Will There be Hyperinflation or Deflation?

Kiril Sokoloff interviews Dr. Lacy Hunt of Hoisington Investment Management, the world’s greatest monetary economist and expert on bonds, on the most important issues of the day. Dr. Hunt explains in very lucid language why many of today’s beliefs about the global economy are incorrect: The Fed is not printing money now. QE1, QE2 and QE3 were also not printing money. The current massive U.S. fiscal programs will not stimulate the economy, only accelerate its long-term downward-growth trajectory. The productivity of debt has fallen sharply, and with it, the velocity of money. The best that can be expected from global growth post-COVID is 1% in real per-capita terms. Having reached the zero bound, current monetary policy may be counterproductive. The U.S. has no net national savings and is dissaving for the first time since the 1930s. This means there will not be capital to invest. Based on an examination of 24 over-indebted economies between 1900 and 2008, the over-indebtedness was solved through austerity. The Fed has the power to lend. It does not have the power to spend. However, if the Federal Reserve Act is changed to give the Fed the power to spend, it would result in hyperinflation. The early warning signs are there. The Bank of England may have crossed the Rubicon by giving £500 billion to the UK government to pay its bills. Filmed May 18, 2020.

KIRIL SOKOLOFF: Well, coming back to David Hume’s famous paper, and you’ve referred to me number of times. His conclusion was that governments should essentially run surpluses because there’s always crisis or problematic. If you look at corporations coming into this with the worst balance sheets in history, with profits having been flat since 2012, 40% of Americans barely able to get $500 in an emergency, it seems to me that as we come out of this, one of the implications is going to be we need to be better prepared for the future. Do you think that that’s the way we’re going to go, that we will be, look, we got real wakeup call here, we need to have money for rainy day?

LACY HUNT: think that’s the case for the private sector, but don’t feel that that’s the case for the government sector. Remember, net national saving has the private sector and the private sector saving was fine. 8.50%, not bad. The problem was that we had 6.50% government dissaving and so we only ended up with two. The real problem is that you have to have net saving from the private, the government, the net foreign sector, and if the government, even though maybe well-intended, maybe the actions are very popular.

All of these measures that were taken to deal with the pandemic, they were very popular. The measures– and they were essential. They were humane, they had to be done. It would have been far better if we’ve been following Hume’s advice, which is you run surpluses so when you have an emergency, you have– and by the way, Adam Smith in the Wealth of Nations followed Hume, made the same recommendation. Of course, no one remembers that anymore. No one reads Hume and Smith.

KIRIL SOKOLOFF: To get to positive net national savings, presumably that’s– I’m not saying it’s governmental objective, but it should be national objective in some form based on your point that in order to have money to invest, you’ve got to be able to save out of income. If government is going to keep on running deficits, at pick the number, 15 plus percent GDP, in order to have positive net savings rate, that implies very significant private savings rate.

LACY HUNT: Unachievable, and let’s say that we bring back lot of our operations, in other words. If that happens, then the current account deficit will start to shrink, but the current account deficit is always the opposite of the capital account. When you have current account deficit, you have capital account surplus, but the capital account surplus is net foreign saving. This is one of the problems. If you repatriate businesses, and you shrink the current account deficit, then you’re going to shrink net foreign saving. It’s quite possible that we will have two of saving movements. One for the increased level of government dissaving and also less positive foreign saving. We import lot of saving from the rest of the world.

KIRIL SOKOLOFF: Given the output cap, not having the savings to invest, is that better than it might otherwise have been? Because we got five, six, seven years to fill that output gap, or is the transformative event that is the easiest way out, if that’s the right word. Is that dependent on having the capital and savings to invest? Does that mean that in order to have that transformative, new economy, we’re going to have to have net national savings? Am taking that–

LACY HUNT: The thing about those transformative events is that they often create surge in income, and thus in saving that they finance themselves, but that’s why use the term transformative. It cannot be evolutionary. Let’s think about the situation that we were in the late 1920s, early 1930s. We take on great deal of debt in the ’20s and ’30s. We struggle throughout the 1930s. When Germany invades Poland, we still have an unemployment rate of 17% or 18%. We’ve come off the peak levels, but we still have very high unemployment rate and we have substantial number of people underemployed.

In other words, we really made very little progress to turning the economy. We stabilized things, and we ended the worst aspects of the Great Depression. Then World War II comes along. lot of folks including the great JM Keynes believe that it was the deficit spending of World War II that shored the problems of the Great Depression. That’s not my reading. It is true that on national income accounts basis, we ran deficits of 14%, 15% which is what we’re now running again by my calculation, national product account basis.

However, we had two other events that occurred simultaneouslyNumber one, 

  1. we had surge in our exports, and 
  2. we had mandatory rationing. 

If you wanted to buy 10 pounds of sugar, you couldn’t. You could buy one maybe, you had ration, and so people were paid to produce exports and to produce military goods. The private saving rate went up to 25% of net national incomeWe were able to cover the federal budget dissaving and we paid off the debts of the 1920s and 1930s. When World War II ended, Keynes suggested if we didn’t continue running the budget deficits of World War II, we would go back into the Great Depression, but that didn’t happen.

The budget was basically balanced all the way through and to the early 1960s. We ran small deficits, but we ran small surpluses on balance. It was close to balance. We opened up our export market, we opened up markets to the US, we financed the reconstruction in Europe and Japan, we had tremendous resurgence. If you look at McKinsey’s 24 cases of overindebted economies and how they got out of it by austerity, one of their cases is the US during World War II. They labeled it fortuitous circumstance. We didn’t go into World War II to get rid of the debt problem of the 1920s and ’30s.

It was something that happened as result of the policy mixes but the folks in America were okay with the austerity because it was great national endeavordon’t think that they would be willing to do that today. Everyone is relying on more government activity to solve the problem, not realizing that that’s the source of our deteriorating rate of economic performance.

KIRIL SOKOLOFF: Well, on that note, it’s been really instructive ending [?].

Gods And Monsters (Great Military Blunders Documentary) | Timeline

Episode 1 tell us how the egos of Maj. Gen. Charles V.F. Townshend, Field Marshal Bernard L. Montgomery and Gen. Douglas MacArthur led to disaster for their troops.

We have long saluted military genius and bravery. But the other side of the coin is military incompetence – a largely preventable, tragically expensive, yet totally absorbing aspect of human behaviour.

From the Crusades to Vietnam, history is littered with examples of stupidity, obduracy, brutality and sheer breath-taking incompetence. Lack of communication, technological failure and a misplaced sense of superiority have led to the deaths of thousands of ordinary soldiers, let down by their masters and betrayed by arrogance. Using a combination of history, human interest and archive footage underpinned by powerful story-telling, Great Military Blunders charts man’s folly and cruelty in a series of stunning debacles, spanning almost a thousand years of conflict.

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Produced by Darlow Smithson Productions.

The Secret Plot to Bring the U.S. into WWII

At the outset of the Second World War, the Allies were desperate to have Americans fight alongside them. So, they enlisted Canadian M16 officer William Stephenson to help sway them, kicking off a large-scale, state-sponsored influence campaign. Author Henry Hemming joins The Agenda to discuss his book, “Agents of Influence: A British Campaign, a Canadian Spy, and the Secret Plot to Bring American into World War II.”

FBI Enforces Anti-Debt Peonage Statutes After Pearl Harbor

Peonage, also called debt slavery or debt servitude, is a system where an employer compels a worker to pay off a debt with work. Legally, peonage was outlawed by Congress in 1867. However, after Reconstruction, many Southern black men were swept into peonage though different methods, and the system was not completely eradicated until the 1940s.

In some cases, employers advanced workers some pay or initial transportation costs, and workers willingly agreed to work without pay in order to pay it off. Sometimes those debts were quickly paid off, and a fair wage worker/employer relationship established.

In many more cases, however, workers became indebted to planters (through sharecropping loans), merchants (through credit), or company stores (through living expenses). Workers were often unable to re-pay the debt, and found themselves in a continuous work-without-pay cycle.

But the most corrupt and abusive peonage occurred in concert with southern state and county government. In the south, many black men were picked up for minor crimes or on trumped-up charges, and, when faced with staggering fines and court fees, forced to work for a local employer would who pay their fines for them. Southern states also leased their convicts en mass to local industrialists. The paperwork and debt record of individual prisoners was often lost, and these men found themselves trapped in inescapable situations.

Generational Power Transfers During Political Crisis (Grant Williams, Neil Howe, Harald Malmgren)

Grant Williams and Neil Howe travel to the nation’s capital to continue their discussion about how previous “Fourth Turnings” have impacted the United States. They weave their way through the National Mall, paying homage to the WWII, Korean War, and Vietnam Veterans memorials and the generations they represent. They then meet with economist and former presidential advisor Dr. Harald Malmgren to get a look inside generational transfers of power and politics during times of upheaval. Filmed on April 4, 2019 in Washington, D.C.

Modern Monetary Inevitabilities

ALEXANDRIA, VIRGINIA – In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin Modern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.

MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.

The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US , which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate-change abatement; and technology-driven labor displacement. Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.

MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary – as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.

MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is

  1. to cut overnight official rates to stimulate credit and investment expansion. The second (MP2)
  2. is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and
  3. proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.

In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.

The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the  associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.

The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.

The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.

As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.

The Unrealistic Economics of the Green New Deal

Saving planet, creating jobs are noble ideas—but by combining them, Green New Deal exacts too high a cost

The Green New Deal that Democrats unveiled last week is actually two deals: one to combat global warming, another to create millions of well-paid jobs for targeted groups.

Individually, both goals have their merits. But by combining them, the Green New Deal promises to make climate mitigation both absurdly expensive and deeply partisan and is thus more likely to set back than advance the climate cause.

The premise behind the Green New Deal is right. While the world may not spontaneously combust in 10 years, global carbon-dioxide emissions need to start dropping soon, by a lot, to keep temperatures from rising more than 1.5 degrees Celsius from 1800s levels, according to the Intergovernmental Panel on Climate Change. Increases beyond that raise the probability of extreme weather, deadly heat and rising sea levels.

Because the private market has no incentive to reduce carbon emissions, government intervention is necessary. But not all interventions are created equal, and the Green New Deal’s seem engineered to be as expensive as possible.

Consider its goal of massive public investment to achieve 100% renewable energy in as little as 10 years. Kevin Book, head of research at ClearView Energy Partners, a research firm, estimates replacing the 83% of current U.S. generation that is not renewable with solar photovoltaic, wind and biomass would cost $2.9 trillion—nearly a full year’s tax revenue.

This excludes any cost for interest, operations, maintenance, new transmission lines or compensation to private investors for writing off natural-gas and coal plants with plenty of useful life left. It assumes cheap battery storage that doesn’t yet exist. Even so, this works out to $83 to avoid one metric ton of carbon dioxide.

The Green New Deal’s plan to upgrade every building in the U.S. to “maximum energy efficiency” is even more questionable. A study by Meredith Fowlie, Michael Greenstone and Catherine Wolfram in the Quarterly Journal of Economics found the federal government paid an average of $4,585 each to weatherize homes in Michigan. Extrapolate that to 95 million homes nationwide, and the bill tops $400 billion. The cost of avoided carbon dioxide: up to $285 per ton.

To understand how high $83 to $285 per ton of carbon dioxide is, consider that Barack Obama’s economists put the economic harm of a ton of CO 2 at $50. Or that you can pay a power producer

  • $6 to reduce emissions by one ton in New England,
  • $15 in California, and
  • $25 in the European Union,

based on emission permit prices in those jurisdictions, notes Mr. Greenstone, an economist at the University of Chicago.

Yet in the Green New Deal, trillion-dollar price tags are a feature, not a bug. That is because its mission is to create “millions of good, high-wage jobs” in “front-line and vulnerable communities.” The higher the price tag, the more jobs it creates. How to pay for it? Its Democratic sponsors would raise taxes on the rich and borrow the rest, including from the Federal Reserve, just as the U.S. did during World War II, dramatically boosting output and employment.

But in 1941, the U.S. had plenty of unused resources to mobilize: just 28% of prime-aged women had jobs. By 1945, 35% did and today, 74% do. (The data aren’t strictly comparable due to changing definitions.) The war effort still spurred intensive inflation pressure, contained only with wage and price controls. The U.S. is now close to full employment and its debts are far higher. Even in today’s world of low inflation and low interest rates, the scale of deficit spending the Green New Deal implies would likely push both higher.

Republicans and business groups have long fought even modest costs to mitigate climate change. Jacking up the price to finance left-wing Democratic priorities will only intensify their opposition. Indeed, Republicans and President Trump are itching to run against the Green New Deal. This guarantees inaction on climate unless Democrats win the White House, House of Representatives and 60 Senate seats.

What the U.S. needs is the Green New Deal’s sense of urgency combined with market mechanisms that incentivize carbon reduction at the lowest price, such as a carbon tax, carbon credits or tradable emission permits. This will also spur innovation that other countries can adopt to tackle their own emissions, which will be 88% of the global total by 2040.

Germany’s experience is illustrative. In 2000 it began targeting subsidies to renewable power and by 2017, renewables’ share of power consumption had risen fivefold to 38%. Because renewable generation was initially so small, the subsidies weren’t that burdensome, says Michael Pahle of the Potsdam Institute for Climate Impact Research. The priority, he says, was spurring innovation to drive down costs. But, he says, as renewables became much larger, cost became much more worrisome.

In 2015 Germany introduced reverse auctions, in which producers bid to supply energy at the lowest possible subsidy. By attracting the lowest-cost supply, this has driven solar photovoltaic prices down by half. Some bids have required no subsidy at all.

Even so, because Germany is phasing out nuclear power and hasn’t targeted transport, industry and agriculture emissions, it is behind on its emissions reductions. This underlines the need for an economywide carbon price, Mr. Pahle says. That is a lesson Americans should learn now, not after they’ve spent trillions on a Green New Deal.