For all economic boffins: Interesting interview with Dr. Lacy Hunt

I came across this highly informative interview with Dr. Lacy Hunt of Hoisington Investment Management on Mish’s blog: Global Economic Trend Analysis. He found it on another blog:, and the interviewer is financial journalist Kate Welling. A sample quote:

Kate Welling: I suppose all this means you expect a recession this year?

Dr. Lacy Hunt Well, consumer spending will slow this year very dramatically from a very weak
base. We had a decline in real disposable income in 2011. GDP rose, but GDP
measures spending, not prosperity. In 2011, as is often the case, when inflation rises,
households initially try to maintain their standard of living. So in the face of rising
inflation and trailing wages, which was the story in 2011, families resorted to
increased credit card usage or to drawing down their saving. But in addition to a
decline in real disposable income in 2011, we also saw a net decline in net worth
[lower chart below]. And a year-over-year decline in net worth has been associated
with the start of all the recessions since 1969.

We touch on many of the topics discussed in this interview, including in our recent conversations about Greece. It is well worth the time to go through all 29 pages of the interview.

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

5 CommentsLeave a comment

  • I think she’s absolutely right when she discusses private sector debt levels (and the effect of debt in general) throughout much of her discussion.

    However, I disagree with her emphasis on federal government debt as a major problem–that’s the MMT’er in me. She compares the US, Japan, and the UK to Europe, but I don’t believe the Euro countries are comparable to us–different situation entirely given their relationship to their currency. I also disagree with her conclusion that austerity is the only solution and that more spending won’t do anything.

    I see two actions that should be taken in the US to break up the logjam: (1) Some form of private sector debt forgiveness program to delever that sector and get things moving again (a la Steve Keen) and (2) increased federal spending to assist households during the transition (a la MMT). If we’re worried that government debt instruments will soak up too much private sector investment, then don’t cover the spending gap with them.

    And of course go after the banks, etc. to fix the overall regulatory environment! 🙂

  • I like Keen, I just read Debunking Economics, but who who takes the hit with the forgiveness? If it is private, then there is some kind of capital call. If public, then it is another public debt that has to be carried. I suppose the Fed can balloon its balance sheet to 5 tril.

    So even if the debt is public, you want to keep going after the banks;

    I hate the banks, but how is this going to help with capitalization, ultimately?

    Who affords the jubilee?

    The comment is respectfully directed to Bolo. Sorry for its location.

  • no, no, no…, not you or me Numerian. Me or Dean Baker. Read this from his piece over at CounterPunch:

    The spending associated with World War II ultimately got us out of the depression. There is nothing magical about spending on war; spending of the same magnitude on road, schools, hospitals or anything else also would have lifted out the economy out of the depression at any point after the initial collapse in 1929-1930.

    Hey…, I graduated from the eighth grade well before “No Child Left Behind”. They didn’t give you a diploma to enhance your self-esteem…, you were required to earn it. I have no idea how Dean earned his. Right Dean…, this situation is no different than a World at War with the US being the lone standing survivor that waited out the worst of the carnage, practiced austerity measures like gas and food rationing, victory gardens and war bond buying to make it all possible. And then being the last standing empire on the planet we rebuilt the world…, well hell…, all we really needed to do was spend more money…, go further in debt and build roads and schools and hospitals. What blithering idiots we were. We needn’t have sacrificed all those men and boys to some silly war effort. We could have just built roads, and schools and hospitals here in the good old US of A.

    OK…, enough with the rant Numerian. I did catch the link at at Mish’s site. Have to admit that I didn’t slog through the 29 page link…, but with an eight grade diploma and feeling like a blithering idiot after reading Baker and being so remiss…, I would recommend that everyone at least read Mish’s piece. My favorite takeaway was this one:

    Lacy: Keynes and Friedman both felt that The Great Depression was due to an insufficiency of aggregate demand and so the way you contained a Great Depression was by your response to the insufficiency of aggregate demand. For Keynes, that was by having the federal government borrow more money and spend it when the private sector wouldn’t. And for Friedman, that was for the Federal Reserve to do more to stimulate the money supply so that the private sector would lend more money. Fisher, on the other hand, is saying something entirely different. He’s saying that the insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.

    Kate: And that your goose is cooked if you don’t you cut off the credit bubble before it overwhelms the economy?

    Lacy: Yes, and Bernanke is thinking that the solution is in the response to the insufficiency of aggregate demand. That was Friedman’s thought. That was Keynes’ thought and most of the economics profession has traditionally thought the same way. They were looking at it through the wrong lens. Fisher advocated 100% money because he wanted the lending and depository functions of the banks separated so we couldn’t have another event like the 1920s.

    Kate: You’re saying that Fisher argued against fractional reserve banking?

    Lacy: Yes, and so did the people that more or less followed in Fisher’s footsteps, principally Charles Kindleberger and Hyman Minsky. Minsky felt that the way you prevented a major debt deflation cycle was to keep the banks small.

    Kate: Prevent them from ever becoming too big to fail in the first place?

    Lacy: Right. Don’t let them merge. You don’t want them to get big. I actually gave a paper with Minsky once, in 1981, in which he advocated that position. Kindleberger was very precise in “Manias, Panics, and Crashes,” when he said that when you have a small credit problem, or many small problems, some say, you don’t want the Federal Reserve to respond. Because if the central bank comes in and bails out a small problem, then that will be a sign to those who want to take more risk that they don’t need to be cautious — they can always count on the central bank to come in and bail them out. If they do, Kindleberger said — and this was in ’78 — then the future crisis will be even greater. “A free lunch for speculators today means that they’re likely to be less prudent in the future. Hence, the next several financial crises could be more severe.”

    Kate: Once again, we didn’t prevent the excessive buildup of debt, so now we have to deal with pressing deflationary forces.

    So…, I’m with you Numerian. I don’t believe the MMT’ers or the Kenysians that we can spend our way out of this. Whether we can manage our way slowly out of it…, or if we have the willingness and desire too is a question well beyond this eight grade graduate.

    You next assignment…, should you choose to accept it…, is to enlighten me on this new housing bailout bill. Sounds to me like “we” are bailing out the high priced home owners (1%ers?) (and the Banksters of course) now that we have already foreclosed on the affordable homes. I see the Housing Starts picking up as an indication that there is a demand for affordable housing…, but not much demand for McMansions.

  • the 29 pages are large type with lots of full page graphs…, so it wasn’t nearly as time consuming as I envisioned. And I should have read it in entirety before I posted my Baker Bash above…, I would have been able to quote this little passage as back-up:

    And it’s usually not a lot of fun. No. That’s why I sent you those quotes from a great study by the McKinsey Global Institute Study [box below], listing what they call the Four Archetypes of the Delevering Process. What it boils down to is that austerity is required in about 75% of the cases. Either you do it yourself or it’s imposed upon you. They do address the possibility of “growing out of debt” and they cite the case of the U.S. in World War II and a couple of other instances. But to my way of thinking, the U.S. during WWII was also an austerity case. If you look at my chart of the personal savings rate back to 1929 [above], you can start to see that what really brought us out of the Great Depression were our exports. Our allies’ countries were being disrupted by actual fighting and they had manpower shortages. So we were selling them everything that we could produce — but meanwhile, our people could not spend the income we were receiving.

    The Delevering Process: Four Archetypes
    1. “Belt Tightening”. The most common delevering path. Episodes where the rate of debt growth is slower than nominal GDP growth, or the nominal stock of debt declines. Examples are Finland ’91-’98, Malaysia ’98-’08, U.S.’33-’37, S. Korea ’98-’00. 2. “High Inflation”. Absence of strong central banks, often in emerging markets. Periods of high inflation mechanically increase nominal GDP growth, thus reducing debt/GDP ratios. Examples are Spain ’76-’80, Italy ’75- ’87, Chile ’84- ’91. 3. “Massive Default”. Often after a currency crisis. Stock of debt decreases due to massive private and public sector defaults. Examples are U.S. ’29-’33, Argentina ’02- ’08, Mexico ’82- ’92. 4. “Growing out of debt”. Often after an oil or war boom. Economies experience rapid (and off-trend) real GDP growth and debt/GDP decreases. Examples are U.S. ’38- ’43, Nigeria ’01- ’05, Egypt ’75- ’79.
    McKinsey Global Institute. Debt and deleveraging: The global credit bubble and its economic consequences, page 39. December 2010.

    Right, there was rationing and tremendous austerity on the home front. So the only thing that people could do with the money they were making was buy war bonds.
    That’s correct. And that’s what they did — look at the personal saving rate. We’re not getting that same response here. The saving rate went up for a while, but it’s now back to 3.5%. We’re essentially back where we were when the recession started.

    I repeat…, Baker is an Idiot. And I’ll throw this quote in for good measure for those who think that we can fix the problem by taxing the Fat Cats and Banksteers more…, not going to happen.

    Certainly not if you listen to what we’ve heard so far in terms of campaign rhetoric. Part of the problem is that these are serious matters and to solve them, it’s going to require a lot of sacrifice by a lot of people. That’s why I really like that Eichengreen quote. The thing is, no one wants to have austerity. We all enjoy the good life. We don’t want to have to raise taxes; that’s unpleasant. We’re going to have to change the benefits tables for Social Security and Medicare. We’re going to have to cut discretionary spending — even though it has already been cut substantially. Right now, the four main components of the federal budget are Social Security, Medicare, Defense and interest payments on the debt. By the end of this decade, if market rates are unchanged —
    Quite an assumption.
    Yes, but at these rates, by the end of the decade, the three top components of the budget will be Social Security, Medicare, and interest; that’s according to the Congressional Budget Office projections. If you hold market interest stable through 2030, by then interest payments will absorb 35% of the budget. If the market interest rates go up by two percentage points, that adds about $300 billion a year to our deficit. By the way, that’s why you hear it said often that one of the solutions is to inflate our way out.

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