martenson: Understood. So that means that you are fundamentally of the opinion that structurally we're going to see low growth going forward, and therefore having a duration of 20 years means that you're looking for rates to be moving down, not up, going forward. The quick translation in my book for people who are in equities is that you need to understand the extent to which equities are priced for rapid growth. It feels to me like there's a pretty big gap between what equities are telegraphing and what bonds are currently telegraphing, about as large as I can recall in my lifetime watching markets as carefully as I do now. Would you think that is a fair characterization, that there's a bit of a—

Dr. Lacy Hunt: I think that is a fair characterization. I personally don't think the stock market is a very good barometer of economic activity. I know that the Fed thinks that wealth influences economic activity, consumer spending, but that's not what the studies show. I mean last year we had a tremendous increase in wealth, stock prices and home prices together after inflation were up more than 30%, but consumer spending is just barely moving this year. In fact the latest numbers are quite disappointing. I mean 1987, many people recall the market meltdown of that year, Wall Street crowd said that we would have economic Armageddon in 1988 yet the GDP growth rate was 4%. But a lot of folks assume, and I think incorrectly, that the stock market is the economy. I don't. I think the stock market will only turn down after it becomes apparent that the economic situation is faltering. And so I would not take confidence, I think that right now the economy is much weaker than is generally understood.

To just tell you one sort of approach that we use here, we're very interested in what happens to money supply growth and the velocity of money. We consider them equal partners. Since 1987 velocity has been trending down at about 3% per annum, but in the first half of this year velocity actually decelerated at a 4% annual rate; which is an indication that the composition of debt is moving it the wrong direction. So we have money growth around six and velocity declining at least three, but perhaps at four; which suggests that nominal GDP growth is only in the 2% to 3% range. Well you've got to take that 2% to 3% and split it between inflation and real growth. Which means, and most people have the inflation rate this year somewhere around 1.5%, maybe a little bit higher. Well one and a half nominal growth is two, that only leaves you half a percent real; if nominal growth is three that leaves you with 1.5%. I think that we're going to be lucky to have 1.5% real growth rate this year.

The problem with money velocity is that it too is a symptom of the extreme over-indebtedness, just as is the inability of the Fed to activate the Wicksell effect or to bring up the inflation rate. These are—they're operating the way they do because of the indebtedness problem. I think if you look at the big ticket sectors of the economy, as of right now, August of 2014, the big ticket sectors are flattening out, if not faltering. Ford Motor in releasing the July vehicle sales said that the automobile market is flattening out, and that's with a record percentage of subprime loans. If you look at new home sales, flattening out would be a generous interpretation, they're trending lower. If you look at nondefense capital goods shipments, they have flattened out. They might be trending lower than machine tool orders last month; you may have seen the numbers were negative year over year. Well machine tool orders are just a small component of capital spending but it's hard to envision a situation where capital spending in general can be doing well when the machine tool component is negative.

So what we're left with, basically with your big ticket items flattening out, is you've got to try to move the economy by selling items that fit into the grocery cart or that go across the counter. Well you can keep an economy kind of stable, keep the nose above the water line, but the economy is not going to move forward in this type of environment.

Chris Martenson: Well fascinating, and thank you so much for your time today. I have a final question for you. It relates to the idea of inflation, a lot of people wondering where it is. I know that you made the point that there's just so much industrial capacity across the world that it's hard for inflation to really get going. So here's the question, what would happen if China and Russia go back behind their walls and iron curtains respectively at this point in history?

Dr. Lacy Hunt: Well that would be worrisome and it would change the dynamic because the price level is determined by the intersection of the aggregate demand and aggregate supply curves. The aggregate supply curve is really the cost of production. Now the cost of production is heavily influenced by the scale, the economies of scale. We saw that when the Berlin Wall came down in the late 1980s that there was a tremendous increase in economies of scale which brought the cost of production downward. So if you were to pull Russia and China out of the picture, that would matter. Now if it's just Russia by itself, that's not that consequential. China in my opinion is the lynchpin; but they are so dependent on export sales. As a matter of fact, as a result of the way in which they trended they've become more dependent on export sales to the west. So for the time being I don't think the risk of China pulling out is that great, but it's certainly something that we would have to monitor.

Chris Martenson: Absolutely. Well with that I really want to thank you so much for your time. We've been talking with Lacy Hunt of Hoisington Asset Management. Lacy, obviously extremely well-grounded in history and that comports well with how we view the world. There's nothing new under the sun. We have to understand where we are in terms of where we've been. So, Lacy, thank you for much for your time today.

Dr. Lacy Hunt: Great pleasure to be with you, Chris, and congratulations on your work and best wishes for your continued success.

Chris Martenson: Thanks and likewise for you.

Dr. Lacy Hunt: Okay, all the best.

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34 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Another Great Scoop.

Merry Monday Morning all.

I have to pause the tape to take notes. This is like drinking from a fire hose.

The policy makers here are in a bit of a dilemma. We can't move forward on fiscal policy, the decisions are too tough, too ­­­­­­­­onerous for too many people.

My mind went to a TV program in which modern day people were subject to the conditions of your pioneering families and given a piece of land and had to construct a log cabin and live within their means. Most failed. I think that conditions will become even tougher because all those wide open spaces are now full and the soil is depleted. (Did I mention the climate challenge?)

Press play.

The "natural rate of interest" I assume that implies the rate at which the economy grows. If we take a proxy for the natural rate of interest to be, say, the increase in the amount of coal burnt- does it necessarily follow that it is wise to increase coal consumption in order to invoke the Wicksell effect? I am being disingenuous. The answer is Mu.

The money borrowed must be spent wisely on research into an alternative to coal. Instead we send these researchers to Coventry in order to protect precious Chairs at Universities.

Now I must off to work.

 

rubearish10's picture
rubearish10
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Posts: 24
Great Podcast

Enjoyed the discussion quite a bit. Macro, no doubt brings thought process into focus (at least for me). Over indebtedness has been an ongoing topic for quite a while now and yet the US appears to remain the cleanest dirty shirt (if not even cleaner lately) around the developed globe. So, we wait even longer (I admit to be one of those people still waiting....) for the umpteenth shoe to drop and then what? Massive USD short covering (meaning you ain't seen nothing yet I'm sorry to say to all us PM holders) breaking global trade and economies further into pieces, a stock market crash and then what? A Central Bank rescue of course. Am I right so far? Maybe yes, maybe no.

This is complete insanity! If you're investing any assets in securities markets you better be hedged because there's no fundamental correctness to a model portfolio. Especially if you are a "retail" investor with Schwab ETAL because it'll be too late for you to get out!

Nobody and I mean nobody really knows the outcome of this experiment and we thank all those who try to predict. IMAO, this is my view. <laughing> So, I'm long and short duration using Strategic Income Funds, paring down high yield, long miners, long PM (physical), 25% equities (while accumulating S&P Puts, hedged in FX and long 25% CASH!

Forgive me for spewing personal portfolio models but I'm bored of all this and going to play golf tomorrow!

Chris, we love your dedication, hard work and variety of insight!

Rubearish10

treebeard's picture
treebeard
Status: Platinum Member (Online)
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Posts: 627
The problem of the specialist

We have a crisis in the way that we think.  What is so revolutionary about what Chris, Adam and the team have done here is to make interdisciplinary connections (the three "E's"), the foundation of the website. Unfortunately, the intellectual world in which we live has a sclerosis which is withering as the debt discussed in the article, the disease of the specialist, where one discipline tries to explain everything within their own dogma. I must say that I was dumbstruck, flabbergasted by the statement:

You take the debt on, you buy now, but you have to pay later. Many presume that you never have to pay later, but that's a faulty assumption. That's the difficulty that we have, and we're trying to solve an indebtedness problem by taking on more debt.

Really?! I don't know if this just run of the mill ivory towerism, or something else.  Who are the many who are making that presumption, the mass of this country who are putting there groceries on their credit card because they don't know how else they are going to eat?  Or trying to reeducate themselves because the jobs have been off shored?  Nobody has had a car towed out of a driveway been foreclosed on?  Or is it the PTB that he is referring to who may be creating debt for their own reasons, which has little to do academic economic theory?

Not only is that the problem in the United States, but it's also the problem around the rest of the world. We're all trapped in this debt sclerosis. U.S. public and private debt is about 346%; it's been rising now for three quarters. No longer deleveraging here.

Obvious enough, but what might be the cause?

there's some transitory inflation from time to time because of the vagaries of food and fuel, and extraneous governmental policies related to issues such as healthcare. These intermittent inflationary spikes are all drowned out because economic growth is too weak.

No mention of peak everything here, just some vagaries of food fuel inflation, drowned out because of all this debt that is preventing us from getting back to economic growth.  The between the lines implication here is that we need to get back to economic growth???!!!!  WHAT?!

We took on a lot of debt in the 1920s. We drew down the saving rate but in the 1940s we had a tremendous surge in the saving rate; the saving rate went up to 25%, it remained high after the post-war period. We paid the debt to GDP ratio down, and we were able to have the great post-war boom. But unfortunately, unlike what happened in the late 1940s and the 1950s, we're trying to take on more debt and take on more of the wrong type of debt

No mention of a couple of world wars that took out all the competitive industries around the planet, and gave the Anglo-American empire global control of oil resources that created wealth beyond the dreams of Midas.  Just suddenly hard working Americans decided they want to do the upright thing and start saving?!!!

the key to monetary policy is to look at the relationship between the market rate of interest and the natural rate of interest. If the market rate of interest is above the natural rate of interest, that will depress economic activity; because you'll have to take resources from the income stream and put it into the financial stream. Otherwise, if you get the market rate of interest below the natural rate of interest, then you can take resources from the financial stream and divert it to the income stream. Now probably the best measure of that for the market rate of interest would be something like the Baa rate. The Baa is the lowest investment grade rate. So you've got all types of credit out there and the natural rate of interest would be nominal GDP growth rate. Well we have this relationship, you can look at the date since 1930, and what you see is when the market rate goes above the natural rate, you get recessions; when it goes below, you get expansions.

Are interest rates and interest rate meddling really the only cause of all this?

The root cause of the problem is too much debt, too much of the wrong kind of debt and trying to solve an indebtedness problem by taking on more debt.

How can the root of the problem be to much debt?  Isn't debt taken on for some underlying reason (i.e. root cause), can we seriously believe that debt is taken on for it's own sake is the statement implies?

 

What Keynes did not understand is that the problem of the 1920s had been rectified by the high saving rate and the debt pay down that occurred during World War II and in the aftermath of World War II. The reason that we have not been able to regenerate the immediate post World War II boom is that we have not corrected the balance sheet imbalances; and as long as they persist, we are stuck in this situation.

How could a discussion of the post war US economy not include the facts to the American oil boom and the global destruction competitive industries. And why can't we correct balance sheet imbalances?  How about some reference to the three "E's"?

I personally don't think the stock market is a very good barometer of economic activity. I know that the Fed thinks that wealth influences economic activity, consumer spending, but that's not what the studies show. I mean last year we had a tremendous increase in wealth, stock prices and home prices together after inflation were up more than 30%, but consumer spending is just barely moving this year. In fact the latest numbers are quite disappointing.

Yes, we been kicking his idea around this site for years, how very insightful. I guess I am a little disappointed, Chris, on your own, your insight and thoughtfulness towers over this guy.

aggrivated's picture
aggrivated
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wisely spent borrowed money?

I've just heard that TVA is going to make some changes in it's generation of electricity.  'Down with coal' is the plan in place for closing the Memphis TN Allen coal fired power station.  These forward thinking leaders are replacing this with -----wait for it-----a gas fired plant.  Brilliant!  Now if we can only start to export some of that natural 'fracked' gas and get the prices up to world market rates the skyrocketing cost of electricity in the mid south will surely drive all citizens to solar power quickly. IF CNG efforts fail, then we will surely run out of natural gas more quickly. This is government incentives at their best.  In a few years I'll be looking for someone to do a nice retrospective graduate paper on how TVA stimulated conversion to alternative energy generation all with borrowed money.

So, what to do?

Jack Spirko recently said that the greatest failure of leadership is on the personal level. 

If you were living in the mid south, how would you respond to this move personally?  I'd love to hear some thoughts.

 

Arthur Robey's picture
Arthur Robey
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Posts: 3936
can we seriously believe that

can we seriously believe that debt is taken on for it's own sake is the statement implies?

My view Treebeard, is that there was a war between Labour and Capital in Regan's time. Capital won and offshored all industries because they are mandated to maximise shareholder profit.

This gutted the working, middle class. It also took out the tax base of the USA and other camp followers. Rich people dodge taxes and poor people are untaxable, leaving the burden on the Middle class. Solution easy (and Wrong)-Print money.

The real solution would be to reverse whatever Regan did. Oh! and repair the Law- Companies are Not people, and "the interest of the shareholder" must be broadened to include all of the interests of the shareholder. Would the shareholder not prefer a stable civilization and a healthy environment in which to raise children? Money is way down the list on Maslow's Hierarchy. It is not even on the list!

The velocity of money tanked and so TPTB lowered lending standards and we all know how that turned out, don't we?

People took on debt because that was the environment in which they found themselves. If you don't get wages then you must perforce borrow to survive. If TPTB created the problem they have a moral obligation to repair it. All that is required is to recognise that these debts are digits on a computer. The same things that one scores in any Virtual Reality game. Press reset, al-la Prof Steve Keen. Poof Debt Gone. But Chris has already explained that we don't know who owes who what. In any event choices will have to be made, and soon.

I fully acknowledge the role of Energy in this set of events. One view does not preclude the other.

KugsCheese's picture
KugsCheese
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Posts: 1469
Interest Rates

Lacy Hunt obviously doesn't want to scare his customers and loose biz, but there is no way interest rates will stay low and change slowly.    If rates only go up 3%, the US Treasury has a big problem.

Doug's picture
Doug
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Posts: 3200
What to do, what to do

If I could give you more thumbs up I would, but if your Steve Keen reference was to suggest a debt jubilee, I'm curious what would happen in a debt jubilee to the tens of trillions of dollars in credit default obligations out there.  They aren't debt, they are insurance against default of debt.  Can the losers in the jubilee collect on their insurance?

Also, while I certainly appreciate the fairly wide ranging approach of this site to discussing the world's problems, I think Jeffrey Sachs comes as close as anyone in grasping the broader causes and implications of our global crises.

Seems to me the bottom line is, if we want to fix it, to somehow create the political will worldwide to do so.  Even then it will be a hell of a stretch.

Doug

Atreat's picture
Atreat
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Thanks Treebeard

For articulating what I only had a dim sense of, which showed up as uneasiness, as I listened to this podcast.  Disturbingly I defer to experts, often unconsciously.  As this site often points out, and I need to remember regarding the three E's, is that this is an unprecedented historical situation.  Again thanks for being so articulate when I could only muster fogginess.  I do hope Chris comments on your post.

VitalyGo's picture
VitalyGo
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Posts: 22
The Minds Eye

Interesting podcast. I always find the discussions with institutional players interesting. It gives some insight into how the current system is run and what kind of analysis they are looking at.

It will be interesting to see what Yellen's next move is, continue tapering into a recession and let interest rates rise or return to QE in bigger doses.

Also, it was interesting how shifty Hunt was on advice to individual investors. I'm not sure there are a lot of options for the retail investor other than providing liquidity for the professionals.

 

kelvinator's picture
kelvinator
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Posts: 215
If My Car Mechanic Doesn't Share My Worldview

I can still learn something really useful about how to keep my car running from his/her specialized knowledge.

I really agree with many of your comments, treebeard, and often think they're phenomenal (eg, I think a 4th "E" for personal and social "Evolution" may be a key one to think about and develop).  I'm sure my worldview is a lot closer to yours than to Lacy Hunt's.  Still, like a lot of folks, I have to try to understand what's going on with the mechanics of the financial world - how it thinks about itself, how it's likely to evolve, so I can stay solvent and get things done, just like I (at least used to) know how to diagnose and clean my own carbuerator so I could save money, enjoy getting around and take care of business.

To me, this was actually a great interview that Chris had with Lacy Hunt that I've already sent to a friend and posted elsewhere for others to read.   It's not great because I agree with Hunt's overarching worldview.  I suspect I wouldn't agree with many aspects of what (I'm only guessing here) is a particular brand of conservative, "free-market is brilliant" financial worldview that I often see among asset managers.  I would also guess (without really knowing) that the reason you have a problem with what Hunt says ultimately isn't because he's a specialist, but because like me, you don't agree with the unexpressed actual worldview underlying his detailed analysis;  that's why Hunt is not talking about peak everything, wealth inequality, Wall Street thievery, etc.  He doesn't necessarily see or believe those things are important - not because they are out of his area of specialization.

But, still, what I liked about the interview is that he has clearly had a massive focus on the phenomenology of what happens financially (in terms of stock prices, bond prices, interest rates) in societies historically that try to use more debt to solve problems of debt.   His approach provides one explanation of why Japan's 10 year bond pays about 0.5% after 25 years of printing money, adding debt and generally trying to fool financial reality.  Since all major economies may be on a similar path to Japan, it's worth considering what he has to say, since how the financial world falls apart and evolves will be a big part of upcoming changes.  I listened to Hunt and others last year and added to some of my savings in safe, longer term bonds when 95% of analysts said to toss them, and that's been a good thing, since it makes sense to keep some of what I have in the paper world, and since they've done well since.   Like like my original VW bug, once smoke starts billowing out of the rear end of those investments, I'll call in the tow truck and move whatever's left into something more useful. ;-)  It's all stepping stones to a very different world, it seems - taking what's useful, leaving the rest behind, and trying to open up some new channels to broadcast and receive truths that I expect may start to evolve more rapidly before long.

Bheithir's picture
Bheithir
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Posts: 24
TVA Coal Power

aggrivated, I feel your pain. My rural property isn't very far at all from the Cumberland City plant. While it isn't slated for closure, the size of it, 2.36 GW and consumes 20,000 TONS of coal a day, makes it a significant portion of the whole supply. Almost 10% if I did my math right. If they were to close that, then prices would definitely go up. As it is, we will be paying more in the years ahead. I don't think alternatives will make significant contribution to replacing the closed plants. Wind power in Middle Tennessee isn't that viable, because the constant wind speed at 80 meters around much of the state is less than 6.5 m/s. This isn't suitable for commercial development. As for personal wind mills, it may be something that could be worth doing dollar wise, if you built it out of scrap and didn't have too high of installed cost. Payback would be much faster than buying a commercially manufactured windmill, if you could get similar efficiencies. It may be fun just to do it. On the other hand a wind mill will be an advertisement that power may be available at your location if we have have grid collapse. 

Personally I'm going with PV's and thermal solar that is on the back of my house and not readily visible from the road. I'm also going to mix in some wood gas generation or steam power generation to keep battery bank up to snuff.

treebeard's picture
treebeard
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Posts: 627
In the secret PP communicaton center...

The PP team has done a great job cultivating the site and bringing really top talent in for commentary, when they first started out, who had heard of PP, attracting high quality speakers was a bit of a challenge.  Now the reputation of the site has grown and Chris has made numerous TV appearances.....

Adam:  Hey Chris, great job. Heard you got Dr. Lacy Hunt, the executive vice president of Hoisington Investment Management Company, that brilliant macro economist, to do an interview.  How did it go?

Chris:  Erh, well about that, I have some good news and some bad news.

Adam: What do you mean?

Chris: Well the interview went great but one of the crackpots from the peanut gallery went off on Hunt in the commentary.

Adam: Who was it this time?

Chris: Treebeard

Adam: Oh, him again, what the heck do we do now, can we pull the comment.

Chris: Nah, to late for that.  We may finally have to do it.

Adam: Do you really think so, no other options?

Chris: Yes, its time to call in..........  THE KELVINATOR  his excellent writing skills, broadness of mind, even temperament and excellent communication skills should win the day. We have to give it a try.

Adam: All right, lets do it.

Next day.............

Adam:  So Chris, how did it go?

Chris:  Let me see, lets pull up the comments on that.......

Adam & Chris:  OH NNNOOOOOOO.............................

 

aggrivated's picture
aggrivated
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Posts: 572
thanks for the thoughts on power generation

Doing the math still shows that I'm way over in any usage I could hope to produce off my small property.

The #1 thing for me is reduce, reduce, reduce consumption. This is not feeling realistic today with temps running in the high 90's F.   Concurrent with that  will be coming up with some production.   Wood gas is interesting.  Here is a turn key product http://www.tacticalwoodgas.com/ . Germany worked with it a lot in WWII. This looks good for running a generator or cooking, or even a gas furnace if needed in a pinch.

Somewhere between reduction and production I will be able reach a balance that will work.  I agree that multiple  sources of production are wise from a redundancy perspective, but more complexity means more juggling of stuff.  Has anyone had any experience with tied to grid production and getting paid for excess electricity?  How big are the strings?   I've heard some states are thinking of taxing producers to help pay for the grid.  Should I just try to stay off grid for essentials and produce that amount  while enjoying air conditioning as long as it is affordable? 

The other side of the coin------------------

From a keeping the peace social perspective, I can't see the USA allowing too many going without enough power to at least keep the boob tubes running.  Without the mental anesthesia they provide, too many citizens might wake up to all the mess around them.  Maybe it would be better not to worry about having power as much as other areas like food and security.

aggrivated's picture
aggrivated
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"Stepping stones to a very different world"

Have any of you read Zeus Yiamouyiannis, Ph.D work on Transitioning Economy at www.CitizenZeus.com?  He is a friend of Charles Hugh Smith and has some interesting ideas to transition to a 'very different world' that are well worth some discussion.  Can we get him for an interview on PP?

kelvinator's picture
kelvinator
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Is My Comment Smokin', But in a Bad Way, treebeard?

like an investment in the status quo gone wrong?  To me, the whole world these days >is< kind of like a cartoon, and thanks for supplying such a fun caption.  This is exactly why things are going to get more interesting as time goes on - the narrative of what's supposedly going on in the world and parodies of the narrative will start to play off each other, the parodies pulling in the tougher and better realities as they mock the catastrophic absurdity of the Official story.  And then finally, you're bound to have a whole new enchilada explanation of reality multiplex that lands from inner space to captivate the imagination of a new and difficult generation.

>>Of course, as we all know, it's absurd to imagine that debts could be used to pay off debts at any financial level in the world. <<  Are we brazen, incompetent fools?  "It's obvious on it's face" is an expression I always like to work in when I can. And yet, that's what's clearly going on, along with Official Mumbling that that's not really happening and it's all good.   And with literally millions of experts who live, work and feed their families within the edifice of "that's not really happening and it's all good".   Why is that?  Because you know, humans.  It turns out, if there's even a small chance that perpetual motion exists, that this global check kiting thing can actually work out if we pay a few economic rocket scientists to explain why, then well, we've got a show to run, job to go to, plane to catch, money to make.

But Big Changes are afoot, we can be pretty sure of that. And there are going to parts of things that work for awhile and then don't, and other things that start to work that we hadn't expected.

You who live on the shores of the possible,

Cast your boats to sea.

And turn your oars in moonlight's wake.

And let your lives drift free...

 

Mark_BC's picture
Mark_BC
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Posts: 522
I agree with treebeard that
I agree with treebeard that this article pushes a lot of my buttons but I think it's worthwhile to have these kinds of guests because they give us certain viewpoints to consider. I'm sure Chris was also entertaining these thoughts as well but is skilled at getting the guest to reveal insight that we might not otherwise consider and to not disagree with them for the sake of argument. This interview provides a window into how the heart of the financial world thinks and acts, something I'm always wondering about: do they actually truly understand the predicament we face and are taking the actions we see because they are evil, or do they just not have a clue?
 
I also think that "specialists", and specifically economists who basically lord over everything else in the world because they are managing the top of the pyramid of complexity, can be very dangerous, and this article seems to reveal that to be the case. Don't get me wrong - a specialist in diagnosing cancer is a great thing to be specializing in. But specialist economists? It's a dangerous combination. Economists need to be generalists and learn as much as they can from a whole wide range of subjects, particularly the natural sciences and engineering. Unfortunately, they don't seem to. That's what's broadened my perspective so much -- coming from the natural sciences and engineering and learning all about economics.
 
What's happening to the world and US right now is tragic of epic, even Biblical, proportions. What's even worse is that TPTB don't have a clue why it's happening. Even today. They're busy trying to patch up the symptoms, while ignoring the root causes. "Economy stagnating? Well that's from too much debt!" Really?
 
I often try to put social narratives into historical context. Nowadays pretty much everyone agrees that the mass genocide of American natives and the blacks that were brought over as slaves was one of the darkest of human history. Yet many people back then considered it acceptable and desirable; any unpleasantries were merely the means to a greater end. Yet the economic policies that our leaders impose on us today, and the general social narrative that economic growth is good, that consuming more helps the economy, that we need to produce more and more oil to solve our problems, etc. etc., these are all dominant social narratives that our leaders profess and the vast majority of people out there also accept. Yet their effects are equally genocidal as what we did to the natives and blacks. It's interesting how public sentiment can be so wrong; it just reveals how our world views are almost totally shaped by our greater society. Unfortunately when the average person truly understands how misguided our current way of thinking really is, it will be far too late.
treebeard's picture
treebeard
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It's all good

It's that old Chinese curse, may you live an interesting life. We seem to be doing that in spades.  But nice to have good company for the ride.  I consider you all good company!

Nobody on the deathbed says, "I wish I played it safer, played by the rules, kept more things to myself". Of course you can't take yourself to seriously either.  I suppose if I had listened to this podcast while I was doing other things as I normally do, I probably wouldn't have commented, just thought well this isn't my cup of tea, perhaps somebody else will get something out of it.  But as fate had it, my wife was still sleeping so I read the transcription, not wanting wake her up with the noise.  I kept clipping things into the comment box as I read that rubbed me the wrong way or didn't make a whole lot of sense. I got myself all riled up.

Thanks for the comment Atreat, love that you articulated what you did, trust yourself, give your unique gift to the world, the gift, whatever it may be. As banal and overused as those words may be it is still true. Of course Arthur, love all your comments, I do agree that it has been and will a war of capital against labor.  But if that isn't shooting yourself in the foot, I don't know what is.  It is amazing how short sighted human beings can be.

Kelvinator, I guess since I first read your handle was tempted to do a play the terminator, just couldn't help myself, I do agree with your comment.  Right after I hit the save button I thought that made I was a little harsh, it's all grist for the mill.  I do remember some exchanges a while back that got pretty intense, you were always considerate and articulate, compliments in the comical post were intentional

Mark_BC, your post are always right on, thanks for your comments.

I did watch the Jeff Sacs video, I'm glad he is still trying to work some positive change within the system, I'm not sure that that is really possible any more.  It sure is going to be an interesting ride.

cmartenson's picture
cmartenson
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Posts: 5971
When we wallow in just one E
treebeard wrote:

(...)

How could a discussion of the post war US economy not include the facts to the American oil boom and the global destruction competitive industries. And why can't we correct balance sheet imbalances?  How about some reference to the three "E's"?

(...)

I have to confess, I find Lacy Hunt to be personally a quite charming and interesting fellow.  When I met him at a Casey conference a bit over a year ago, I dug into his background and discovered that he was working at the NY Federal reserve at the same time my grandfather, Arthur S Hamlin, was serving on the board.

Alas, he couldn't quite place him in his memory, but I bet if I could get him a picture he might.

At any rate, he was really a very nice person.

I brought him on because he has about as complete an economist's view as you can find, plus the ability to speak normally and he's not prone to clubbing one with the obscure jargon of his biz.

But as Treebeard has raised, as have others, interviews like this are a trip over to the village of the blind and deaf men.  They know the world they know far better than any of us can imagine.  Their sense of touch is incredibly highly refined.

But they know nothing of energy (light, colors) because those have been entirely out of their sense of perception their entire lives.  And they know nothing of the rich tapestry of sounds (the environment) except for the grossest of thumpings and vibrations that come in through their sense of touch.

What I love about these interviews is the chance to see the world through the senses of someone who experiences it entirely differently.  The fact that they also represent the views of those that happen to have the reigns of power goes further and implies that I have the obligation to know what they are thinking.  

As a final step if we are going to communicate the other two E's, the onus is on us to figure out how to translate our world into their sensory arena so that it transforms their thinking.

I really consider these interviews to be like anthropology expeditions and I try to keep as open a mind as I can to get the other party talking for as long as possible and as freely as possible.  This is why I don't go for challenge style interviews where I try to impress the guest and everyone listening that I have a different point of view.  

If I did that, I suspect many of the guests would last for 15, perhaps 20 minutes.  When I can get someone as prominent and busy as Lacy to talk with us for 40 minutes I think that's best for us all because it means he's relaxed, open and sharing his world with us.

Lacy grew up at a time when net energy was expanding, pollution was a minor and localized problem, and population still had plenty of room to expand.  I rather doubt I would have specialized any less were I a budding economist during that era.  Beliefs and worldviews are set during those formative years and only a very few rare individuals not only can but willingly seek to unearth and challenge their primary beliefs.

I like to think I am one of those people, and I would have been that way no matter when I was born, but I know there's a darned good chance I would have been a product of the times.   Such inquiries were very much the exception just a few short decades ago.

Bheithir's picture
Bheithir
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Producing Your Own Power
aggrivated wrote:

Doing the math still shows that I'm way over in any usage I could hope to produce off my small property.

The #1 thing for me is reduce, reduce, reduce consumption. This is not feeling realistic today with temps running in the high 90's F.   Concurrent with that  will be coming up with some production.   Wood gas is interesting.  Here is a turn key product http://www.tacticalwoodgas.com/ . Germany worked with it a lot in WWII. This looks good for running a generator or cooking, or even a gas furnace if needed in a pinch.

Agreed. Amory Lovins of the Rocky Mountain Institute coined a term. "NegaWatts." Measures the amount of energy saved. My mantra is to find all air intrusions and seal them and Insulate, Insulate, Insulate. As for Wood Gas, these folks here in my home state have a nice setup. http://www.leafgenerator.com This is going to be one of my major purchases in the future. I forgot to mention that I have many acres of hardwoods to cull from. Especially bordering property where the logging company came in and harvested and left a fire hazard mess behind. I go and "clean" this up. No one cares and if they did I would complain on how they left lots of fuel in the event of a forest fire. I use an electric chain saw running from a marine battery and inverter. I have a gas Stihl Pro for cutting down trees, but prefer the electric for trimming an sawing up downed trees. I haul this around with a beat up Land Rover with no plates smiley and use SUV to snake out logs for processing.

aggrivated wrote:

Somewhere between reduction and production I will be able reach a balance that will work.  I agree that multiple  sources of production are wise from a redundancy perspective, but more complexity means more juggling of stuff.  Has anyone had any experience with tied to grid production and getting paid for excess electricity?  How big are the strings?   I've heard some states are thinking of taxing producers to help pay for the grid.  Should I just try to stay off grid for essentials and produce that amount  while enjoying air conditioning as long as it is affordable? 

 

The other thing I have done is brought in a second breaker box and mounted it next to the first one. This second box is powered from Alt sources and I just moved the the refrigerator circuit and other important circuits to it. As I grow my capacity, I will move more circuits. Stove and water heater are propane.

I will never really  have the ability to run my heat pump or electric dryer from alt sources. I also have a wood stove for winter heating. So I would have to hang wet cloths on a cloths line and suffer from the heat in summer. With that said, for those of you who do live in a hot climate, you can get used to it. I did basic training in Columbia SC in the 80's during June/July in WWII Barracks. No AC there. I acclimated.

TechGuy's picture
TechGuy
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TVA

"I've just heard that TVA is going to make some changes in it's generation of electricity. 'Down with coal' is the plan in place for closing the Memphis TN Allen coal fired power station."

I don't think the TVA had a choice. I am pretty sure Washington DC mandated that they shutdown thier coal fired plants. What is worse, is not only are the shutting them down, they are dismantling them so they can never be restarted. 

"Jack Spirko recently said that the greatest failure of leadership is on the personal level. "

Well, The American Public had a hand in electing these clowns. 

"If you were living in the mid south, how would you respond to this move personally?"

Same a the other Poster, PV Solar Thermal, WoodGas, and Steam. 

"IF CNG efforts fail, then we will surely run out of natural gas more quickly"

I think you meant LNG - Imported Liquidify NatGas. Yes, its a fantasy. Since we are approaching a worldwide shortage of NatGas. Europe is tapped out and needs to import just about all of its NatGas. Asia also has strong demand. The World is actually counting on the US to export NatGas!

We probably have some room with Frack NatGas, but the prices need to go up to about $12 to $16 per mbtu, instead of about $4. Of course $12/mbtu will make Electricity prices much higher. Burning NatGas for electricity is foolish since NatGas is the #1 fuel for domestic heating and hotwater. 

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Mark_BC's picture
Mark_BC
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Thanks for that link

Thanks for that link Time2help. Reading the comments to that article clearly reveals the classic endless left versus right debate. I can't help but roll my eyes at how little we've progressed in our collective understanding of economics. Of course each side, left or right, has something worthwhile to say. But in the end they are all myopic, essentially "economic specialists" who do not account for all of the other factors affecting economies as discussed here and on similar sites. How can it be that a few people like us peons on internet websites who have attempted, and I'd say have succeeded, in merging economics with the "real world" as described by science and engineering, could have figured this all out while those actually managing our economies (and debating it in the CoFR comments section) are hopelessly lost? Could it really be so? It seems so.

I've always had the opinion that the winner of any debate is the side that can completely understand an opponent's argument, reiterate it, and then point out its flaws. From this perspective, I have come across no one from the economics field who can refute or even address the issue of energy and resources and how they fit into the grander economic picture. I guess that's how all new social narratives and belief systems emerge -- a few free thinkers think outside the box and gradually start to change peoples' ways of thinking.

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Mark_BC ... Amen!

Amen!

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Atreat
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Thanks Chris et al

This site truly is my compass.

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Mark_BC
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I thought this was funny and

I thought this was funny and appropriate

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charleshughsmith
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Posts: 726
optimizing flawed metrics and the easy way out

Three thoughts on this excellent thread:

1. borrowing from the future is the easy way out, hence its universal appeal. Once the debt starts hurting, lower interest rates to zero. The pain goes away and now we can borrow even more from the future. yea, win-win-win, etc.

2. As long as freshly created central-bank credit/money still buys real-world stuff, issuing credit is the easiest way to maintain the status quo. 

3. We optimize for whatever metrics are in place, even if they're tragically flawed. The system makes no sense except as the optimization of flawed metrics: GDP, "growth," money as happiness, etc.

 

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aggrivated
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good work!

Thanks Bheither.   I like your electric chain saw idea.  I've got an old tractor (no tags :) ) for cleaning up the woods.  Do you have a well?  How are you powering your well?   They are usually power hungry.

Cold water can go a long way in keeping cool in the summer.

Ag.

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davefairtex
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why not really just print money?

That Council on Foreign Relations article is astonishing.

Zero Hedge has the full text.

I've included two particularly egregious paragraphs below:

http://www.zerohedge.com/news/2014-08-26/it-begins-council-foreign-relations-proposes-central-banks-should-hand-consumers-cas

Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances -- but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.

Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality -- without skinning the rich.

So to summarize:

  1. Its not a giveaway, it's like everyone gets a dying rich uncle each time a recession looms!
  2. Business cycles need to be stamped out - and we can do it through handing out free money!
  3. There are no unintended consequences, nobody loses, and inequality gets fixed!
  4. Recessions are all about Too Much Saving and Not Enough Spending.  Free money fixes this!
  5. And the best part is, it is SUPER EASY TO DO!

So let's see: Business cycle: FIXED.  Poverty: FIXED.  Debt bubble pop: FIXED.  Is there anything Free Money can't fix?

 

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Luke Moffat
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Posts: 384
Labour and Automation

Looking at the labour angle from a different perspective; I recall reading, a long time ago, that automation was meant to assist the factory worker by reducing the amount of human labour necessary for production whilst retaining the labourer's wage. The theory went something like this - you currently work 40 hours a week, we get a robot to do half your shift, you still get paid the same because production output is the same. Now i will concede those events did not transpire directly. Human labour was outsourced east due to cost, workers in the west lost their jobs, the west automated to reduce/eliminate the cost of labour even further to remain competitive. The east is in the process of following. However, all of those jobs disappearing forced people onto welfare/social credit. Welfare is funded either by taxation or deficit spending (call it bond purchases, printing money, expanding balance sheets, QE, whatever - I don't care what the magic trick is called anymore). Now for my opinion - the only logical way out is to tax the productive companies even more to cover the cost of the interest on the loans. Therefore, machines are used to produce the goods whilst people sit at home and receive the money they require from government to purchase these goods and keep the whole thing rolling. Under this system of ultra low interest rates why can't deficit spending go on forever? Knowing full well that if it stops the unproductive members of society go without credit? Starving people not only get angry, they tend to break stuff and anyone who is around trying to stop them from breaking stuff.

Admittedly, more automation won't set the masses free but it will keep them alive. Not quite the worker's paradise of Soviet dreams...

more like...

but such is the cost of our little experiment. Then again, you get what you 'pay' for

Time2help's picture
Time2help
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Posts: 2888
It would be nice if people paid more attention

But everyone is so busy.

 

 

KugsCheese's picture
KugsCheese
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Joined: Jan 2 2010
Posts: 1469
Economic Collapse, Bailout & All The Presidents’ Bankers with N

A good discussion on Wall Street and Politics.

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pinecarr
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Posts: 2259
Thanks Bheithir and Aggrivated for the useful/interesting links!

Thanks Bheithir and Aggrivated for the wood gas links!  I wasn't aware of this option before, and so appreciate learning about it, and getting a couple of good links to start with.

Thanks also, Aggrivated, for the introduction to Zeus Yiamouyiannis', PhD's,  website, www.CitizenZeus.com.  Any friend of Charles Smiths' automatically warrants a look as far as I'm concerned.:)  The ideas he presents at the site, which are very consistent with our thinking here, have captivated my interest: the need for us to proactively taking responsibility for change at the grassroots level (leaning into the pointy stick) vs letting it "happen to you".  I look forward to ordering his book, "Transforming Economy: From Corrupted Capitalism to Connected Communities" as soon as it comes out in hardcopy form.

Cornelius999's picture
Cornelius999
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Posts: 381
Funniest video ever Mark-BC.

Funniest video ever Mark-BC.  Thanks!

Cornelius999's picture
Cornelius999
Status: Gold Member (Offline)
Joined: Oct 17 2008
Posts: 381
Thanks for super informative

Thanks for super informative Nomi Prins interview video KugsCheese.  I had forgotten to check out " All the Presidents Bankers."

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