Lacy Hunt

Transcript

Porter Stansberry: I'm really pleased to tell you that we have one of the foremost economists in the world standing by to give us his view about these matters. His name is Dr. Lacy Hunt. And he works for a firm in Texas called Hoisington investment management. Dr. Hunt has an incredible track record. He has forecasted consistently, for the past 30 years, that US Treasury rates would continue to decline because of a unique contrarian theory he had, which was that greater levels of debt would lead inevitably to lower interest rates. And this was very contrarian and the opposite of what the Keynesian economists have predicted for years and years. But Dr. Hunt's been right. And so I wanna bring him in now and ask him some questions about what this ultimate end game is as he sees it. Dr. Hunt, thank you very much for joining us tonight. I appreciate you being here. Can we just start please with a review of your unique and contrarian theory? Why does greater levels of government debt lead to lower levels of economic growth and lower levels of interest rates?

Lacy Hunt: Debt is an increase in current spending in exchange for a decline in future spending unless that spending generates an increase in the income stream to repay principal and interest. And what the modern econometric studies show is that the debt that we're taking on is not doing that collectively for us.

Porter Stansberry: Lacy, let me jump in here just for a second ‘cause I wanna make sure that our audience really understands what you're saying. As an economist, you're using a lot of jargon and I appreciate that. But this is a really key point. So what you're saying is that if a family adds a bunch of debt, for example, if they do so in a way that increases their income or increases their productivity then that debt can actually help the economy. So think of like a family farm. If a farmer borrows a bunch of money to increase his acreage and to plant more corn and soybeans, then that kind of debt can be very productive to an economy and to the family. If, on the other hand, if you borrow a bunch of money to buy a third minivan or to put an addition on your house or to put in a swimming pool, that kind of debt isn't going to increase your income, and that kind of debt burden can be very dangerous.

Lacy Hunt: We all know from our personal lives that households that live beyond their means head to trouble. We know that businesses that spend excessively and live beyond their means – that they can go bankrupt. We also even know that of state and local governments. There've been a number that have defaulted in the 200-year-plus history of the United States. Well, so where I evolved to is to look at the production function. And the production function is universal, on both the micro level and the macro level. And the production function is determined by the level of technology and the three factors of production: land, labor, and capital. And we know one of the iron-solid mathematical constraints is that if you overuse one of the factors of production, the GDP will initially rise rapidly. But if you continue to overuse one of the factors of production then the GDP will flatten out and it will go lower.

Porter Stansberry: Lacy, thanks. The most worrying thing I see from this ongoing debt bubble is how much capital has been leant to companies with very questionable business models. I was telling our audience about WeWork. This is a real estate company that's borrowed huge amounts of money and has allocated huge amounts of money from investors to buy real estate and then just releases it to other users. And the secret of their business model, believe it or not, is they give away free beer to their tenants. And this is corporate commercial office space. It doesn't make any sense. Obviously that's not going to end well if you're losing $2 billion on $1.8 billion in revenue, as you said, it's not gonna go on for long. And there's lots of stuff out there that's like that in smaller and less famous ways. But, Lacy, what I wanted to ask is: can you talk in general about how the increase in sovereign debt has led to this global financialization and the increasing volatility in the financial markets as a whole?

Lacy Hunt: Well, the impact that you describe is really a reflection of the fact that the overuse of debt produces weaker growth. It debilitates monetary policy. So monetary policy therefore has to try to compensate for the underperformance of economic activity. And so what we see is: the central banks all around the world are pursuing policies to, in essence, not only help sovereign governments fund their activities at low rates but to encourage the private sector to take on more debt. This is all done under the hope that somehow more debt will kickstart the economy and will be able to break out of the weak growth trajectory. But that's not the case.

Porter Stansberry: Well, you know, guys, I think that what Lacy's work really shows us is that when governments borrow huge amounts of money and invest in things like wars in the Middle East, and when consumers borrow things and spend a trillion dollars on college degrees, that might be the greatest waste of capital in the history of humankind [laughing]. You know, it's not likely that those investments are gonna lead to greater amounts of income. It's impossible. And, as a result, the economy is certainly going to slow. So the more and more of our economy is being financed with debt, the lower and lower growth rates are going to become, and the more likely it is that we're gonna have some kind of a major financial accident. Lacy, is that a fair representation of what you see? Or am I missing something important?

Lacy Hunt: I think it's fair. But I would say that before you get to the crisis period, you're going to have this long slow period of decline. But the process is one of long debilitation. And then you make yourself very vulnerable that when you need the funds and you need access to the markets you don't have them. And that's where we're going, Porter, in my opinion.

Porter Stansberry: Dr. Hunt, thanks so much for your time this evening.

Lacy Hunt: It's my pleasure. Thank you for your great questions and thank you for your very kind comments, Porter.