RE: LeoThread 2025-08-16 03:50

What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is economist Lacey Hunt. Dr. Hunt is the executive vice president and chief economist of Hoisington Investment Management Company. He previously served as chief U.S. economist for the HSBC Group, as executive vice president and chief economist at Fidelity Bank, and as senior economist for the Federal Reserve Bank of Dallas during the course of a 55-year career studying markets and the economy. In the first hour, I asked Dr. Hunt for his broad assessment of how he thinks the global economy is doing today and what monetary and cyclical economic indicators he relies on to make that assessment. We discussed the increased role of the U.S. Treasury as an economic policy actor in (1/41)

the post-pandemic period, the concerning decline in the net national savings rate, and whether the neutral rate of interest, a hotly debated topic among economists, is actually moving lower in what this means for trend growth, interest rates, and inflation. In the second hour, I asked Dr. Hunt why he believes that the Fed has been able to raise interest rates by more than 500 basis points in less than two years without inducing a recession. Is this because other causal factors have remained more accommodative, or have the lags just grown longer and more variable? And if so, why? What does this tell us about the business cycle and the effectiveness of monetary policy? We also discussed the chronically high fiscal deficits and the implications of trying to reduce them in an environment where the economy is becoming more dependent on government spending to boost economic growth, support critical national investments in energy and defense, and contribute to the private savings of the (2/41)

economy. If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing that we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are (3/41)

solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this highly informative and long overdue conversation with my guest Dr. Lacey Hunt. Dr. Lacey Hunt, welcome back to Hidden Forces. I'm glad to be back after seven years. Seven years, yeah, something like that. You were on in 2017 and you were an in-studio guest at that time because this was everything before the pandemic was in studio and people still love that conversation. In fact, I was actually speaking recently with someone that you know, Eric Besmajian, who has been on the podcast as well, and he was telling me how much he loved that conversation and how much he was looking forward to us talking to again today. And he's a good guy, Eric. We all need to pray for him. He's fine. Yeah. Yes, he's been public about what he's going through and he's a wonderful guy. Wonderful. Wonderful guy, brilliant guy. So, well, like I said, I'm very excited to have you on the (4/41)

podcast today. We didn't have a chance in our first conversation to talk about your biography, your history, your background. Are you a native Texan? I am, yes. Did you grow up in Austin? My family originally settled in Nacodotus back in the 1840s and I spent some early years in Nacodotus, but my main junior and senior high school years were in Houston. I had a great grandfather, it's insatiable to say who would be a great grandfather, who received a land grant from the Republic of Texas in 1843. And the Republic of Texas was only in business from 1836 to 1846. So, we've been in Texas for a long time. Wow. What did your parents do? They were very learned people. My father was a PhD psychologist. He earned his PhD in 1941, the year before I was born, in the University of Texas. I guess you could say that I was a behaviorist before I was an economist. My dad was always teaching and instructing. I didn't pay as close of attention as I should, but it was quite of an experience growing up (5/41)

with him. My mother was an educator, but she was very learned as well. She had received a scholarship to Occidental College because her father was a very poor president and minister, but his chief parishioner was chairman and chief executive of Union Oil of California. He was also on the board of Occidental College. And he arranged for my mother as well as her four siblings to go to Occidental. And my mother later earned a master's degree in speech and drama from USC. And my father was there one summer taking a sabbatical from a renowned psychologist at USC. This was off the books. It apparently would have been arranged by a professor at UT with a professor at USC. But my mother was in charge of the summer play and she had put signs up over the USC campus needed someone with a Southern accent. And dad applied. He got the job and shortly thereafter or a year or two later he married my mother. So he got a part in the play with his father? Yes. He had the Southern accent that she needed. (6/41)

He was a Texan. That's how your parents met. That's an amazing story. Yeah, it is. And when dad was a child psychologist he was more aligned with Carl Jung than Freud. And my mother was a role plays musicals for elementary school. When she retired she was principal of the largest elementary school in Houston. So you had the example of your parents who were both in academics. Did you know at a young age that you wanted to be an economist or was there some other general sense of what you wanted to do and that sort of realization of your interest in economics came later? No. When I went to Sweeney in 1960 I wanted to be a doctor, medical doctor. And for the first year and a half I was taking all the pre-med courses. And then in the spring of 1962 I had time for my first elective and I took the principles of economics. And at the end of the spring semester I switched my major. I found my true law of economics. What attracted you to economics? Just fascinated me. I read a book by Hal (7/41)

Brenner on the worldly philosophers in my very first course. It's a great little book and I was just drawn to it because it sort of combined institutional understanding, history and quantitative analysis. And I thought that that was a good use of some of the abilities that I have. I'm not the strongest in anyone but when you work them all together I think I have a little bit of an edge. And so when I left Sweeney I got an MBA thinking business world was for me. Went to Wharton. I was a finance major. And after my MBA at Wharton I was offered a full fellowship. I had a university fellowship at Temple University in economics. And that fellowship in today's dollars it was tax free. It would be about close to $50,000 even though at the time it was $300 a month. But it was tax free and I had no duties. And I finished in two and a half years later. I had a parent of my PhD in January of 1609, defended the dissertation in December of the year before and then went to the Dallas Fed. So that (8/41)

was your next job after getting your PhD going directly to the Dallas Fed? I went to the Dallas Fed, yes. So what did that experience working for the Dallas Fed teach you? And how long were you there? When did you go again? You went during the end of McKinsey Martin's administration. I went in 69 and I left in 73. And it was very, very fortuitous because when I went to the Dallas Fed in 69 I was really the most conversant in monetary theory and history and macroeconomics. And I had built an econometric model of the euro dollar market. I knew Internet. My fields were macroeconomics and international economics and finance and mathematical and statistical techniques. And I was in a position to work pretty closely with the director of research at Dallas and the president of the bank. The president of the bank is a very distinguished agricultural economist, Dr. Phillip Coldwell. And Ralph Green was director of research. It was in due course I started advising them for the FOMC meetings. (9/41)

They did something for me that was very valuable. They sent me to do the training program for fed regional economists at the Fed of New York. And in fact, I made two trips, lengthy trips, to study the operations of the FOMC and its execution. I doubt that if I had been at the board of governors or if I had been at one of the larger Federal Reserve banks, I would have never been tapped, I don't think, to have that kind of exposure. But at the Dallas Fed I did. And that was very beneficial to me. And I had time to do my own research. And I'm very fortunate I started getting published in some of the lesser academic journals. Before the time I had left the Dallas Fed, I was published in the journal Finance, which is a rather significant feat at the time. And it was co-authored. But nevertheless, I made it in a few times. And I was able to get some recognition from my dissertation by writing a comment on someone else's very extensive work. So I was starting to get published. My econometric (10/41)

work was noticed by Dr. Michael K. Evans, a Brown-aid educated econometrician who was co-developer of the Wharton model with Larry Klein. And Mike Evans asked me to come to Chase Econometrics to build the first large-scale econometric model of the financial markets. At that time, the Chase model, which Evans had spun off and had broken with Klein. But there was just one financial equation in the entire Chase econometrics model. And the same was true for the Wharton model at the time. And that was that the Treasury bill rate was a function of the Federal Reserve discount rate. There were no money supply equations alone. There were no other financial variables, no long-term rates, intermediate-term rates. So I built that model. It was a monthly-based model. And the J.I. Press in Greenwich, Connecticut published that as a book in 1976 called Dynamics of Forecasting Financial Cycles. I've always looked at the financial cycle as leading the business cycle. Keep in 1976, at that point in (11/41)

time, Minsky had not developed his financial instability hypothesis. Narr had Kendallberger written his great book, Mania's Panics and Crashes. But I was thinking in terms of financial cycle, I didn't define it as well, I don't think, as Minsky and Kendallberger did. But I was inclined in that direction before their great work. Of course, I took advantage of their work and other work to greatly amplify what I had started to do. But that's how it all got started. Did you have an opportunity to get to know David Rockefeller while you were at Chase Bank? I did. I did. Michael Evans called me and he said, you're going to get a call from Mr. Rockefeller's secretary and he's going to give you a project to do. And I know you're busy because you're putting out... I was putting out the, every month, the Chase Econometrics monthly financial model and existing mic to some extent on the regular macro model and talking to clients, traveling around. I was pretty busy. The secretary, his secretary (12/41)

asked me to come up to Siem in New York. Chase Econometrics was in Balaken with Pennsylvania, the first Western suburb out of Philadelphia. So I took the old bankrupt, Femme Central Railroad in New York and went up to the top floor of Chase Manhattan Plaza. And I saw David Rockefeller and he gave me an assignment and he said, this is what I want you to do. Do you think you can do it? And I said, I can. He said, can you get it to me in a certain and gave me a deadline? So I went back and I worked on it very, very diligently. And I sent it to his office. And a few days later, I got a call from Mr. Rockefeller's secretary, asking me to return to New York. And I was pretty proud of the project. I thought that it was a great effort. I had done exactly what was wanted. And I went to see Mr. Rockefeller and he started out saying something to the effect. Well, this is a great first effort. Wow, that must have been a very cool experience for someone at your level and your age at that time, (13/41)

getting that kind of compliment. You know, I was still in my twenties. I'd earned my PhD when I was 26. So I was crestfallen when he said it's a good first effort. And he then suggested several different avenues to me. And my crestfallen condition, I took the train back to Philadelphia, worked on it. I don't think I slept for days while I was trying to complete the undertaking and sent it back to New York. And a few days later, David's secretary called and said, Mr. Rockefeller wishes to thank you for your excellent effort. And I did another great project for them. What are butcher who was number two in command today? It was very interested in productivity and how I that helped the inflation at the time. And they undertook an extensive study of productivity, which they wanted to be able to document with solid research. And Michael Evans assigned me that job. I was a major undertaking because the Chase published double page editorials in Wall Street Journal and other leading (14/41)

publications at the time about the findings of the productivity study. My name wasn't mentioned, but I knew I had done it and I kept those records. But I got to do that. And David also asked me to attend the asset liability committee meeting, which sort of changed my whole life because I knew at that point in time I wanted to move from research into the financial investment. I interviewed someone named Roger W. Robinson, who was senior director of international economic affairs at the Reagan NSC and was one of the architects of the economic warfare against the Soviet Union in the 1980s. And he was, coincidentally, David Rockefeller's personal staff assistant in the 1970s. And I remember him telling me what that experience was like. He would fly with David on his private plane to Europe and to meet everywhere, wherever he went, people wanted to meet him, the local politicians, the presidents, the prime ministers, et cetera. And I just think when I hear you tell this story, I have that (15/41)

additional context of understanding that in the 1970s, there weren't many people in the world who were more powerful than the Rockefellers. They were at the very top. And to know David and to have that kind of relationship must have felt extremely special. I never got to travel on the plane, but I did get invited to the asset liability meeting. And I did keep in mind that they had a large economics department headed by John Wilson. And David could have used many economists or multiple of their economists for some of the projects which I did. And that was a very good feeling for me. It was one of those great privileges because when I went from the Dallas Fed to the econometrics unit of Chase Manhattan, I had no idea who was running Chase Manhattan and had any idea whatsoever that I might actually come in contact. But David was an exceptional man. He was a very good economist. He had a PhD in economics from the University of Chicago. It was one of those great pleasures in life that you (16/41)

just sort of stumbled into. So you've done many other things besides that. We can't get into everything, but most notably, perhaps you were chief U.S. economist for HSBC Group, which is one of the largest banks in the world, or at least it used to be. I don't know where it still ranks today. It was number one when I left them. When they bought Carol McIntyne and McGinley, they were still the British colonial bank, 18th largest in the world. William Purvis took them from the British colonial bank to the largest bank in the world, which is where they were when I left in 1996. William Purvis was another one of those exceptional people, knighted by Queen Elizabeth, great banker. It was a privilege for me to get to know him a little bit. I would travel to Hong Kong or London and the scene. From time to time, I would be given projects to do for him. And that was also a wonderful experience. And I also survived quite a few mergers, I think a total of five in that process, which was a very (17/41)

pleasing demand. I don't know how I did it, but I did. And you were also EVP, executive vice president and chief economist at Fidelity Bank. So let's use the totality of your experience, your academic experience, your experience at the Federal Reserve, and your experience working in the private sector as an economist. The 50, I think 55 years you've been in the business or so. Let's use that to paint an economic picture of where we are today and then go about doing some analysis on it. First of all, when you look across the global economy today, what is your assessment of how it's doing? Poorly, very poorly. Take for example, if you look at real per capita GDP, or the average of real per capita GDP and GDP, which is really the more appropriate thing to do because they diverge and they're equivalent. And so to get the best understanding, I think it's appropriate to average GDI and GDP. That's what the... Gross domestic income and gross domestic product. Yes. That's what the National (18/41)

Bureau of Economic Research, which is our business cycle dating authority, and probably don't preeminent research organization in economics. That's what they do in assessing changes in the business cycle. They take the average of GDI and GDP. So in the 20 year moving average to 1970, it was growing at 2.2% per annum. And in the last 20 years, ending 2023, we're growing 0.9% per annum. We've lost 1.3% per annum in the 20 year growth rate. And by the way, if you look historically from 1870 to 1970, and we have data, pretty good data, not perfect, for that 100 years, the real per capita growth rate was also 2.2%. The last 20 years, we're down to 0.9% per annum. If we had stayed at the 2.2% just in the last 20 years, the average real economic activity per person would be $78,000 or so. Whereas in actuality, it's only 66,000. So we're really losing a lot versus trend. And this is even worse in Europe and the UK and Japan. All of us are not performing in the way in which we did. And I (19/41)

believe it's a reflection of the harmful effects of too much debt, very, very high levels. I think it triggers a law of diminishing returns, which is derived from the production function, one of the main concepts in economics. Economic output is technology interacting with the factors of production, land labor and capital. Overuse, one of the factors of production, initially output rises, continuing to do so, output flattens and still increase that factor. It turns down, mathematicians call that a parabolic function, falls out of partial differentiation of the production function. That explains why we have the growth that performance is the standard of living has been slowing. Now, however, we have an even more serious situation because we have negative national saving. If you'll make sure you remember that the circular flow, which says GDI equals GDP equals production of goods and services, they're interchangeable. So you can move parts of one side to the other back and forth out of (20/41)

the circular flow. We know that net physical investment, plant and equipment must equal net national saving. And we now have a condition of negative net national saving. Without net national saving, we cannot have net physical investment. Without net physical investment, we cannot increase the capital stock, which means that the production function is not going to be able to develop. It's going to develop as long as we have negative net national saving. So when you say negative net national savings, can you define what net national savings is for listeners? Okay, so saving has three components. It's private saving. Private saving actually has two components, household and corporate. So there's private saving, foreign saving, which of course is the inverse of the capital account, and then government saving, which in this case is dissaving. So what we have a situation today is that the federal budget deficit is greater than the sum of private saving and foreign saving. So we have a net (21/41)

negative national saving. The production function is not operative. You know, to make labor and natural resource extraction more productive, they have to be given increased capital stock to work with. And the physical investment is equal to the change in the capital stock. So we've really dug a deep hole for ourselves. The problems are basically worse. Everywhere else, there's some minor differences, perhaps, but the budget deficits are just simply too large. And you say, well, we can have the Federal Reserve, Accelerator Central Banks accelerate monetary growth. However, additional monetary growth does not correct the problem of negative net national savings. You can increase the money supply, but that will just have an inflationary impact. There's no way to inflate our way out of the problem. Inflation just has a devastating impact on the modest and moderate income households, which then means that inflationary policies increase the income and wealth divides. We're seeing that big (22/41)

time in all the major economies of the world. So you could conceivably use fiscal policy to reverse negative net national saving, but there is no one that has that agenda. No one whatsoever. And it would require a great deal of political goodwill and shared sacrifice. And there's just no pathway to achieve it. So we're stuck with it now unless something for two of us happens. It's going to be very hard to alter this downward trend in the standard of living, which means that the income and wealth divides are going to get worse. And it's not a wholesome development at all. So is this dynamic analogous to burning the furniture to heat the house? What you're basically doing is you're using your depreciation to live on. There's a classic story in American history about the pilgrims. They embarked just before Christmas in 1620, and they didn't get a chance to plant their crops. They were starving or scatting about to find whatever they could. And they came upon a large store of corn that was (23/41)

buried there somewhere near the ocean. And they ate it, which infuriated the Indians because it was their seed corn. And so basically we're sustaining consumption and daily living by eating our depreciation. That's what it means when you have negative net national savings, you ultimately get negative net national investment. And you're not going to be able to grow your capital stock. It's a very difficult situation. And I don't think that this is well understood at all because it blocks the normal production function. The production function goes back to the original work of David Ricardo. He only took into consideration two factors of production. And then a lot of additional work, much of a much improvement and understanding is traceable to the work of Robert Solo. Nobel Laureate taught at MIT and he had the exogenous growth market. He relied on the production function and he developed the marginal revenue product of capital, natural resources and labor. But the exogenous variable in (24/41)

his model was saving. You have to have saving. You may recall, having read Keynes, Keynes talked about the fallacy of thrift. And his idea here was that if people do what's right in their own interest to try to prepare for a rainy day, they will have to take retirement or education or unexpected needs and they say that this will leave the economy with an insufficient level of saving. And so by doing the right thing on the individual level, we have this adverse macroeconomic impact. The problem is now Keynes is concerned about too much saving doesn't apply because we have negative net will save, which is a very, very serious problem. And it will become more evident and it's going to be difficult because this concept is complex. And frankly, I don't think that the American economy has much of an understanding of economic theory or economic history. So the relationship of savings to interest rates is inverted, right? So as savings decline, interest rates, all things being equal go up. All (25/41)

things being equal. And there is an effect there. I think though that the main thing ultimately is what happens to inflationary expectations and the main ingredient inflationary expectations. It depends upon whether there's too much money chasing too few goods or whether we have the reversal of that situation. So now, you're putting aside the national savings rate. I just know that the personal savings rate throughout the 90s and early 2000s continue to decline. And yet this is a period of declining interest rates. Is that because we were importing foreign savings? It was declining. And at that point in time, the debt levels were deleterious. They were triggering the law of diminishing returns. So the increased indebtedness was pulling the growth rate down. But you still had positive saving. The budget deficit were not so large that they were greater than the private and the foreign savings. So in that time period, generally speaking, the debt was when you're operating with the (26/41)

production function and you're overusing debt, you generate the law of diminishing returns, which is deleterious effect. And the increases in money that the place in that time period were not excessive. In fact, that you would call them generally normal and they were more than offset by a downturn in velocity. And so the net effect was that the inflation rate came down and so did inflationary expectations and interest rates. During the pandemic, what we basically did is we pushed money growth far outside the bounds of normality. And it led to, you know, 9 to 10 percent inflation rate there in 21 parts of 22. And the economy did better for a little bit. But ultimately, inflation is so hurtful to so many people that the Federal Reserve had to reverse themselves, which is what they're now doing. And even with the six trillion dollars of debt that was taken on during the pandemic, that did not bring the rate of growth in real per capita income back to the trend line, just brought it back (27/41)

to the trend line. But because of the Federal Reserve's operation, it produced all of this excessive inflation, which had a devastating impact. And so the economy has been left in a very difficult position. If you look at the real average weekly earnings over the full time hourly and salary people, which is about 120 million people in the last 14 quarters of the expansion, there's been a decline in the one and a half percent annual rate. That's the average. But within that average, you've got some skew at the very high end. There was excellent performance. And so the high inflation has just really had a terribly debilitating effect on the vast majority of our people, which it always does. In fact, there was a pre-Adam Smith economist by the name of Richard Camelot that understood that when you have rapid monetary growth, you get excessive inflation, a damaging impact on more moderate income people, which exacerbate the income and wealth of us, which is what the pandemic did. And we're (28/41)

seeing that today very, very evidently. So I want to talk about inflation and why it seems somewhat stuck, at least as a measure of CPI at around 3% or so. Before we do that, one of the topics that's been more hotly debated in the last year or so among economists, especially, has been the neutral rate. What is the neutral rate of interest? And there's a lot of speculation about whether it's higher or lower. I think you fall on the camp that it's lower. First of all, explain to our listeners what the neutral rate is, which also known as R-star. And what is the relationship between the neutral rate of interest and the net national savings rate? Well, the first of all, I think that the key relationship is what's happening to the real per capita growth rate in the average of GDI and GDP. And so in 1970, it was 2.2% and we're now 0.9%. So I think that that kind of gives us a bit of an approximation. It has to be moving in alignment with the standard of living. So the standard of living (29/41)

growth rate is coming down and the natural rate is coming with it. What was the first part of your question? Well, my first question was, what is the neutral rate of interest for people that don't know? And then what is the relationship between the neutral rate and the savings rate? How does savings, in other words, impact the natural rate of interest? Up until now, the impact has not been that important because you see, 2023 was only the eighth year in which we had negative national savings since 1929. And the other seven years, they were all when we were in serious economic contractions. Well, four of the negative national savings occurred in the 1930s. And then we had three negative national savings in 2008, time 10. Very, very rare, but it was not a persistent condition. But now we have a very, very difficult problem and one that at least to me appears very difficult to resolve. Before now, we had an excessive debt in this problem using the production function, which indicated the (30/41)

debt was bringing the growth rate down the law of diminishing returns. But now, however, when you have negative national savings, what it means is that we collectively are living beyond our means. But we don't have the resources to increase the capital stock. So if savings are so low, does that mean that we should expect to reach a bottom in the savings rate at some point and for that trend to reverse itself? And if it reverses itself, does that mean that we're going to be in a period of lower natural rates of interest for the foreseeable future? Because I think that's where you fall in. You expect a lower neutral rate of interest, but is the reason because people are going to have to start to save more? Is that the reason why? Well, the question is they don't have the income to save more. So I don't think that redressing the negative net national saving rate can be really done in any significant way by the private sector, nor by the current account, which then determines the foreign (31/41)

save. I think the problem is in the governmental sector. The things can be done to private saving, but I think that they're minute in comparison to what needs to be done to fix the federal budget deficit. Fed Chairman Powell recently said that the budget now is unsustainable. And I think he's correct. And the reason he's correct is we have negative national saving. We cannot have an increasing level of prosperity in this environment. So the economy has really held hostage to the federal fiscal situation. Do you think that the Treasury has become a bigger or more important economic actor today relative to the Fed, relative to what the Fed was, say, 15 or even five years ago? We've had two major coordinations of monetary and fiscal policy. The most recent, of course, is the pandemic where the Fed became a partner with fiscal policy. But this was done one time before in the 1970s. Nixon was president. I was a young economist at the Federal Reserve Bank of Dallas and wage and price (32/41)

controls were put on by Nixon. He had legal authority to do so. He asked the Fed to accelerate monetary growth and they were forced to do so because Burns quite unfortunately agreed to be part of the wage and price structure. He was chairman of the interest rate and dividend control committee. And he was also serving as chairman of the Federal Reserve Board. And so to placate those that wanted to be able to raise prices but they could not or wages, the Fed, he had to try to hold down the interest rates and the dividends. And so doing the accelerated monetary growth. When the inflation, however, surged out of control, Burns discovered that the fiscal policy partners were no longer there. And so guess who had to clean up the inflation of the early 1970s? Burns and he didn't do a very good job of it. It was only partially done. And we suffered for suffered rising inflation all the way until Paul Woker came in and it took him two years to finally get the job done two or three years to get (33/41)

the job done. So now we go into the pandemic. And there's no recollection of major path policy mistakes. That's just the character of the way things are. So no one remembers that the last coordination entered in disaster of too much inflation. And a decade of rising inflation and this worsening of the income and wealth of it. So the power fed cooperates with fiscal policy. And to do so he coordinated engineers and unprecedented increase in money supply, which was even greater than what Burns had done during the early 70s. But the same thing happened to Powell, which happened to Burns. When the inflation problem arose, the fiscal policy partners were no longer present. And that left the Federal Reserve to clean up the problem by itself. And so one of the great challenges that the economy faces is for the Federal Reserve to operate independently. And those that tell you that we can somehow solve our problems of this declining rate of growth in the standard of living by adopting some sort (34/41)

of inflationary outcome. And my view are gravely wrong. If accelerations and monetary growth only produce very transitory gains in economic activity. When people realize the inflationary impact of monetary policy, then the system becomes unanchored. And you have this devastating impact that worsens the income wealth distribution. And so the best thing for the Federal Reserve is to maintain its independence and not give up its ability to do the right thing. And I don't know to what extent this played a role, but the Federal Reserve moved very, very slowly to deal with the monetary increase that they put into the economy in 2021 and the inflation got out of control. Now, the inflation has come down. But last year's decline is what I call a contra normal cyclical development. That was the largest decline in inflation for any year in which GDP was rising inflation. Has declined by more than it did in 2024 on several occasions, but they were all in recessions. So we got a response, but it (35/41)

was an abnormal response. Normally inflation is a lagging economic indicator. And I think it's not surprising that the inflation rate is kind of stuck where it is. That's its nature. But as time goes by and as the monetary restraint moves further and further into the economy, which it's doing right now, there will come a point in which the inflation rate will fall. The sickality of it is that inflation is a lagging indicator. And I'm just going to give you one contrary indicator, which I think indicates this. The CPI, as you said, is stuck up above at 3% or slightly more. But the real problem here is the so-called shelter component, very controversial component. If you exclude shelter, the CPI has been under 2% for the last eight months. It is 1.8%. Now, the shelter component is a very badly conceived sector. What the Bureau of Labor Statistics does is they ask folks, what is the value of your home if you were going to sell it? Well, people always have an inflated value of their home. (36/41)

And they spend money and resources to ask people this question on a monthly basis. And once they get the response, then they have a formula that converts the selling price into what you would rent it for if you were going to rent it. Well, that's ridiculous. They don't need to survey what the selling price is. The selling price is known in every major market in the United States. In fact, where footage of each home is being sold as well. So this surveying to try to determine what people would sell their homes if they were going to sell them is a very foolish and expensive way to go. Just use the existing home price sales data. The formula that then converts the home price sales data into rent is not, and I don't have any problem with that. Now, that would be okay. But we have this horrendous component in the meantime, in real terms, money the way I measure it. And I like to take him to excluding currency. I think it's a more modernized concept currency is still a medium exchange and (37/41)

store value and unit of account, but it's fading importance. If you look at money in real terms, in that basis, we have record declines for the last 12 months, 24 months and 34 months. And we're also getting a very large decline in real terms of bank credit and bank loans. And in fact, CNI loans and nominal dollars, even in mid-March or 80 billion where they blow where they were at their peak back in the fall of 2022. Monetary policy is extremely tight and monetary policy will work with long legs and the inflation rate will come down. The unemployment rate, which the Fed is also focused on is another lagging indicator. So the cyclicity of the situation, the cyclicality, I mean, suggests that the inflation rate will actually fall to the Fed's target. But at the same time, the unemployment rate will rise more than where they're expecting it to go. So Dr. Hunt, I'm going to move us to the second hour of this conversation. And some of the questions I have for you are, one, a follow on the (38/41)

comments that you've ended the first hour with, which is why have the lags been so long this time? Why have the hikes of short-term interest rates by the Fed taken so long to materialize in a slowdown of the economy? I'm also curious to understand and sort of follow up on our conversation about the savings rate and interest rates and economic growth. To understand how we get out of the situation, because if the United States government needs to, quote, get its fiscal house in Northern, in other words, rely less on debt financing to pay fiscal obligations, that would also lead to an economic contraction. And so like we seem to be caught in this impossible situation where the solution to the problems of too much debt result in an economic contraction, which raises the relative carry burden of that debt. So that's something I want to talk to you about. I also want to understand more specifically how far out you see interest rates remaining depressed, because if you do believe that the (39/41)

neutral rate of interest is actually lower than it was going into the pandemic, which I think is your position, but you can clarify it in the second hour. If that's the case, how long is that going to continue in your view, or what are going to be the factors that are going to be contributing to it? And the same thing goes for inflation. And I also, of course, want to ask you what asset classes or industries or sectors you're most bullish on. What are the things that you think are going to do well in this environment? For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want to access the second hour of today's conversation with Dr. Hunt, head over to hiddenforces.io. And sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile (40/41)

device using your favorite podcast app, just like you're listening to this episode right now. Dr. Hunt, stick around. We're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (41/41)