The Impending Recession With Dr. Lacy Hunt

Legendary economist Dr. Lacy Hunt joins Julia La Roche on episode 115 for a wide-ranging discussion on the economy and why we’re facing an impending recession.

Dr. Hunt is an internationally known and award-winning economist.He received the Abramson Award from the National Association for Business Economics for “outstanding contributions in the field of business economics.”

Dr. Hunt is Executive Vice President and Chief Economist of Hoisington Investment Management Company (HIMCO), a firm that manages over $5 billion for pension funds, endowments, insurance companies and others.

This is the 54th year in Dr. Hunt’s career. He served as a Senior Economist for the Federal Reserve Bank of Dallas. When he entered the Fed, William Martin was chair and was grappling with severe inflation and when Dr. Hunt left the Fed, Arthur Burns was chair and also trying to contain rampant price increases.

Dr. Hunt served 23 years on the Board of Trustees at Temple University where he received his PhD in 1969, and is an honorary life trustee as well.

0:00 Welcome Dr. Hunt
1:55 Macro picture
3:00 Corollary between severity of inflation and recession
4:50 An untenable situation for moderate/modest households
6:29 Looking under the hood of the economy
9:50 Michigan consumer sentiment index
11:55 Coordinated fiscal and monetary response to the pandemic
14:20 Law of diminishing returns
17:03 What does a hard landing look like
20:30 Another contra cyclical development in the financial cycle
23:00 A deep/short recession or long/narrow recession
26:00 Debt, demographics
29:40 US dollar
30:40 Private spending has a positive multiplier, government spending has a negative multiplier
36:06 Other Deposit Liabilities (ODL)
41:55 Contra normal developments
43:15 Discretionary monetary, fiscal policy have failed
48:30 Fed needs to move away from full discretion
50:20 Groupthink at the Fed, no diversity of opinion
54:00 Classical economist
57:00 5 phases of the business cycle

#economy #recession #inflation

What we really need is we need a lower dollar and I think the dollar will go lower uh as the recession hits but unfortunately when the recession hits this will be transmitted back to the rest of the world the dollar will stabilize it won’t go down too far but

There but we will need to have a different level for the dollar than we do today it doesn’t work for us and it doesn’t work for the rest of the world either Dr Lacy Hunt is an internationally known and award-winning Economist he re received the Abramson award from the National Association for

Business economics for outstanding contributions in the field of business economics Dr Hunt is Executive Vice President and chief Economist of Hoisington investment management company this is the 54th year in Dr Hunt’s career Dr Hunt served as senior Economist for the Federal Reserve Bank of Dallas when he entered the FED

William Martin was Fed chair and grappling with severe inflation and when Dr Hunt left the FED Arthur Burns was chair also trying to contain rampant price increases Dr Hunt served 23 years On The Board of Trustees of Temple University where he got his PhD and he

Is an honorary life trustee as well Dr Hunt it is an absolute pleasure to welcome you on the show thank you so much for joining me today my pleasure nice to be with you to you well it’s nice to be with you and Dr Hunt I have

To say you are an absolute Legend and one of the most requested guest that I have ever received on this show so it is truly an honor to have you on to learn from you um so I’m just beyond honored I would like to start where I always start

With my guest and that is the big picture the macro view for you today I would love to hear what that is and I also want to give you as much time as you need to set the table if you will for the macro picture

Today well I think we’re in in a very it’s stage Advanced stage of monetary deceleration and that’s quite significant uh the business cycle goes through a process um in inflations accelerating inflations lead to recessions but inflation is are not they don’t just happen they’re caused and accordingly a more complete

Definition of the business cycle would say uh inflationary accelerations which are preceded by monetary accelerations uh lead to inflation which then forces a monetary contraction and that process is well underway and um we’re on the verge of a return to the traditional business cycle and I believe a recession or hard

Landing is impending I would love to explore that a bit further and the seriousness of the inflation and does that also mean does that lead to or does that factor into the severity of what that recession might look like it it it there is a corollary that the more

Severe the inflation the more severe the recession it doesn’t always hold but there is definitely a tendency and um we’ve we’ve we’ve been this is this is not a new process that we’re going through uh now the the the origin of the current situation was really the

Pandemic and the response and and this was not just a an overreaction of monetary policy but there was Heavy fiscal involvement as well and um the economy did experience some some nice gains initially but it it set us off toward very high inflation and um in inflation is

Devastating uh it it robs everyone but the modest and moderate income households the most and uh we’ve we’ve been in expansion now for a little more than three years but there’s a very serious dichotomy in one of the most critical variables and that’s average um uh weekly earnings which is actually

Declined over this expansion of of more than three years by about 2 and a half per. and if if you look at median household income it’s declined for three consecutive years uh and we’re back at 2018 levels uh we’ve had a devastating impact uh on on the broad middle of our

Of our household structure and unfortunately these inflationary losses will probably never be made up and we’ve we’ve created what I would call an untenable situation uh historically one of the great attributes of the US econom is that is that we’ve been able to make homes and cars

Available uh to to our moderate modest households and as a result of this inflation a lot of which uh was very serious in the automotive and housing sector is that is that we’ve made homes and cars very unaffordable uh there are quite a few home affordability indexes around and they have slightly different

Outcomes but either home affordability is at an all-time low or it’s at the lowest level in two or three or four decades it’s a very bad situation Cox Automotive recently put out a study that 61% of our households are not able to afford a new car and it’s going to take

A long time of um of decelerating Trend in prices and and the reversal of the recession iary forces that we face in order to make these these critical elements and uh affordable for for our people so we’re facing a longtime difficult situation uh and I I think that that our

People are rightly very worried about it in spite of the gains in in GDP which has been impressive but in spite of the greater uh the expected increases employment I think the economy is is very very vulnerable I would love to hear more on the vulnerabilities because

You brought up the GDP and I was just looking at the headlines that came out this week saying red hot booming resilient economy I want to hear more about the vulnerabilities and Dr Hunt what do you think folks are missing because it certainly seems like there is this Narrative of a resilient economy

But it sounds like there’s some real issues when you look under the hood there are and that’s what you have to do here you have to look under the hood I like that phrase um one of the most important Concepts in economics is known as the circular

Flow uh which which says that what we ear equals what we spend uh the GDP is is our expenditures but the other side is the income statement um before the third quarter and the three three previous quarters um your GDP was Rising uh by a little bit more than 2%

But the gross domestic income was declining by about 6% in the third quarter now we don’t have the complete income figures we only have the expenditure figures and they’re very preliminary but um the the GDP gain was led by consumer spending which had a seemingly very robust 4% increase

However uh real disposable income other words income from all sources after taxes interest expense and adjusted for inflation actually fell at a 1% annual rate 4% increase consumer spending 1% rated decline in disposable income as a result uh the personal saving rate in September fell to

3.4% um if if if the personal saving rate had had remained flat in the third quarter then consumers spending and GDP both would have been negative in the third quarter now the at 3.4% personal saving rate that is not an all-time low but it is extremely uh depressed in fact

The the lowest point of the great financial cycle regression recession was 2.4% so consumers were willing to spend thinking that their situation that they were facing was temporary but but by the end of the quarter uh although they had had spent very heavily at the beginning of the

Quarter we were seeing a surge in delinquencies on subprime automobile loans some of the credit card companies experienced record right offs in the third quarter and most importantly home foreclosures in the third quarter were up 34% from a year ago and and so uh the consumer sh great fatigue uh in

Addition um I think that we we need to pay attention uh to uh to what the survey from the University of Michigan is so this this is an outstanding series it it was started by the late Dr George Katona carried on by Richard cirtain his student uh it’s available since 1953

It’s the longest of our series and and in and October uh households told Michigan that they’re in a wretched shape in fact the Michigan index is below where we entered all of the recessions since 1953 a very very uh worsome indicator of that that things are not all right I’d

Like to make one other real quick Point here uh there are there are a lot of notable instances where economies have a a sharp surge just before they go into recession um one of them that that I’m very familiar with was uh the third quarter of 1981 we were Paul vulker was fighting

Inflation uh and in the third quarter the economy grew at 4.9% identical to the rate that was prar reported this week um however when all was said and done the National Bureau of economic research said that the recession started in J in July of 1981 it was it was the

Deepest of the postwar recessions lasted all the way to December of 1982 so see the economy can can have this this last Surge and be impressive but but still the recession can come and I I’m afraid that we’re facing significant difficulties the monetary restraint uh work difficult situation globally and uh

So that it one needs to be on guard well I have to say Dr Hunt you can feel free to share as many points and and lessons uh I like to make the show about my guest and learn from folks like yourself and I’m I’m certainly enjoying

That I have so many questions that I want to ask ahead go right ahead okay so one is um it seems to me just listening to you we got into this situation because of the response to the pandemic so the the unprecedented um the fiscal response and the monetary response from

The fed and my question for you and I don’t know if this is a bit of a naive question is it unu how is it unusual to do the coordination is that an unusual move for them to make and was that the mistake it’s a very very perceptive question um

The Federal Reserve Act was designed for the Federal Reserve to be independent um we only really have two examples of of significant coordination of the two the first was in 1971 uh Richard Nixon was President he was facing reelection in 1972 inflation was out of control the dollar was under

Attack Arthur Burns was chairman at the FED I was in was head at TI um and uh so uh the FED cooperated with Nixon they imposed wage and price controls chairman Burns agreed to serve as chairman of the the dividend and interest rate control committee which was part of the

Price price and wage controls terrible situation for the FED to be in fed should be totally independent uh money supply accelerated sharply the economy had a great year in 1972 uh but then we had an inflation process that less than another decade and and one of the problems for burns

Was that once the inflation took root the fiscal policy Partners were no longer there to work with him in other words so both of them caused the problem but then when the problem erupted all the burden was was face was was on the fed’s shoulders and that’s essentially

What happened during the pandemic it was a coordinated effort when the inflation blew up in everyone’s face um only the Fed was left to to deal with the problem and the same sort of situation I I’m I might tell you a little uh lesson that I learned long

Ago um I’m going to quote a famous sociologist the modern father of sociology um uh and uh what he he gave us the law of diminishing returns a number of other uh uh his name was Richard Burton and his son professor at MIT winner of the Nobel Prize and he

Talked about uh theories of grand the fallacy of the theory of grand design and um what uh the point that he made is that uh when you undertake the theories of Grand Design you don’t really have any experience or very limited experiences to know of what will be the outcome because you’ve never

Really tested and he used the analogy of the fell who’s out hiking about and he sees a cave up on the side of the hill and he’s interested in caves and so he goes into the cave and the pathway appears to be clear and so he moves into

The cave and path is still clear and he gets further and further in until he he hits a roadblock and there’s a cave in and the fell thinks well I’ll just retrace my steps um but unfortunately to him as he was moving into the cave it caused the

Cave slide behind him and the pathway out is not the same as the pathway in and uh so when you implement these theories of grand design and you get everybody excited about them and think oh how creative but but what you’ve done is you moved outside your zone of

Knowledge and correcting the problem is not as simple as engaging the solution that you perceive to be and so uh it was a combined monetary and fiscal policy operation I hope we never see that again the Federal Reserve was designed specifically to be independent of the fiscal policy makers

That that’s the way and that was well structed it it was to be a system of checks and balances that’s the whole structure of the American system and and we we obliterated that um in the case of the Nixon Administration and the early 1970s and again in the pandemic response

Of our Central leaders and uh the country is now paying the price and the highest price is being paid by those that are least able to afford it yeah and those folks um it’s the backbone of the American economy too and my my follow on to you and hearing you talk

About um just how big of an impact that is and how many people are affected is what from your Vantage Point does a hard I take it you in the hard Landing Camp yes and what does that look like and how do you see that play out I actually

Never asked anyone how does a hard Landing play out it’s usually are you in the hard Landing or soft Landing camp but how does one play out from where you sit it’s going to affect All Phases of the American economy it’s going to help affect it’s already in my opinion

Affecting household income and then as I said earlier we we have this dichotomy already between what we’re spending and what we’re earning uh one of the most serious is um the situation with regard to net National saving um in the second quarter we don’t have the numbers yet for the third

Quarter we had negative net National saving um uh there saving has three components it has private saving uh foreign saving and then government saving now if if you accept the notion that gross domestic income equals gross domestic product in the theoretical sense algebraically it’s the same thing as saying physical investment is equal

To uh net saving uh in other words to get an increase in the Capital stock you have to have saving if you don’t have saving you cannot get an increase in the Capital stock and and without an increase in the Capital stock you will not be able to raise the standard of

Living and and uh what what is so unusual about our current net National saving being negative uh this has happened before it happened during the pandemic it happened during the great financial crisis but negative net National saving has not happened in a period of rising GDP totally conormal cyclical

Development and uh this is this is going to present problems for a long after the time the Federal Reserve eases monetary policy because it’s quite possible that the net National saving will go even more negative during the recession because the the tax revenues will fall away the built-in

Stabilizers the cost of them will go up the Federal deficit will increase uh and the the uh constraint of of scarcity of saving impale our ability to grow for example when you when you have negative National savings such as we have today and there is a need to take on some

Other new product let’s say artificial intelligence then then those funds have to be clawed out of the existing level of sa it’s it’s it’s not a healthy situation at all and so um we have to contain the inflation but we we also have to somehow find a way to uh restore

Saving into the positive territory it’s going to be a difficult situation to do I want to hear just a bit more on that so we already have net um negative savings and we’re technically in a i GDP Rising I I suppose like to some resilient economy at the moment but in a

Recession it goes even more negative can you just help me understand just the severity of that or the consequences just what that could mean it sounds like that’s really important to understand and that’s a like you pointed out was um I think you called it Contra you can correct

Me yeah another another Contra cyclical development is that normally the financial cycle leads the GDP cycle and then the GDP cycle leads the price uh labor cycle so the financial cycle leads the GDP cycle by about 5 to nine quarters uh right now uh the peak of the

Financial cycle was the fourth quarter of 2021 so we’re eight we’re twoe we’re eight quarters there’s nothing abnormal about the lages nothing at all in fact the weakness in the income side of of the economy suggests that the the lags are already biting uh the Michigan confidence is suggests the lags are

Already biting um and then then the inflation begins to come down one to two quter after GDP well we’ve already had a 500 basis point decline in inflation it’s come from five 9 to four um it’s stuck up there because uh because we need to get it down to the

2% range to so that we can begin to address this affordability problem but we what what’s interesting is that the inflation rate has come down when the GDP is still rising and um so there there’s two possible outcomes uh when you have severe monetary acceleration followed by severe monetary

Deceleration um and and you have to sort of think under the curve and the area under the curve can be determined either by the depth of the movement down from the curve or the length of time you’re below the curve in other words height times width so you could have you could

Have a deep and relatively short uh recession or you could have a relatively narrow recession and a long recession then the area is the same um so it could it could go either way and it’ll it’ll depend upon a host of host of other circumstances some of which are totally

Unpredictable for example we we don’t know it’s impossible to know what will be the outcome of the situation in the Middle East there are other other contingencies that that work can that we can talk about or think about conjecture but there are some that we probably can’t even figure out ahead of time

There are always these shifting unknowns that are going to uh enter into any situation but uh so you’re either facing deep and relatively short or long and relatively narrow could be either way but all sectors of the economy will be impacted jobs will be reduced the

Hours hours that we get to work the rate of increase in wages and that’s not a good situation uh because the economy is is not not as wealthy as it used to be our ability to do the things that we want to do are not not as easy for us um let me

Just describe one of the problems that we have here that I that I particularly am concerned about um let’s say that a person is interested in in in buying a new car or a new home and they’re looking at the cost of a 4-year automobile loan the cost of a six-year

Automobile loan and a 30-year mortgage and let’s say that that individual is a prime borrower not not one point away from prime or two or three someone that has the best credit right today more or less round numbers four month a fouryear automobile own six-year 30-year conforming boage they all cost you

8% but in the last 12 months average hourly earnings have only gone up 4% and to me that doesn’t compute and so we’re we have many many adjustments that are standing in the way of a return to normality and I’m afraid it’s going to take some time to work it out and

Another difficulty that we’re going to find out and and this current F Reserve will learn it just as pre previous fell reserves have le is that is that the the capabilities of the fellow Reserve are asymmetric uh the fed the FED can eventually contain an inflation it takes

A long time they’ve been working on the current one now for two years almost uh and uh but when it comes to trying to bring an economy out of a recession the fed’s capabilities are greatly diminished greatly diminished uh the phrase that’s often used is that

It’s like pushing on a string you keep push on string but this Situation’s going to be more difficult because because we’re so hly indebted and we have very poor demographics and the rest of the the global economy is in worse shape than we are so see those are three very really

Important parts as well um I would love to explore those maybe we can tick through them I’d like to hear um um your view on the over indebtedness and um how that makes it more difficult also demographics I think that’s really important um especially around population and then it sounds

Like there won’t be a savior of I guess it’s kind of like the phrase where the what the the cleanest dirty shirt in the laundry pile or something like that that gets tossed around I can we explore those factors yes yes we can um well one

Of the basic one of the most important concept in economics is the law of diminishing returns it was originally developed by the great Economist David Ricardo uh Ricardo was followed quickly on the heels of Adam Smith founded the profession but he probably did really more for economics than anyone else and

He he he worked in the confines of what’s known as the production function which says what we produce is determined by the factors of production land labor capital and he said that if you begin to increase one of those factors of production such as debt Capital initially you get an increase in

GDP but if you continue to increase debt Capital the GDP flattens out it’s called e equal equivalent returns you still increase debt Capital then you get diminishing returns it’s like a parabola increasing and then eventually decreasing returns and we’re so heavily over ined it now that we the diminishing

Returns phase so the notion that we can somehow Bor more money and spend it and get our way out of it is not going to work in the current situation uh and that’s why the studies show that when uh when government debt goes above 90% of GDP gross government

Debt for more than five years that you lose about a third of your trending in growth and the trend in growth is real per capita GDP that’s the standard of living so before we became heavily over indebted the economy was growing about 2.2% perom and now we’re growing 1.3%

Perom and we’ve lost about 40% of our growth rate by the way that was predicted more than a decade ago uh by Reinhardt Reinhart and rool as well as the Swedish econom econometricians Hendrix Z andberg the the debt is going to be a a constant

Source of paying for us um Japan is the most uh thorough example of extreme over indebtedness but Europe who’s doing worse than us is more over indebted than we are China is now suffering from extreme over indebtedness and and that’s the problem now to demographics um the fact of the matter

Is that uh population growth having a young population High birth rate high household formation generates economic growth think of the cost of forming a household unit of having children uh raising them and so forth that that’s expensive today we’re the youngest population on the world much much younger than than Europe China or

Japan uh our birth rate is is however very depressed historically depressed the situation is worse in all three of those countries and and so the demographics are not going to help us they’re going to hurt us and then um the problem is that uh right now um the

Because we are the best the dollar is too strong for stability in the world and so what we really need is we need a lower dollar and I think the dollar will go lower uh as the recession hits but unfortunately when the recession hits this will be transmitted back to the

Rest of the world the dollar stabilize they won’t go down too far but they but we will need to have a different level for the dollar than we do today it doesn’t work for us and it doesn’t work for the rest of the world either yeah so dollar has to go lower

Yes it does and it will go somewhat lower but not a great deal lower got it um I have another question just I I took a bunch of notes from Reading um some of your quarterly letters and one of the things I wrote down was is um this idea that private

Spending has a positive multiplier and the government sector has a negative multiplier and I thought that was really interesting and I would love to hear more on that well when when when I was studying economics uh college and as a graduate student um I was taught and I

Believed that if you engaged in a dollar of deficit spending um you would increase GDP by $5 in other words you get the dollar of the spending but then it would boost the private spending by another $4 in other words there was a multiplier um in actuality the

Multiplier was never that high that that was never proved um in the early period of of of of World War II take for example 1942 in which we had the largest percentage increase in government spending that we ever had and government spending also incre was at the highest

Percentage of GDP even in that year the multiplier was only 06 in other words we did a dollar’s worth of of debt financed activity uh we reduced private spending by 04 uh today it looks like that if you undertake a dollar of of debt Finance the Govern

Spending um you will reduce by the end of three years private spending by about $130 so you’ll actually have a net loss of 30 cents in GDP you get a little boost in in in economic activity for maybe three to six quarters but by three years uh the increase in in government

Spending actually drains private GDP more than the initial increase in government sping and uh there is there is no free lunch there done whatsoever it’s it’s no different it it what what the econometric shows is that is that there is no there’s no difference between what happens on the

Individual level or business level if you if you live excessively beyond your means for a long period of time you’re either going to go bankrupt or you’re going to go out of business uh and the industrial countries ultimately they don’t go out of business but their effectiveness turns negative and so the

Final consequences are the same there is there is no free lunch here I want to hear um just on the path that we’re on there it sounds like there could be some real long-term consequences to this it’s like you get that short little boost but it also has that negative impact on the

Private sector side of things so well I think that right now we can already see that for example um in the in the fiscal year that just ended fiscal year 203 2023 um which ended the last day of September um the federal deficit was about $1.7 trillion um during that same time period

The FED liquidated about a trillion round numbers about a trillion dollars of Securities from its portfolio which forced the banks then to liquid at another five 500 billion so between the two of them the fed and the and the banks they sold about a trillion and a

Half there was a deficit of 1.7 trillion which meant the domestic private non-bank sector had to purchase 3.2 trillion of Treasury Securities which means that you transferred $3.2 trillion of resources from the private sector to the government sector but the private sector has a positive multiplier the government

Sector has a negative multiplier you get an initial benefit but ultimately it’s a negative benefit and I’m afraid that that’s where we are in the situation there may be individual sectors they benefit but the overall economy loses in this transaction there’s no there’s no netw hey there I just want to quickly

Interrupt the video and just say thank you thank you so much for coming to this Channel and choosing to watch this interview I hope that you are enjoying it and I appreciate you visiting the channel if you like what you see please hit that subscribe button it doesn’t

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Incredibly lucky that I get to do something that I just love so I just want to say thank you and appreciate you subscribing all right back to the interview well I know um my viewers will also want me to bring this topic up with you because I know it’s like one of your

Areas of focus and maybe we can get a bit of a lesson on it and that is odl other deposit liabilities can you explain that to us and then um dive into the sign ific of it and why it is so important to follow okay well to other

Odl is is on the feds um Regular weekly release uh the h8 release fed it’s a composite of the bank balance sheet in other words all the assets and liabilities Consolidated balance sheet of the banks um it’s it’s basically uh all of your um consumer type uh demand uh and time saving

Accounts um and I think it is a superior measure of money uh M2 which is not available weekly it’s only available monthly uh and therefore not not as current includes currency and it includes large denomination time deposits currency is a medium of exchange which is an important characteristic of money but currency is

Losing its its role um you you you can’t do a transaction for $10 million it would take too many brain trucks and so as as we have larger and larger nominal transactions and also people increasingly don’t want to take currency they will take it but it’s more difficult to use

It a large denomination time deposits uh there you lock your money up for 90 days or 120 days if you cash it in you don’t do it it full value so that’s not readily available in addition the money market mutual funds are not included uh because they they can’t

Create money they can only attract deposits and they immediately reinvest it uh the great monetary Economist bu Freeman believe they shouldn’t have been included um so odl is a superior measure of money um and why it’s important is because in 2020 and 2021 it grew by 20%

Per anom for two years average the historic average growth rate was 7% so we went almost three three times faster than the historic average uh and now uh we have a massive contraction um and if you what I like to do and I think the appropriate way to do

It uh is to look at it in real terms in other words adjust for the inflation rate um and I look at the oneyear change the 2-year change threeyear change the three-year change is now negative which means that the massive money mountain created in 2020 and 2021 has been

Reversed and so so the Federal Reserve has removed the source of the inflation we’re just in the sanum waiting for the impact to fully manifest itself in terms of the broader economy it’s a very significant element another reason why it’s very important um is because the the the the bank

Liabilities lead the bank assets when when the F Reserve changes policy the banks don’t want their balance sheet interrupted they want to continue doing so the banks basically have to be sledg hammered and so the FED reduces the liability side and then eventually the asset side of the balance sheet uh

Responds what is what is very significant also another Contra normal cycal development is that bank credit is now also declining for the latest 12 months 24 months and 36 months that what bank credit uh is a lagging indicator it doesn’t typically go negative in real dollars until you’re already in a

Recession U uh when the recession hits going to go even even more negative which means that let’s say the Federal Reserve does nothing more to tighten monetary policy on the liability side you’re going to still see a further contraction in Bank lending and uh there will be additional monetary restraint

Coming into the system it’s one of the reasons why it’s it’s better to never allow monetary growth to go to such exrain as it did in 2020 and 2021 because it causes the inflation and you have to deal with the inflation so in many respects what has happened over the

Course of the business cycle is that you have a problem the FED comes in guns blazing they accelerate monetary growth they take it too far they bone the bones and they have to correct the problem that they themselves created and then they slump the slumps wow so that okay this is so this

Is why it’s so having you so when you have these Contra normal cyclical characteristics like now right now um the bank bank credit for example and we’re not in a recession it’s going to get even worse it’s already negative what are there any others that are on

Your radar because you mentioned the um the net the the net savings earlier going negative what are there other Contra um indicators out there for you indicators would be that net National saving is negative when GDP is rising uh another one would be the fact that your average weekly earnings has

Declined uh during a period of rising GDP and another negative would be or another Contra normal development is that the inflation rate has come down without the recession which is a way of in economics you can you can measure a situation by looking at quantity variables or Price variables and they

Should tell you the same thing so even in the last year when the GDP is continued Rising being people’s expectations including mine uh the inflation rate still fell 900 basis points in September of last year the 12-month increase was 9% it’s now under 4% um so the fact that the inflation

Rate is come down uh much earlier than normal to my way of thinking is a sign that fundamentally the the true condition in the economy is weaker than is generally perceived yeah weaker than genu um generally perceived Dr Hunt we mentioned at the top of this conversation you’ve

Been in this space your career is 54 years at this point and if you had to just step back and and look at the context of your career and even I know you study econom like just the history of economics in general how worried argue about the economy if you had to

Contextualize within the span of your career and the recessions that you have seen play out well um the the real problem to my way of thinking is that um generally speaking uh discretionary monetary and fiscal policy have failed uh the the Federal Reserve has has has really responding to one crisis

Has laid the seeds to the next Crisis um that uh others saw this problem long before I did uh the Nobel laat Milton fredman wanted the fed the money supply growth rate contained in a four to 6% range that the Federal Reserve would only have a latitude of 2% point to to avoid

Extremes to too high or extremes too low try to keep it in a normalized Range uh the great Stanford economist John Taylor developed the Taylor rule for the federal funds R all this was to designed to prevent these massive swings in discretionary policy because the FED is

Acting and and and trying to deal with one problem they create another problem they take us from one crisis to the next uh and and so discretionary monetary policy has basically failed us but the same could be true with regard to fiscal policy um the the the we

Collectively and we’re all at fault here um we have not been able to live within our means and we’ve become increasingly over indebted and we’re triggering the law of diminishing returns um uh the uh Milton fredman was was very interesting conom very wide man uh he he advocated that we go from

Fixed exchange rat to floating exchang and that happened in 1971 when President Nixon closed the gold window uh but there was an unintended consequence of that when we were on the gold standard and uh our we we mismanaged our Affairs there would be a gold outflow and and the newspapers would

Report it it would be on the television the country would become alarmed and the gold outflows served as a kind of a seral control mechanism on bad policy monetary and fiscal policy and so we would try to write the problems to prevent the go to stabilize the gold outflows when Nixon

Closed the gold outflows and the dollar started started floating freely then it the the the condition in the international markets was no longer important and so if you if you look at what happened uh prior to the closing of the gold wend to today we’ve lost a significant amount of our Trend economic

Growth rate and and fredman um uh I saw that this was this possibility was developing and he advocated a constitutional amendment that would require a 60% vote of the Congress uh to run a def unbalanced budget a deficit budget in other words there had to be such a clear uh National

Emergency of some kind that you not run a a balance budget and um the fredman amendment carried the house carried the senate in the early 1980s it was supported by President Reagan but it didn’t get the two-thirds vote and uh I I think if we’re going to

Address the problems we would need to have that sort of discipline built in a lot of state and local governments require balance budgets and I think we’re going to have to get back to that other words Force the politicians to live within the means of the country uh

In order to avoid of the these longer term consequences it’s something I think about as a millennial just because I I feel like it’s something my I feel like my generation younger Generations we’re going to really have to deal with the consequences unfortunately that’s true

Very true we have I do we’re not handing it all very well no um I do want to ask you about the FED though um because if we were talking about that they’re almost they’re almost creating the next Crisis with actions with their actions if you had to change something

Or fix something within the FED what would that be I think there I think that I think that we have to get away from Full discretion F I think they should be confined to operate within some limits in other words we we we cannot go to extremes and money supply growth or

The federal funds rate it should be in balance with regard to other critical variables we they have complete discretion to do whatever they do and and by the way they’re not held accountable and unfortunately um because they’re not held accountable and the leadership of fed is constantly changing

Positions uh people come and go new fedal Reserve chairman new members of the board new Federal Reserve Bank presidents um there seems to be no Collective memory no one remembers the prior problems and the mistakes were made there’s no auditing of the fed and so everyone no one is held

Accountable and since the new people came in they were generally not a party to the last set of mistakes uh and so we go forward uh allowing this halfhazard uh situation just to persist and and so we have to find some way uh to have more responsible both monetary and fiscal

Policies and I I frankly don’t know whether that’s possible even the political uh the political divide within the country theoretically so it’s it’s more of a theoretical exercise than a practical exercise do you do you think that there might be like folks in the fed and you’ve you’ve been inside the

Fed and see you have a glimpse that many of us do not do they come from the same kind of school of thought when it comes to economics in the fed and is that an issue I think there’s two real problems um I think that the F Reserve is

Uh is there’s two problems one it’s controlled by group think and second uh there there is really no diversity of opinion in the way that most of the economists in the fit operate um we we see disagreements within various fed officials of of really unimportant matters whether you raise the FED funds

Rate 25 basis points or you don’t raise it at all or you raise it 50 and they have differences on their Dot Plot of whether the GDP is going to rise two or two and a half% those are inconsequential um if it it there was um a great social

Psychologist uh at Yale University by the name of Veri Janice he wrote with GR groupy and uh what what chanice did is that he would bring experts in various fields to an open form forum and they did a lot of different areas foreign policy science economics and uh they would discuss a

Hot button issue and in the open Forum with everybody present there would be hardly any disagreement and when but when he went to to to discuss the matters with them one on-one in a private setting he found that there was a much greater uh dispersion of views serious challenges

And he would ask the experts well why didn’t you say so when you were all together and and what they would say to him well if you go to a meeting and you vly disagree with everyone else you tend to be ostracized you the the the view is

That if you don’t understand the current situation um that you somehow you lack understanding of the current situation is is for your disagreement and so there is tremendous pressure to conform you can you can deviate on on small and unimportant issues but not on on the big

Policy issues and and that’s that’s true in corporate life but it’s it uh but it’s also true in the Federal Reserve the other problem uh is that the the Federal Reserve um has 400 PhD economists and uh it’s the most expensive economic research organization in the world um the the basic problem is

That they’re virtually all neoc kanian you you you have hardly any I don’t even I don’t even know any Austrian Economist there there are very few neoclassical Economist I would consider myself um more closely aligned with neoclassical um they’re they’re all neoc casian and uh it they’re they’re from

The best schools and they’re Diversified in every way we’ve got all kinds of people from all types of ethic backgrounds everything but but when it comes to the thought of how the economy Works they all view the world the same way and that’s not a good situation why

Are they all why are they all neans why why not have more diversity of these they come out of the best universities and the oh okay faculties and the best universities are all neoc Kanan okay well what is can you explain what NE what you you said you’re neoclassical

What what is that and when did you become one or well um it it’s classical Economist is one that really tries to look at economics as a whole uh and what I try to do is I try to apply to whatever extent as possible uh microeconomics to the macroeconomic level um

For example I I gave you one already I look at the production function the production function is real economics it says what we produce is determined by the factors of production land labor and capital and from that then you s throw things involv and and one of which is the law of diminishing

Returns and so I I I I try to look at things in the classical role um uh the in in the 1820s uh David Ricardo who I mentioned to you earlier uh was asked whether um the Napoleonic Wars should have been financed by taxes or by borrowing and uh Ricardo thought about

The matter and he said I don’t think that it matters if if you tax the money the if you tax to pay for the war the resources come out of the private sector if you borrow the funds it comes out of the private sector Ricardo however was was

Sincere enough that he acknowledged that he did not know this was an idea he had but he didn’t know whether empirically was true which he and he couldn’t have answered the question because we didn’t have the computer capabilities we didn’t even have the contig contiguous data series that we have today in 19

36 KES and by the way the economics profession follows Ricardo all the way until 1936 when KES writes the general theory and kanes says the opposite of Ricardo that you could take on debt financed activity and you have this multipli KES however didn’t admit that he didn’t know and he couldn’t have

Known either because we still didn’t have the capability of of analyzing but today we have the econometric techniques we have the computers we have the continuous data and the answer is that Ricardo is more correct than K than K Ricardo was a classical Economist but

Except when we we take the fine uh home techniques what we find is that the government multiplier is actually negative that that uh when you uh that the experience you have when you go down to the DMV real that the private SE does a better job than the public they do they

Certainly do I have to say Dr Hunt this is probably one of my favorite conversations just because I am learning so much from you and you have a wealth of wisdom would you let me sneak in one more question before I let you go yes

Please okay so I got your book A Time To Be Rich from 1987 and I would love for you to share you have the five stages and I would in the economic life cycle where where we are in the five phases if you could just explain give us

A little bit of a lesson of the five phases and then pinpoint where we are well I I I’m I’m very touched that you could get this book it’s out of print it is out of PR I found it on eBay over a year ago it’s very difficult to

Get uh it my second book my first book was Dynamics forecasting Financial cycle uh which is a a very academic book um uh it was an econometric model time to be rich is kind of a self-help book uh it was published by McMillan um and that book was

Republished in Japanese by the Toyo Kai simp and we sold a lot of copies of the book in Japan as well uh there are five stages of business cycle that I said um there’s two in a recession and three in an expansion so so here you come there’s

Your business cycle you’re coming down and you hit the trough the trough would be the low point of the recession you come out of the recession you move into Revival so Revival is the first stage of expand there is a CH there it is and then after Revival you get

Acceleration where the economy speeds up and the inflation rate is slow to respond so you get faster growth and you don’t get an increase then you go into maturation in which the economy’s growth rate begins to slow down but the inflation rate moves higher and and then

You hit the recession and there’s two phases the first phase is ease off and the second phase is plunge um and uh I believe that right now we’re in the maturation phase in spite of the GDP I think that there are enough negative indicators the production sector the income indicators

And uh others to suggest that we’re in maturation and that we’re we’re going to soon be moving into the esa phase well Dr Hunt it has been an absolute pleasure if you would like to leave the folks who are watching and listening any partying thoughts anything that you’d

Like to add please take a moment to do so well no I think you’re you had really great questions and uh you know I I just wish everybody well um I think that uh what I’ll do is is if you want uh I have this list of recommended readings

And if you if your if your listeners are interested have them contact you and you can make that available to them they would love that um well Dr Lacy hunt thank you so much for being so generous with your time your ideas and just all of your wisdom and knowledge I really

Appreciate you taking the time thank you Julia I’m glad to do it