Lacy Hunt: The Economy Is Seizing Up While The Fed Dithers
Summary
Market Outlook: Lacy Hunt predicts a significant illiquidity process emerging, which he believes will lead to a deflationary event, with the Federal Reserve being slow to respond.
Federal Reserve Policy: Hunt argues that the Fed is behind in its actions and should cut interest rates by at least 100 basis points to counteract the economic pressures from tariffs and other global factors.
Fiscal Policy: Current fiscal policy is described as extremely restrictive, with the Congressional Budget Office's projections showing minimal net federal stimulus over the next decade due to offsetting factors like tariffs.
Tariffs and Trade: Hunt emphasizes the negative impact of tariffs, which he believes are leading to a margin squeeze and reduced liquidity, potentially triggering a Kindleberger spiral similar to the Great Depression era.
Economic Indicators: He criticizes the Federal Reserve's reliance on flawed data, suggesting that more accurate and timely data collection methods should be implemented to better inform policy decisions.
Investment Risks: The discussion highlights high market valuations and potential risks from financialization, suggesting that current market conditions resemble those preceding past financial crises.
Employment Concerns: Hunt warns of potential job losses due to economic pressures, particularly in sectors outside of AI, which is currently driving much of the economic growth.
Call to Action: He stresses the need for significant monetary support and lower interest rates to mitigate the risks of a global economic downturn.
Transcript
And so so I believe a significant illquidity process is emerging and it's it will only become more more evident as time passes and I think that that is a a deflationary event and all right I think the Federal Reserve is behind the eightball well way behind the eightball. [Music] Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. It's an especially confusing time for investors given how divided the experts are on whether resurging inflation or disinflation deflation is more likely from here. Your answer to this question determines whether you think the Federal Reserve starting to cut interest rates is a good idea or not. Today's guest has very strong views on this matter based on a lifetime of study. For perspective, we've got the great fortune to sit down with one of the greatest living economists, Lacy Hunt, former senior economist for the Federal Reserve Bank of Dallas and current executive vice president of Hoisington Investment Management Company. Lacy, thanks so much for joining us today. >> Glad to be here. Nice to nice to see you, Adam. >> Always wonderful to see you, Lacy. Thanks so much for joining us. Uh, I know I stand between you and your Labor Day weekend, so we'll wrap this up as quickly as we can. Uh, and first and foremost, I just want to let folks know, um, we're we're going to talk about your thoughts on current Fed policy here, Lacy, but this really is just the appetizer, even just the amuse bouch, if you will, to your appearance coming up at the thoughtful money online fall conference where um, you give really a graduate level walkthrough on where you see things headed from the macro perspective. you walk through a ton of charts that you create specifically for that event. So, um you know, I'm I'm not going to dig too deep with you on these issues because we're going to get a chance to do that in real depth at the conference. That being said, um let's get started. >> I might go deep. However, >> you you do whatever you want, Lacy. You always have cart blanch to do whatever you want. So, let's let's kick it off here. What is your current interpretation of the status of fiscal policy today? In one word, it's extremely restrictive. And I know that that's not the general view, but let's just let's just look at some of the facts here. So, according to the Congressional Budget Office, the big beautiful um bill act uh will add uh $3.4 trillion over the next 10 years. That's 340 billion per year. Um, however, embedded in that number are um, uh, roughly $3 trillion of, let's call them accounting tax cuts. Accounting as in terms of stipulated by the law and the procedures of the Congressional Budget Office. And um in addition there are $3 trillion worth of expenditure reductions. So the net uh increase in federal stimulus measured in this very narrow sense for the 10-year period is is is $400 billion or 40 billion per year. uh however uh that is uh all while all factual not very useful. >> Now the S&P global who recently reaffirmed the credit stating of the United States said that the fiscal situation is stable that it's it's neither improving nor deteriorating. Mhm. >> Um in spite of the uh calculations of the CBO. And the reason that they said that is that it it looks like a reasonable assumption is that over the next 10 years tariffs are going to add $3 trillion in revenue or $300 billion per year. And so if you if you have a net 3.4 stimulus and you have three trillion in in in tariff revenues, you're almost in balance more or less washes each other. Um but but that's that is that is a a simple mathematical calculation that is not the dynamics of the economics. And the reason is that of this $3.4 4 trillion in stimulus in the big the big beautiful bill act is that $3 trillion was a mere rolling over of the 2017 tax cuts. >> Right? >> The tax rates that are in effect this year and went into effect eight years ago are the same tax rates that will be in effect in 2026 and uh for the nine years afterward. Uh so there there's no net benefit uh in in any sort of macroeconomic sense from extending the tax cuts. Mhm. >> So the way I look at it is that there is roughly $3 trillion of expenditure reductions plus the restrictive effect of of of uh $3 trillion over 10 years in tax revenues. Now um and that's why the S&P Global can say that they're in balance. Uh but the matter of fact is that even there the calculation is is too simplistic because there are many dynamic effects that are going to take place as a result of the tariff increases and this is this is what I want to talk about. Uh the the main feeling is that the tariffs are being absorbed and there hasn't been any significant damage yet. Um but but I would not share that view. The the way the tariffs work out historically, it's a very very slow process. It goes through multiple stages. Um the first act of raising tariffs is not the final act when there is tar retaliation. And if if the parties that that the instigator country and the retaliator country are not happy, you may have second, third, and fourth round of tariff increases in retaliation. And we're seeing >> the whole tit for tat. Yep. >> Whole tit fortat game goes on. Now um so uh the other thing that we we have to take into consideration uh when we're we're talking about tariffs is the nature of the goods that are are in the international flow and the bulk of them with the with the exception of of certain energy products like gasoline and life-saving drugs and maybe some life saving medical equipment and perhaps a few rare earth or earth minerals. The all of the rest of the goods are highly price elastic. Mhm. >> In other words, if you raise the price, you get a a much larger percentage decline in demand than you would for the average product that would be traded u on a global basis. And >> because people can either forgo it or they can choose substitutes. Yeah, >> they can. Well said. Time is very important. Time can be a substitute. Um, and you can also shift to to older equipment, for example, >> or you can rearrange the production process, or maybe you can find a way to simply modify and amend what you're working with. Um, and and so the the whole process is we're dealing with price elastic goods. And I I personally would say that for most internationally traded goods, excluding the ones I mentioned, the price elasticity is three, which means that a one percentage point increase in price reduces demand by 3%. So um let's let's let's think about this in another way. Last year the imports of goods were 3.3 trillion. And um right now it looks like here in in August that the the more the the tariff rates in in in already in place are somewhere around 10%. So without allowing for the dynamic effects 10% times 3.3 trillion is more than three trill 300 billion per year. >> Yep. >> 3 trillion over 10 years. That's why S&P can say the fiscal situation is in stability. Um however um when when when a country and with dealing with inter price elastic goods if they if they institute tariffs there's retaliation because of the flatness of the curve. What happens is that prices go up initially quantity demanded falls. If you use the micro model, >> the retaliation occurs, quantity demanded falls further and the price level falls back. Now, uh, the Fed chairman Pal has only talked about the first round effect and the first round effect can go on for months, but there is a second round and and because of this um highly price elastic curve, the the first effect which starts slowly and then builds is that there is a very significant margin squeeze because firms cannot push the price increase through rapidly. >> Yep. >> They they they would lose market share substantially and and people have options as to deferring demand or moving to other products or simply not buying at all. And um so this margin squeeze as it slowly materializes causes a downward or what I would call an endogenous shock to liquidity. And most of us assume that that the Federal Reserve controls liquidity. Liquidity is an exogenous element. But no, this is one of those times as demonstrated by the period from 1925 to 1939 that the imposition of tariffs can have several rounds of a negative liquidity effect. Economists like to use the term endogenous. So the first occurs when corporations experience the loss in liquidity because they sell less or have to take lower price or combination of both. But but to get their house back in order firms have to cut the demand for the factors of production which would be labor, natural resources and capital. >> Mhm. And when they do that then that causes another uh downward shock to liquidity. And of course if the process is playing tit for tat along the way the whole element it is is going on and on. But there there's still another effect which which no one is talking about at all is that the objective here is to raise tariffs and to improve the trade sector. However, the trade sector is the inverse of the capital account and capital account is the is the same thing as net foreign saving and and so if you improve the trade deficit you worsen the capital account. H >> now the capital account is is is and the ser saving of the foreigners that have by necessity plowed back into the United States because they want to sell us more goods than than they want to buy from us. Um has resulted in the fact that the foreign sector owns 18 trillion of of common stocks of equities. They own five trillion of corporate bond. I'm doing in round numbers here. They have two trillion of of of government mortgage paper and they have 8 trillion of US treasuries. So, so when you improve the current account, the capital account's going to deteriorate and there going to be less funds for all of these uses uh that the foreign sector has been supplied because what what has been the role in the past is we get goods and they get IUS in the form of ownership of US firms and directly through equities, indirectly through bonds and and and by vesting and other types of of fixed income instruments in the US. And when when when this other when the capital accounts begin to flow, that results in another downward exogenous shock to liquidity. Now, I'm not the one that thought of this. I wish I wish I had. the the whole process was originally subh described by the great Charles Kendallberger in his his famous book the world in depression 1929 to 1939. Now Kandleberger is well known for his book Mania's panics and crashes. >> Mhm. >> But he wrote about 20 different books in economics in including the one on the great depression. He he also wrote the leading text uh graduate text in international economics. It's now in its fifth or sixth edition. The world in depression is probably in its fifth or sixth edition. I don't know exactly which one. But but these these these endogenous shocks to liquidity call uh create what Kendallberger the process that he described has been described by others as the Kendallberger spiral. So the tariffs as they go on reduce liquidity. Now in in in the period there of the 20s and the 30s um the Bank of England had always in the past acted as the world's central bank but they couldn't do that because they had basically been emaciated by World War I. The US was actually in position to take over and be the world central bank but they didn't want to take that role. And so as as world liquidity was collapsing, the central banks were sitting on their hands and allowed this downward spiral of liquidity to occur and and so we we've seen action by the EU, we've seen actions by the Bank of England, but the central bank of the world, because the US is the world's reserve currency, is still the one that counts. And so so I believe a significant illquidity process is emerging and it's it will only become more more evident as time passes and I think that that is a a deflationary event and and all right I think the Federal Reserve is behind the eightball well way behind the eightball. >> Okay. and just get into the punch line real quick and I'll let you expound on it in a moment. But when you say the Fed is really behind the eightball presumably then not only do you think they should be cutting, you think they should be cutting by a lot more than perhaps just 25 basis points. >> No, I think it's going to take a lot. I I said, you know what, I was with you earlier. I said I thought they needed to cut by 100 basis points this year. And I think they they still need to do that. They should have done it before now in my opinion. And by the way, I said that before the president did. I don't want anything I'm I'm shilling for President Trump, >> but I I believe that the case is there. Um that that this process is is very potentially very tenuous and there needs to be u uh significant central bank action here to offset what is going on globally. >> Okay. And and just to help folks appreciate the the situation, let's say this was a you're a fireman here and you're trying to rate the fire, right? Is this a a one alarm fire or a five alarm fire at this point in time in terms of the the urgency of the action needed? >> I would say it's it's already a second or third alarm, but it but it's not putting off any smoke yet. and and central central banks like to say they're data dependent. The data is always backward looking, >> right? That's why they always criticize it for being too late. Yeah. >> But but you see, but this is a unique situation. The the only other time that this ever happened was between 1929 and 1930. By the way, um Kindleberger was of the view that the whole period was one of of of depression and the only thing that ended it then was when the German tanks moved into Poland in 1939 which ended the process >> and uh this this has many um similarities to me. >> Okay. Well, let's similarities. >> Let's hope the similarities don't evolve to to being that similar. I think anybody would love to to see another world war come from here, though I understand that, you know, maybe maybe that's a risk that's on the table. But back to my sort of question about about what sort of severity are you ringing the this bell with right now? Um uh if if we don't act or we take the wrong actions here, Lacy, like how how worried are you about what the outcome would be? >> Well, I if if it Let me just say this. If it were >> because because deflation isn't fatal, you know, we have recessions from time to time. I don't get the sense you're worried about a garden variety recession, though. >> No, I think it I I think I think that it is potentially serious enough. ultimate outcome is deflationary and um uh the matter the matter is very complicated. The the tariffs are under constitutional review. They could be declared unconstitutional. I I don't know what the outcome will be, but there are other issues that are at play, but but I I think that it it's a sufficiently sufficient risk that the Federal Reserve in the current situation should ignore the current statistics and look to prevent um the the uh negative aspects of a international tariff war of damaging the global economy. >> Okay. >> They should be moving in well in advance of the process. >> So, let me ask you this then, Lacy. Um, I mean, you, as I said in the intro, you're you're one of the most accomplished economists alive. >> Um, and I don't say that just to just to flatter you, but but if I can flatter you, I will. But no, I mean, you you've you've had a phenomenal career. Um, but I mean the Fed has hundreds of PhDs working for it. Some of them have got to have read Kindleberger. Uh, you know, up until this past Friday at Jackson Hole, um, Pal was pretty sanguin this year. Like, how come how come >> to call the labor market strong, >> right? So I mean so h how how come nobody at the Federal Reserve has done what you've done which is just looked at the historical record and said hey look Kindleberger respected he wrote a whole book on this >> it's even called the Kindleberg spindleberg spir spiral like are they just ignoring it are they are they >> I don't I don't know what they're doing I don't know how their research is being formulated I know that one of the things that I don't like about the Federal Reserve that we we have the Federal Reserve has the most costly economic research organization in the world. But one of the things that that I think that all of us is in the United States regardless of our political opinions the virtually all the economists in the Federal Reserve are >> neocanesians >> and um there there's a an alternative view. It's a neocclassical view. I I've sort of fall into that camp. There's the Austrian view. There's the monetary view which is a sort of a branch of the neocclassical school. These viewpoints are hardly represented at all. And um it it seems to me that the the Federal Reserve has just settled into this notion that they will be totally data dependent. and they will ignore everything else. And um uh but in some cases I get the sense that the Federal Reserve if they if they follow certain indicators and they don't like what those indicators say then they flip. Um, for example, last year, um, uh, Chairman Pal at one point in time was willing to acknowledge that the quarterly census of employment and wages, the QCW, was coming in significantly weaker or that the payroll, the monthly payroll number was consistently overshooting. And um we we know from the QCEW that was that covered the fourth quarter of last year, there was a massive overshoot in the QCW. I mean in the payroll visa v the QCW, but the chairman has continued to refer to the labor markets as being strong. Um and uh the at at some point in time in the past the chairman has acknowledged when there were discrepancies between the household survey and the payroll survey. Well, since January um the household employment um is is down 600,000. The payroll is up 7. That's a discrepancy of 1.3 million. >> Mhm. >> There's a lot of reasons that that in fact the Federal Reserve is not as data dependent as they appear and and that they they they appear to seize on the variables that suits whatever their opinion about what they should do. not uh not in fact a reflection of of the way things are or the way things will be. I must tell you that I am very uh unhappy um with with the with the leadership of the Federal Reserve >> which is undergoing a lot of >> theoretical this is on theoretical grounds and not political grounds at all. >> Yeah. Although I do want to ask you about that in just a moment because there's a lot of drama going on uh at the leadership of the Fed right now. But let let me ask you another question that I I just asked the other day. Uh you said it's like the you know most expensive research institution in government or whatever >> macroeconomic research. >> Okay. So um and they look at data that appears to be obviously flawed or at least obviously imperfect in its collection. Right? So we we we can see some of the issues with its surveys, right? Uh you we've seen tremendous fall off and I can't remember if it's the household or the establishment survey in terms of response rates. >> Households down sharply this year. >> Yeah. Um and these are these are you know these are sampling um uh surveys where they they they they get a small but hopefully statistically significant sample and then extrapolate a lot off of that and everyone's heard about the birth death death death adjustments that they do to the models. Um you know in 2025 in the digital world we have the ability to get extremely granular in our tracking. you know, we we have data sources out there, tax receipts, you know, like actual, you know, payroll data of who got paid what down to the penny. Um, you know, we now have the blockchain technology and and and theoretically which can, you know, kind of atomize all the data that's out there. Um, and the Fed, you know, just went through what a 2 and a half or they're in the process of going through a 2 and a half billion um renovation of their physical facilities there in DC. It seems to me that with a real small fraction of that, they could build dramatically better data collection systems. Um, and have much truer data and probably much more close to real-time data. Um, but I don't see a lot of that underway. Do you have an opinion on that? >> I I can actually prove what you said is right. For example, uh the the firm ADP as they're you know they they actually have a sample of of about 22 million employed people and they are able to take the QCW data and benchmark the ADP series 2 every time the QCW comes out. Mhm. >> I I don't see the difficulty in transferring a lay a computer file from from from point A to point B and and so if ADP can do it with their resources, uh why are we not able to do that? >> Is is there a valid I mean you you >> it's very valid. you you've worked for the Fed before, but but but is there a valid reason not to be doing this or is it just >> There's absolutely none. What I once none whatsoever. Um uh for for example um we could we could view we could we could survey um the top 20 um payroll data processing firms in the country. >> Mhm. calculate a sample from them to do the surveying of the small and intermediateized firms that are not captured by the 360,000 launch firms. I mean, I I the the fact of the matter is they've just been absolutely stationary. And and I think that the one of the reasons the household survey is working better is that that they they have a pretty good sample. U they they're surveying close to 60,000 folks. Um the um last presidential election there were pollsters that got the results right with a random sample of 1,800. You know if you have a truly a true random sample uh it doesn't matter how large this universe is the results will be excellent. I mean, this is um this is a process that should be much further along and um you know, you you and I have had discussions about this in the past and uh I don't I I personally think that it's bureaucratic failure. I I don't believe that it's political. I I just I just think that the the Bureau of Labor Statistics is to data collection what the post office is to mail delivery. >> Okay. So So it's it's more sort of just bureaucratic sclerosis. >> Yeah, I'm afraid so. Misuse of resources >> which which is so depressing. >> Well, you made the point about the Federal Reserve building two and a half billion dollars. We're doing that and we don't have good data. Well, it's just crazy. Yeah. I mean, why would you even think about doing that uh until you got your data house in in order? If if at the end of the day, your institution exists to make good decisions. Doesn't really matter how much marble you have around the people doing the work. >> No. >> Yeah. Um Okay. Well, that's depressing. It seems like that that some reason the Federal Reserve got inspired by Lady Justice and said, "Oh, we should just wear blindfolds here." Um okay well um turning over to the the the the leadership of the Fed. So so obviously um we don't have a great opinion of the Fed in terms of its uh it its data management and collection um practices. Um but >> nor the Bureau of Economic Analysis or the BLS I mean >> yes >> just all falling short. Um and you know I mean we have this big employment report coming up next Friday. The series is so flawed in the way it's constructed that um the real tragedy for be for the economy would be that they they continue to get it wrong and they have another massive overshoot of what is the actual truth. Um historically one of the great uh indicators uh has been this labor differential as part of the conference board survey and uh you know it's it's fallen for eight consecutive months. Eight consecutive months and it's back where it was in 2021, >> early 2020. And um this is this massive divergence that developed last year year late the year before that it's continuing. Um the differential deteriorated again in August after deterioration seven prior months. Um but you know if if if if the procedure is flawed it's flawed but and so when the number comes out of course the markets will react to it >> but it doesn't nec it it doesn't mean that the number is any more valid when the August number comes out than when the July number came or the June number came. >> Well so let me ask you this then Lacy. So, um, we we've we we've got, if I, if I understand you correctly, you think we are are kind of h hurtling towards a Kindleberger spiral here. Um, but we're kind of blind to it, right? Um, I mean, hope in your mind, hopefully the Fed does start cutting because obviously every delay in cutting just makes what's coming worse. Um but obviously until they really get religion around this um they're going to be behind the curve, right? And and probably at some point realize that and then start panic cutting, which is sort of what the history the historical pattern has always been for them. Um >> could I just say one thing? Um, one of the problems is that is that the president and the chairman of the Federal Reserve are do not see the way the world politically the same way. >> Clearly differences. Um and and we've seen this in the past, but the in the final analysis, monetary policy must reflect the true situation of the economy. >> Yeah. >> And if they don't, then the econ country is going to be very badly served by that. And and uh so we're in a very very difficult situation. Um the the current administration uh is is doesn't like the Fed. Some of that is is for political reasons, but what I'm more focused upon are the these these critical functional areas where where there has been misstep after misstep not just in terms of the last year or two years but for a very very long period of time. time. So, let me ask you a question about this then. Um, and I know that there's a lot of discussion right now about, you know, the the potential um political nature of the Trump uh to war and of course people like Lisa Cook, you know, now involved in it, Fed voting Fed Governor. Um, but there has also been discussion amidst all this, especially from folks like Treasury Secretary Scott Besson of saying, "Hey, it's it's time to kind of just re-evaluate how the Fed works, right?" Um, do you do you have any thoughts optimistic, pessimistic or or or whatever about this kind of I don't know if it's a trial balloon or or what that's being raised at this time of like, yeah, we're going to replace, you know, pal when his uh term ends next year, but but maybe actually say, hey, we're going to we're going to ask ourselves like, should the Fed operate differently? Is is is that a healthy thing to raise and is this the right time to be raising it? Yes, it should definitely be raised. The problem is that it is such a politically wired issue. I have seen no path to go, no way to take that path out. >> Just too contentious and and that's sad for the country. >> Okay. So, kind of like the data collection then you just don't think it's going to happen. reform isn't going to happen on a pace that we're going to be happy with. >> No. No. >> Okay. All right. Well, let me let me let me get back to the question I was in the process of asking, which is, you know, so you you see um you know, a a deflationary um period ahead and and right now we have sort of the wrong policy um for it. Um, in terms of the important things for the people watching this video, like the employment market, um, what do you see lying ahead, especially if the Fed is too late to this party in terms of its response function? You know, is this going to is this is this a recession? Is this going to is this going to be one where folks are going to be worried about losing their jobs? You know, are we going to see job shedding eventually? Well, I I think that there if if you Piper Sandler um took the QCW report, which is not seasonally adjusted, and they've se they have create they've seasonally adjusted the QCW all the way back. And by the way, if Piper Sandler can do do it, then why why cannot the BLS do it? And if the BLS wants to tweak the X11 formula that is the normal one used for seasonal adjustments, so be it. But uh but the the Piper Sandler seasonally adjusted series shows a sequential decline in the payroll in the fourth quarter from the third to the fourth. not not big, >> but that's against a very significant increase. Um, one of the things that uh my good friend and yours as well, Danielle D. Martino Booth, >> really first rate economist, longtime friend of mine. Um what she did is she took the the payroll uh the state payroll data which is calculated entirely different from the uh from the payroll data and the monthly situation report and she did it for the June which is the last month that we have available. uh and uh based on the state data, the sum of the state data, payroll data declined in June. Well, one of the things that the BLS should investigate uh is to see whether they could use the state data. It coming out a little bit slower, but it's available for June. It's a hard count and it doesn't rely on the birth death model. Oh. So Lacy, I interviewed Danielle um probably about four or five days ago and uh yeah, she shared exactly that and I think the number for June was a negative job loss of 65,000 >> uh with that state data. Yeah. It is it is it is it it it's it's a credible piece of information and I believe the QCAW seasonally adjusted by Piper Sandler is another critical piece of data. And the fact of the matter is um we we won't know for sure because we we want to compare the QCW uh after the labor department is seasonally adjusted it to the seasonally adjusted payroll numbers that we have at hand. But if if there's no material new information, we're going to have something like a six sigma era uh between the payroll and the QCW in the fourth quarter. >> Wow. Now uh we had during the ' 07 period 07089 period uh we had sigma an eight sigma era which the BLS took a lot of heat for >> and so they what they did is they re uh revised the birth death model but they didn't change they didn't kill the birth death model and go to a different approach. When when they did that, the BLS said we solved the problem and right now we're supposed to be getting an error of plus or minus onetenth of 1%. But we we have the similar uh uh size error as we did apparently during the time period of the great financial crisis. They didn't solve the problem. That's the bottom line. >> That's the bottom line. So, you know, obviously um when you run an economy using flawed data, it's not that dissimilar to a pilot flying a plane with erroneous instrumentation, right? very bad things can happen with bad data. Um, so in your case here, you think we're flying into, and you haven't used this word, but I'm going to use it and let you correct me if you disagree. We seem to be flying into a recession. Um, not realizing that we're doing that. >> I feel that we are um, you know, based on on what I see, um, we grew at a 1.4% annual rate in the first half. To me, it looks like that if you exclude the AI, which is hard to do, and you get into a debate as to what you exclude, it appears that all of the gain in GDP in the first half, the 1.4 was due to the AI, maybe. And without it, you might have had an actual decline. It's close enough to it was either a wash or a negative. And um so we're here in the we're here in the third quarter. It looks like the economy is is just creeping along. The two two numbers that I kind of trust maybe three that this is based on July preliminary information. Real personal consumption expenditures in July are at a 1.3% annual rate above the first second quarter. >> Okay. >> But the trade deficit is subtracting like 04.5%. And government spending, US federal government spending appears to be down. I don't have any additional information that tells me that based on those numbers that the US economy is positive but not by very much. >> And if you rearrange the the components a little bit and just rely on hardcore things like domestic final sales that's also only growing around a 0.5 or 6% annually. Not very much growth. >> Not very much growth. Right. And and not very much growth. So this is where I think the difference between averages and median is important. Um that growth which is an average of the activity across the economy to your point is largely being driven by the AI sector. Right. So >> yeah. So so it's a it's a small sector that's doing a lot of the work right now. So if you if you >> go ahead my my I guess my point is is I if you remove that part if we're only kind of growing kind of anemically uh because the AI sector is keeping us positive. If you look at the rest of the economy, it therefore must be, you know, growing very poorly or in contraction because despite the AI numbers, we're still only, you know, only kind of muddling along. And where I'm going with this is it's that rest of the economy, which is where all the jobs are, right? The AI part of the economy doesn't have a ton of jobs in it. So, I'm concerned about if if we go through this Kindleberger spiral where you talk about, you know, tariffs causing the the margin squeeze, demand goes down, and companies that are caught between rising costs and having to to cut costs because of reduced demand, we're going to we're going to see a bunch of labor shedding in that that long tail of the part of the economy that's not doing well very well right now. Um, and who knows may maybe we avoid going into recession on average, but to many many people it may feel like a recession because personally they've lost their jobs. >> Well, Adam, your point is very well taken. Um, do do you uh have you ever interviewed Peter Bookwire? >> Yes. >> Very astute analyst. Uh really digs into the data um in detail. Um Peter calculated that um if you look at the core um capital good shipments and orders um that the number we had a pretty pretty good rise you know from June to July and and you look at the the first you know the first seven months of the year. Uh Peter uh believes that um that uh excluding the AI categories uh that there was a net decline in everything else. >> Yeah. >> And it requires a lot of effort to to do the calculation and have a lot of confidence in Peter. But I another good friend of mine, David Rosenberg, >> who has really outstanding team and staff. Uh I asked I asked David uh whether Peter's calculation was correct and uh he had one of his top flight economist and statisticians run the numbers. And it was very complicated because we're you're dealing with 12 different NIC codes. But they confirmed that Peter's calculation was correct. And it doesn't matter whether you look at core um orders or core shipments. Um once you exclude the NA, you're you're negative. In other words, the AI is booming and everything else is collapsing. >> Is collapsing. >> That's the basic picture. and and that that indicates that that everybody says capex is doing well. This is an early sign uh that the u immediate expensing you know that's part of the the the big beautiful bill. >> Y >> is it work? Uh, no. I think it's strictly AIdriven and I don't believe that the immediate expensing works in an environment when you're when you're when the capacity use rates and in the manufacturing economy is declining and and we're seeing an overall decline uh which means that excluding AI it's dropping pretty significantly. I think the pressure is already there. people typically when when you begin to deteriorate you you try to hold on hopefully that it's it's a temporary event but in this particular case I don't believe that it's temporary it's temporary okay um all right well lookie there's a bunch of key questions that uh you know everything we've talked about tee up here um how how bad could this get how prolonged could it be um what what do we expect to happen to interest rates and bond yields which are an area of expertise of yours. Um what will be the knock-on effects in the financial markets? Um how might this impact treasuries which obviously you know that's what your firm Hoisington specializes in. Um, we are going to get into all of that and more uh when you uh appear at the uh thoughtful money fall online conference coming up in just it's it's coming up fast just what a little over a month from now, month and a half. Um and then also you will be joining us uh live after the official presentation and fielding live Q&A from the audience. So folks watching if you have unresolved questions here uh you'll be able to ask them. favorite things to do. You have such a great audience >> and >> thank you. It is uh it's such a joy to watch, you know, the smart people in the audience get to ask questions of one of the smartest economists out there and you're so generous in in your time uh and in sharing your expertise, Lacy. So, it's just it's such a pleasure to watch. >> Well, thank you. I have to be really on the top of my game because it's it's like a batter who's getting u fast curve balls coming in on the inside corner. >> Well, you have feel you you you've been batting a thousand so far in your previous appearances at this Lacy. So, as we start to wrap up here, um, knowing that we're going to get into all that stuff, is there anything else that's really kind of weighing on your mind or or burning brightly on your radar right now that we haven't talked about that's worth mentioning here? >> Well, one of the things that we we don't don't know is um uh whether what the courts are going to say about the constitutionality >> of tariffs >> on the tariffs. We don't know that. Um uh I personally think the administration had full authority under the 62 act to raise the tariffs at least 15% and their sector tariffs were I think I think there's legislative legislation that supports them but I'm not a legal expert. I don't know but I would have people to be aware of that. Um uh I I just really don't know what they would do. Um it's a incredibly uh a difficult issue. Um but um assuming that we we go forward with the tariffs, um there is going to have to be a great deal of of monetary support in the form of lower interest rates. Um, and I think that will reverberate across the curve. >> Okay. Um, I've had a lot of questions for you about that, but I'm going to hold off on them for the conference. Um, last question for you, Lacy. Um, just before I begin the wrap-up, um, what are you optimistic about right now? We've talked a lot about pretty heavy things. Is there anything uh on the macro stage or even just life in general uh that uh that you that you've got some optimism around? >> Well, let me just I'm not very optimistic right now. And one of the things that it's gnawing away at me u and this also goes back to Kendallburgger and mania's panics and crashes and Kendallberger said that in mania what happens is that you you see valuations go to extreme levels. >> Mhm. >> Sometimes they're record, sometimes they're not record. >> Yeah. >> Which, sorry to interject, but right now we can say check. >> I'm going to run down them for you here just to answer. This is a great question. And also, there are significant risks that that people dismiss because everything's so good and looks so good. But but but let let's look at look at certain valuations though. Um Bert Malciel wrote a piece in the New York Times just in the last two weeks. Bert who I've had the pleasure of knowing wrote a great book, A Random Walk Down Wall Street, PGes at Princeton. uh his work led to the creation of the index funds knows the stock market very well. Um he said that uh the price earnings ratios are amongst the highest in the last 230 year history. Um, uh, another really astute money manager and recognized thinker, Howard Marx. I don't know if you know that name. >> I do. He's he's phenomenal capital manager. Very bright man. >> He he calls the price earnings ratios Pete a tentpole. Tentpole. and um he cites work that um looking at the forward PE ratios um they don't go back as far um only to the mid80s uh but um the last time they were at these levels um the return on the S&P for the for the next 10 years was confined to a range of plus or minus 2%. Howard also reminds us of where the um where Buffett's favorite measure is, which is the um market capitalization to GDP. That's at an all-time high. Um and um you know another thing that typically happens in mania is that you get extreme financialization. >> Mhm. >> And and u people begin to use new instruments that presumably protect you from any risk. Um well >> like the portfolio insurance of the late 90s, right? Yes. And and other forms of financial, you know, I mean, uh there was very creative stuff being done, new stuff, uh and the refinancing of the railroad railroad boom in the 1870s and they kept the thing running for a while, but ultimately the truth prevailed. And even in the time of of John Law and the Mississippi and Louisiana bubbles, you know, there was financialization. Well, one of the things now is this this use of um of um private equity capital. Um um my good friend Jim Grant been talking about it. Um the default rates have risen a great deal in the past year. Um in addition um a lot of the firms um no longer paying interest. They're um doing these so-called pick extensions. >> Mhm. >> Paying in kind. The vault rate according to the latest calculations I've seen from the grant team is that it's now over 11%. >> Um I mean there there are risks um there are risks that the the tariffs are moving in the wrong direction. Another risk uh that people never talk about in terms of economic performance uh is the disastrous demographics. >> Right? >> We we have weak dem we're going to have one of the slowest growths in population in US history if not not record probably you know very close to it. Uh the birth rates are coming down all over the world. world econom glo the key economies of the world are becoming older you want young economies that's another risk um another thing that's happening that everyone is ignoring uh is that um the major economies are becoming are shifting more and more into command and control >> and what what command and control economies do is that they make economies is more inefficient, less productive and and so we have these significant risks, but no one is concerned about them because prices are high for a lot of things. Makes people good. They feel that if the markets if it's okay with the markets, it's okay with me. But but I I would recommend them to go back and read Kendallberger. Um because I mean these these kind of uh mania situations can go on for a long while. But the thing that Kendallburgger demonstrates is that after the mania you have panic and then you have crash. >> No one can time them. Adam, no one can time them. But it it seems to me that that's the model that people need to be looking at very very closely. >> Okay. Uh, super helpful. Um, all right. So, I I I asked about optimism. You were kind enough to say, "Hey, look, I just don't feel that optimistic, and here are the reasons why." Um, I'm going to put an optimistic spin on this. you you you tell me if I'm I'm grasping for straws here, but it's that um while while all that is true that Lacy has just mentioned and and things may play out the way that history predicts they should here uh so that you know uh the financial markets, the the economy, the average investor um may have tougher times ahead of them. uh you as an individual who educates yourself and positions prudently in advance of what it is likely to happen from here, you can potentially change your destiny here to not become collateral damage to a lot of these concerns that Lacy mentioned. So that's the positive spin I want to put on here, Lacy, which is thatation and some productivity >> trying to to ex to to have these very difficult complex issues explained and the educational service that you provide is exceptional and I want to applaud you and I want to tell you that I'm I'm proud to be your guest again. >> Well, thank you, Lacy. That's a huge honor and I am very proud uh that that you were a part of this movement and uh and even more proud to call you a friend. So, thank you. >> We are good friends. >> All right. Well, let me let me wrap up here. >> Good friends. We've broken bread. >> We have. And I'd love to do it again. And you know, Lacy, at some point, there are some topics that you and I talk about, you know, when when we're off camera or hanging out or breaking bread that I would love to have a conversation on camera with this audience at some point in time. and I don't think we're getting a chance to do it at the conference, but things like um you know, you and I have talked about wealth inequality and the growing wealth gap and I know that that's a very big concern of yours for just American you know, America's future socially. One of the problems of of you see what here here's here's I've talked about this in the past but historically um from from 1870 to 1970 we grew in real per capita terms 2.3% per 20 years we've only grown 1.2% 2% per hour. >> Yes. >> And and it it the the government share is going up. We can see in in great statisticians such as Hendrickson and Berg have shown that as we move into command and control that the growth rate ticks down. It's it's only ticking down of onetenth of 1% for every 1% increase in government. It's very imperceptible. But we've now lost 40% against trend. And and unfortunately whenever this happens, it exacerbates the income and wealth abise. It undermines your demographics. And and so we we have to understand that in actuality for the last 20 years the US economy has done very very poorly and we've left a lot of folks behind. And I don't I don't think this is healthy. >> So I'm right there with you as you know and I do think that topics like this are big topics that really deserve more more time. So I'd love at some point to sit down with you and then just do a you know discussion around these things. Um, another one that comes to mind is uh on the demographic side is um and and this this could be a sensitive discussion, but I know that you could handle it very well, which is okay, now that we've essentially closed the border and we are um we're we're you know in the process of of deporting some percentage of the illegal immigrants that have come here. It is whether you support that or not, it is it is giving the opportunity to sort of say, okay, well, going forward, what should America's immigration policy be? And I don't want to put words in your mouth, Lacy, but um demographically, it's it's very hard to see if we want the economy to continue to grow anywhere near rates that we had in the past that we're going to be able to do that just with natural-born citizens, at least at this point, with these low birth rates. So, we're going to need immigrants and immigrants have always been an important part of the American economic story. And I'd just love to hear your thoughts in greater detail than we have a chance to go into right now that if if you were given control of shaping policy going forward, what would be the key tenants? No, we we we have to find a way to be able to to um to scrutinize uh applications um determine who coming here seeking economic opportunity, who is coming here to work with the system, expand the system, and not to destroy the system or lean on the system for support. Um I'm I'm reminded of Milton Freriedman was such an economist. He was such a great economist and he wrote on so many things. But one of the things that he said is that immigration has always worked to the United States advantage when people came here seeking economic opportunity. Mhm. >> And we've got to find a way to do that in the concept in the in the in the terms of the fact that we are a nation of laws and we want to do this in accordance with the legal process and we it's going to be one of our highest priorities and and it's one of the ones that we need to be turning our attention to as soon as possible. >> All right. All right. Well, look, my friend, um, after the conference, after maybe the holidays, at some point in time, uh, I'd love to roll up our sleeves together and dive into this and maybe even do it in in in a live setting so that the, uh, the audience gets a chance to ask you some of those curve balls and let you take a swing at them yourself. But that's that's down the road. But folks, if you've had interest in that, let us know in the comments section below. So, in wrapping up here, Lacy, first off, thank you. And everyone, please thank Lacy how much you appreciate him coming on by hitting the like button and clicking the subscribe button below. >> Um, you know, if if you want to hear Professor Lacy Hunt go through his master class and what's happening in the macro world and and tackle those larger questions that I I I mentioned we're going to tackle in the conference. Um, then please run don't walk to go sign up for the conference now. And you do that by going to thoughtfulmoney.com/conference. Right now, you'll get the lowest early bird price discount that we're offering. So, do it quick. Get there quick and buy your ticket quick. And if you are a premium subscriber to our Substack, don't forget to look at your email. I've sent you a code that you can use to get an additional $50 off of that price. Last point, if you are >> Can I Can I do a little advertisement here? No. >> Absolutely. Go ahead. >> Here's a great book. Can everybody read the title? >> Hold it up just a little bit more. There you go. Kindleberger. >> You see the title? >> Yes. The world in depression. This scares me because I think you're going to tell me this is going to be really relevant for the next issue. >> Well, it's it's why why we need to understand that working it it we we don't have the same system. Then we didn't have unemployment insurance. We didn't have social security. We didn't have bank insurance. So, we wouldn't go to depression. But um it it's the process of what happens when you have an extended period of beggar thy neighbor policies. And I it's it's it's a great book. It's a very learning process from >> I'm making a note to myself right here to to go literally buy that on Amazon the second I get through with you here, Lacy. I think a lot of other folks watching will do so, too. So folks, we'll read it all together. And from those of you that are feeling a little uneasy perhaps about your personal financial situation, um, if the future plays out the way that Lacy thinks it may, uh, then highly recommend, uh, you consider benefiting from the guidance of a good professional financial adviser. Um, but most importantly, one that takes into account all the macro issues that Lacy has teed up for us here. Uh, and have them help you, you know, come up with a a portfolio strategy and then execute that for you. um that in a way that hopefully will help you um avoid the worst of what might lie ahead and maybe even position you to profit from some of what might happen. Um if you've got a good financial adviser who is doing that for you, great. Don't mess with success. But if you don't and you like a second an opinion from one who does, uh then consider scheduling a free consultation with one of the financial advisory firms uh that Money endorses. These are the adviserss you see with me on this channel week in and week out. To schedule one of those consultations, just fill out the very short form at thoughtfulmoney.com. As a reminder, these consultations are totally free. There's no commitment to work with these firms. It's just a free service they offer to be as helpful to as many people as they can be. Lacy, look, um I just cannot thank you enough, my friend. Um it's very important time uh to get the experience, insights of of longtime experts like yourself. Very much appreciate you coming on, sharing so much with us. >> I'm glad to do it. you're such a friend and you such a a great professional and I'm glad to be associated with you, Adam. >> Yeah, it's such an honor, my friend. All right. Well, look, look forward to seeing you at the conference, but until then, uh, have a wonderful Labor Day, Lacy, and everybody else. You, too, as well, and thanks so much for watching.
Lacy Hunt: The Economy Is Seizing Up While The Fed Dithers
Summary
Transcript
And so so I believe a significant illquidity process is emerging and it's it will only become more more evident as time passes and I think that that is a a deflationary event and all right I think the Federal Reserve is behind the eightball well way behind the eightball. [Music] Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. It's an especially confusing time for investors given how divided the experts are on whether resurging inflation or disinflation deflation is more likely from here. Your answer to this question determines whether you think the Federal Reserve starting to cut interest rates is a good idea or not. Today's guest has very strong views on this matter based on a lifetime of study. For perspective, we've got the great fortune to sit down with one of the greatest living economists, Lacy Hunt, former senior economist for the Federal Reserve Bank of Dallas and current executive vice president of Hoisington Investment Management Company. Lacy, thanks so much for joining us today. >> Glad to be here. Nice to nice to see you, Adam. >> Always wonderful to see you, Lacy. Thanks so much for joining us. Uh, I know I stand between you and your Labor Day weekend, so we'll wrap this up as quickly as we can. Uh, and first and foremost, I just want to let folks know, um, we're we're going to talk about your thoughts on current Fed policy here, Lacy, but this really is just the appetizer, even just the amuse bouch, if you will, to your appearance coming up at the thoughtful money online fall conference where um, you give really a graduate level walkthrough on where you see things headed from the macro perspective. you walk through a ton of charts that you create specifically for that event. So, um you know, I'm I'm not going to dig too deep with you on these issues because we're going to get a chance to do that in real depth at the conference. That being said, um let's get started. >> I might go deep. However, >> you you do whatever you want, Lacy. You always have cart blanch to do whatever you want. So, let's let's kick it off here. What is your current interpretation of the status of fiscal policy today? In one word, it's extremely restrictive. And I know that that's not the general view, but let's just let's just look at some of the facts here. So, according to the Congressional Budget Office, the big beautiful um bill act uh will add uh $3.4 trillion over the next 10 years. That's 340 billion per year. Um, however, embedded in that number are um, uh, roughly $3 trillion of, let's call them accounting tax cuts. Accounting as in terms of stipulated by the law and the procedures of the Congressional Budget Office. And um in addition there are $3 trillion worth of expenditure reductions. So the net uh increase in federal stimulus measured in this very narrow sense for the 10-year period is is is $400 billion or 40 billion per year. uh however uh that is uh all while all factual not very useful. >> Now the S&P global who recently reaffirmed the credit stating of the United States said that the fiscal situation is stable that it's it's neither improving nor deteriorating. Mhm. >> Um in spite of the uh calculations of the CBO. And the reason that they said that is that it it looks like a reasonable assumption is that over the next 10 years tariffs are going to add $3 trillion in revenue or $300 billion per year. And so if you if you have a net 3.4 stimulus and you have three trillion in in in tariff revenues, you're almost in balance more or less washes each other. Um but but that's that is that is a a simple mathematical calculation that is not the dynamics of the economics. And the reason is that of this $3.4 4 trillion in stimulus in the big the big beautiful bill act is that $3 trillion was a mere rolling over of the 2017 tax cuts. >> Right? >> The tax rates that are in effect this year and went into effect eight years ago are the same tax rates that will be in effect in 2026 and uh for the nine years afterward. Uh so there there's no net benefit uh in in any sort of macroeconomic sense from extending the tax cuts. Mhm. >> So the way I look at it is that there is roughly $3 trillion of expenditure reductions plus the restrictive effect of of of uh $3 trillion over 10 years in tax revenues. Now um and that's why the S&P Global can say that they're in balance. Uh but the matter of fact is that even there the calculation is is too simplistic because there are many dynamic effects that are going to take place as a result of the tariff increases and this is this is what I want to talk about. Uh the the main feeling is that the tariffs are being absorbed and there hasn't been any significant damage yet. Um but but I would not share that view. The the way the tariffs work out historically, it's a very very slow process. It goes through multiple stages. Um the first act of raising tariffs is not the final act when there is tar retaliation. And if if the parties that that the instigator country and the retaliator country are not happy, you may have second, third, and fourth round of tariff increases in retaliation. And we're seeing >> the whole tit for tat. Yep. >> Whole tit fortat game goes on. Now um so uh the other thing that we we have to take into consideration uh when we're we're talking about tariffs is the nature of the goods that are are in the international flow and the bulk of them with the with the exception of of certain energy products like gasoline and life-saving drugs and maybe some life saving medical equipment and perhaps a few rare earth or earth minerals. The all of the rest of the goods are highly price elastic. Mhm. >> In other words, if you raise the price, you get a a much larger percentage decline in demand than you would for the average product that would be traded u on a global basis. And >> because people can either forgo it or they can choose substitutes. Yeah, >> they can. Well said. Time is very important. Time can be a substitute. Um, and you can also shift to to older equipment, for example, >> or you can rearrange the production process, or maybe you can find a way to simply modify and amend what you're working with. Um, and and so the the whole process is we're dealing with price elastic goods. And I I personally would say that for most internationally traded goods, excluding the ones I mentioned, the price elasticity is three, which means that a one percentage point increase in price reduces demand by 3%. So um let's let's let's think about this in another way. Last year the imports of goods were 3.3 trillion. And um right now it looks like here in in August that the the more the the tariff rates in in in already in place are somewhere around 10%. So without allowing for the dynamic effects 10% times 3.3 trillion is more than three trill 300 billion per year. >> Yep. >> 3 trillion over 10 years. That's why S&P can say the fiscal situation is in stability. Um however um when when when a country and with dealing with inter price elastic goods if they if they institute tariffs there's retaliation because of the flatness of the curve. What happens is that prices go up initially quantity demanded falls. If you use the micro model, >> the retaliation occurs, quantity demanded falls further and the price level falls back. Now, uh, the Fed chairman Pal has only talked about the first round effect and the first round effect can go on for months, but there is a second round and and because of this um highly price elastic curve, the the first effect which starts slowly and then builds is that there is a very significant margin squeeze because firms cannot push the price increase through rapidly. >> Yep. >> They they they would lose market share substantially and and people have options as to deferring demand or moving to other products or simply not buying at all. And um so this margin squeeze as it slowly materializes causes a downward or what I would call an endogenous shock to liquidity. And most of us assume that that the Federal Reserve controls liquidity. Liquidity is an exogenous element. But no, this is one of those times as demonstrated by the period from 1925 to 1939 that the imposition of tariffs can have several rounds of a negative liquidity effect. Economists like to use the term endogenous. So the first occurs when corporations experience the loss in liquidity because they sell less or have to take lower price or combination of both. But but to get their house back in order firms have to cut the demand for the factors of production which would be labor, natural resources and capital. >> Mhm. And when they do that then that causes another uh downward shock to liquidity. And of course if the process is playing tit for tat along the way the whole element it is is going on and on. But there there's still another effect which which no one is talking about at all is that the objective here is to raise tariffs and to improve the trade sector. However, the trade sector is the inverse of the capital account and capital account is the is the same thing as net foreign saving and and so if you improve the trade deficit you worsen the capital account. H >> now the capital account is is is and the ser saving of the foreigners that have by necessity plowed back into the United States because they want to sell us more goods than than they want to buy from us. Um has resulted in the fact that the foreign sector owns 18 trillion of of common stocks of equities. They own five trillion of corporate bond. I'm doing in round numbers here. They have two trillion of of of government mortgage paper and they have 8 trillion of US treasuries. So, so when you improve the current account, the capital account's going to deteriorate and there going to be less funds for all of these uses uh that the foreign sector has been supplied because what what has been the role in the past is we get goods and they get IUS in the form of ownership of US firms and directly through equities, indirectly through bonds and and and by vesting and other types of of fixed income instruments in the US. And when when when this other when the capital accounts begin to flow, that results in another downward exogenous shock to liquidity. Now, I'm not the one that thought of this. I wish I wish I had. the the whole process was originally subh described by the great Charles Kendallberger in his his famous book the world in depression 1929 to 1939. Now Kandleberger is well known for his book Mania's panics and crashes. >> Mhm. >> But he wrote about 20 different books in economics in including the one on the great depression. He he also wrote the leading text uh graduate text in international economics. It's now in its fifth or sixth edition. The world in depression is probably in its fifth or sixth edition. I don't know exactly which one. But but these these these endogenous shocks to liquidity call uh create what Kendallberger the process that he described has been described by others as the Kendallberger spiral. So the tariffs as they go on reduce liquidity. Now in in in the period there of the 20s and the 30s um the Bank of England had always in the past acted as the world's central bank but they couldn't do that because they had basically been emaciated by World War I. The US was actually in position to take over and be the world central bank but they didn't want to take that role. And so as as world liquidity was collapsing, the central banks were sitting on their hands and allowed this downward spiral of liquidity to occur and and so we we've seen action by the EU, we've seen actions by the Bank of England, but the central bank of the world, because the US is the world's reserve currency, is still the one that counts. And so so I believe a significant illquidity process is emerging and it's it will only become more more evident as time passes and I think that that is a a deflationary event and and all right I think the Federal Reserve is behind the eightball well way behind the eightball. >> Okay. and just get into the punch line real quick and I'll let you expound on it in a moment. But when you say the Fed is really behind the eightball presumably then not only do you think they should be cutting, you think they should be cutting by a lot more than perhaps just 25 basis points. >> No, I think it's going to take a lot. I I said, you know what, I was with you earlier. I said I thought they needed to cut by 100 basis points this year. And I think they they still need to do that. They should have done it before now in my opinion. And by the way, I said that before the president did. I don't want anything I'm I'm shilling for President Trump, >> but I I believe that the case is there. Um that that this process is is very potentially very tenuous and there needs to be u uh significant central bank action here to offset what is going on globally. >> Okay. And and just to help folks appreciate the the situation, let's say this was a you're a fireman here and you're trying to rate the fire, right? Is this a a one alarm fire or a five alarm fire at this point in time in terms of the the urgency of the action needed? >> I would say it's it's already a second or third alarm, but it but it's not putting off any smoke yet. and and central central banks like to say they're data dependent. The data is always backward looking, >> right? That's why they always criticize it for being too late. Yeah. >> But but you see, but this is a unique situation. The the only other time that this ever happened was between 1929 and 1930. By the way, um Kindleberger was of the view that the whole period was one of of of depression and the only thing that ended it then was when the German tanks moved into Poland in 1939 which ended the process >> and uh this this has many um similarities to me. >> Okay. Well, let's similarities. >> Let's hope the similarities don't evolve to to being that similar. I think anybody would love to to see another world war come from here, though I understand that, you know, maybe maybe that's a risk that's on the table. But back to my sort of question about about what sort of severity are you ringing the this bell with right now? Um uh if if we don't act or we take the wrong actions here, Lacy, like how how worried are you about what the outcome would be? >> Well, I if if it Let me just say this. If it were >> because because deflation isn't fatal, you know, we have recessions from time to time. I don't get the sense you're worried about a garden variety recession, though. >> No, I think it I I think I think that it is potentially serious enough. ultimate outcome is deflationary and um uh the matter the matter is very complicated. The the tariffs are under constitutional review. They could be declared unconstitutional. I I don't know what the outcome will be, but there are other issues that are at play, but but I I think that it it's a sufficiently sufficient risk that the Federal Reserve in the current situation should ignore the current statistics and look to prevent um the the uh negative aspects of a international tariff war of damaging the global economy. >> Okay. >> They should be moving in well in advance of the process. >> So, let me ask you this then, Lacy. Um, I mean, you, as I said in the intro, you're you're one of the most accomplished economists alive. >> Um, and I don't say that just to just to flatter you, but but if I can flatter you, I will. But no, I mean, you you've you've had a phenomenal career. Um, but I mean the Fed has hundreds of PhDs working for it. Some of them have got to have read Kindleberger. Uh, you know, up until this past Friday at Jackson Hole, um, Pal was pretty sanguin this year. Like, how come how come >> to call the labor market strong, >> right? So I mean so h how how come nobody at the Federal Reserve has done what you've done which is just looked at the historical record and said hey look Kindleberger respected he wrote a whole book on this >> it's even called the Kindleberg spindleberg spir spiral like are they just ignoring it are they are they >> I don't I don't know what they're doing I don't know how their research is being formulated I know that one of the things that I don't like about the Federal Reserve that we we have the Federal Reserve has the most costly economic research organization in the world. But one of the things that that I think that all of us is in the United States regardless of our political opinions the virtually all the economists in the Federal Reserve are >> neocanesians >> and um there there's a an alternative view. It's a neocclassical view. I I've sort of fall into that camp. There's the Austrian view. There's the monetary view which is a sort of a branch of the neocclassical school. These viewpoints are hardly represented at all. And um it it seems to me that the the Federal Reserve has just settled into this notion that they will be totally data dependent. and they will ignore everything else. And um uh but in some cases I get the sense that the Federal Reserve if they if they follow certain indicators and they don't like what those indicators say then they flip. Um, for example, last year, um, uh, Chairman Pal at one point in time was willing to acknowledge that the quarterly census of employment and wages, the QCW, was coming in significantly weaker or that the payroll, the monthly payroll number was consistently overshooting. And um we we know from the QCEW that was that covered the fourth quarter of last year, there was a massive overshoot in the QCW. I mean in the payroll visa v the QCW, but the chairman has continued to refer to the labor markets as being strong. Um and uh the at at some point in time in the past the chairman has acknowledged when there were discrepancies between the household survey and the payroll survey. Well, since January um the household employment um is is down 600,000. The payroll is up 7. That's a discrepancy of 1.3 million. >> Mhm. >> There's a lot of reasons that that in fact the Federal Reserve is not as data dependent as they appear and and that they they they appear to seize on the variables that suits whatever their opinion about what they should do. not uh not in fact a reflection of of the way things are or the way things will be. I must tell you that I am very uh unhappy um with with the with the leadership of the Federal Reserve >> which is undergoing a lot of >> theoretical this is on theoretical grounds and not political grounds at all. >> Yeah. Although I do want to ask you about that in just a moment because there's a lot of drama going on uh at the leadership of the Fed right now. But let let me ask you another question that I I just asked the other day. Uh you said it's like the you know most expensive research institution in government or whatever >> macroeconomic research. >> Okay. So um and they look at data that appears to be obviously flawed or at least obviously imperfect in its collection. Right? So we we we can see some of the issues with its surveys, right? Uh you we've seen tremendous fall off and I can't remember if it's the household or the establishment survey in terms of response rates. >> Households down sharply this year. >> Yeah. Um and these are these are you know these are sampling um uh surveys where they they they they get a small but hopefully statistically significant sample and then extrapolate a lot off of that and everyone's heard about the birth death death death adjustments that they do to the models. Um you know in 2025 in the digital world we have the ability to get extremely granular in our tracking. you know, we we have data sources out there, tax receipts, you know, like actual, you know, payroll data of who got paid what down to the penny. Um, you know, we now have the blockchain technology and and and theoretically which can, you know, kind of atomize all the data that's out there. Um, and the Fed, you know, just went through what a 2 and a half or they're in the process of going through a 2 and a half billion um renovation of their physical facilities there in DC. It seems to me that with a real small fraction of that, they could build dramatically better data collection systems. Um, and have much truer data and probably much more close to real-time data. Um, but I don't see a lot of that underway. Do you have an opinion on that? >> I I can actually prove what you said is right. For example, uh the the firm ADP as they're you know they they actually have a sample of of about 22 million employed people and they are able to take the QCW data and benchmark the ADP series 2 every time the QCW comes out. Mhm. >> I I don't see the difficulty in transferring a lay a computer file from from from point A to point B and and so if ADP can do it with their resources, uh why are we not able to do that? >> Is is there a valid I mean you you >> it's very valid. you you've worked for the Fed before, but but but is there a valid reason not to be doing this or is it just >> There's absolutely none. What I once none whatsoever. Um uh for for example um we could we could view we could we could survey um the top 20 um payroll data processing firms in the country. >> Mhm. calculate a sample from them to do the surveying of the small and intermediateized firms that are not captured by the 360,000 launch firms. I mean, I I the the fact of the matter is they've just been absolutely stationary. And and I think that the one of the reasons the household survey is working better is that that they they have a pretty good sample. U they they're surveying close to 60,000 folks. Um the um last presidential election there were pollsters that got the results right with a random sample of 1,800. You know if you have a truly a true random sample uh it doesn't matter how large this universe is the results will be excellent. I mean, this is um this is a process that should be much further along and um you know, you you and I have had discussions about this in the past and uh I don't I I personally think that it's bureaucratic failure. I I don't believe that it's political. I I just I just think that the the Bureau of Labor Statistics is to data collection what the post office is to mail delivery. >> Okay. So So it's it's more sort of just bureaucratic sclerosis. >> Yeah, I'm afraid so. Misuse of resources >> which which is so depressing. >> Well, you made the point about the Federal Reserve building two and a half billion dollars. We're doing that and we don't have good data. Well, it's just crazy. Yeah. I mean, why would you even think about doing that uh until you got your data house in in order? If if at the end of the day, your institution exists to make good decisions. Doesn't really matter how much marble you have around the people doing the work. >> No. >> Yeah. Um Okay. Well, that's depressing. It seems like that that some reason the Federal Reserve got inspired by Lady Justice and said, "Oh, we should just wear blindfolds here." Um okay well um turning over to the the the the leadership of the Fed. So so obviously um we don't have a great opinion of the Fed in terms of its uh it its data management and collection um practices. Um but >> nor the Bureau of Economic Analysis or the BLS I mean >> yes >> just all falling short. Um and you know I mean we have this big employment report coming up next Friday. The series is so flawed in the way it's constructed that um the real tragedy for be for the economy would be that they they continue to get it wrong and they have another massive overshoot of what is the actual truth. Um historically one of the great uh indicators uh has been this labor differential as part of the conference board survey and uh you know it's it's fallen for eight consecutive months. Eight consecutive months and it's back where it was in 2021, >> early 2020. And um this is this massive divergence that developed last year year late the year before that it's continuing. Um the differential deteriorated again in August after deterioration seven prior months. Um but you know if if if if the procedure is flawed it's flawed but and so when the number comes out of course the markets will react to it >> but it doesn't nec it it doesn't mean that the number is any more valid when the August number comes out than when the July number came or the June number came. >> Well so let me ask you this then Lacy. So, um, we we've we we've got, if I, if I understand you correctly, you think we are are kind of h hurtling towards a Kindleberger spiral here. Um, but we're kind of blind to it, right? Um, I mean, hope in your mind, hopefully the Fed does start cutting because obviously every delay in cutting just makes what's coming worse. Um but obviously until they really get religion around this um they're going to be behind the curve, right? And and probably at some point realize that and then start panic cutting, which is sort of what the history the historical pattern has always been for them. Um >> could I just say one thing? Um, one of the problems is that is that the president and the chairman of the Federal Reserve are do not see the way the world politically the same way. >> Clearly differences. Um and and we've seen this in the past, but the in the final analysis, monetary policy must reflect the true situation of the economy. >> Yeah. >> And if they don't, then the econ country is going to be very badly served by that. And and uh so we're in a very very difficult situation. Um the the current administration uh is is doesn't like the Fed. Some of that is is for political reasons, but what I'm more focused upon are the these these critical functional areas where where there has been misstep after misstep not just in terms of the last year or two years but for a very very long period of time. time. So, let me ask you a question about this then. Um, and I know that there's a lot of discussion right now about, you know, the the potential um political nature of the Trump uh to war and of course people like Lisa Cook, you know, now involved in it, Fed voting Fed Governor. Um, but there has also been discussion amidst all this, especially from folks like Treasury Secretary Scott Besson of saying, "Hey, it's it's time to kind of just re-evaluate how the Fed works, right?" Um, do you do you have any thoughts optimistic, pessimistic or or or whatever about this kind of I don't know if it's a trial balloon or or what that's being raised at this time of like, yeah, we're going to replace, you know, pal when his uh term ends next year, but but maybe actually say, hey, we're going to we're going to ask ourselves like, should the Fed operate differently? Is is is that a healthy thing to raise and is this the right time to be raising it? Yes, it should definitely be raised. The problem is that it is such a politically wired issue. I have seen no path to go, no way to take that path out. >> Just too contentious and and that's sad for the country. >> Okay. So, kind of like the data collection then you just don't think it's going to happen. reform isn't going to happen on a pace that we're going to be happy with. >> No. No. >> Okay. All right. Well, let me let me let me get back to the question I was in the process of asking, which is, you know, so you you see um you know, a a deflationary um period ahead and and right now we have sort of the wrong policy um for it. Um, in terms of the important things for the people watching this video, like the employment market, um, what do you see lying ahead, especially if the Fed is too late to this party in terms of its response function? You know, is this going to is this is this a recession? Is this going to is this going to be one where folks are going to be worried about losing their jobs? You know, are we going to see job shedding eventually? Well, I I think that there if if you Piper Sandler um took the QCW report, which is not seasonally adjusted, and they've se they have create they've seasonally adjusted the QCW all the way back. And by the way, if Piper Sandler can do do it, then why why cannot the BLS do it? And if the BLS wants to tweak the X11 formula that is the normal one used for seasonal adjustments, so be it. But uh but the the Piper Sandler seasonally adjusted series shows a sequential decline in the payroll in the fourth quarter from the third to the fourth. not not big, >> but that's against a very significant increase. Um, one of the things that uh my good friend and yours as well, Danielle D. Martino Booth, >> really first rate economist, longtime friend of mine. Um what she did is she took the the payroll uh the state payroll data which is calculated entirely different from the uh from the payroll data and the monthly situation report and she did it for the June which is the last month that we have available. uh and uh based on the state data, the sum of the state data, payroll data declined in June. Well, one of the things that the BLS should investigate uh is to see whether they could use the state data. It coming out a little bit slower, but it's available for June. It's a hard count and it doesn't rely on the birth death model. Oh. So Lacy, I interviewed Danielle um probably about four or five days ago and uh yeah, she shared exactly that and I think the number for June was a negative job loss of 65,000 >> uh with that state data. Yeah. It is it is it is it it it's it's a credible piece of information and I believe the QCAW seasonally adjusted by Piper Sandler is another critical piece of data. And the fact of the matter is um we we won't know for sure because we we want to compare the QCW uh after the labor department is seasonally adjusted it to the seasonally adjusted payroll numbers that we have at hand. But if if there's no material new information, we're going to have something like a six sigma era uh between the payroll and the QCW in the fourth quarter. >> Wow. Now uh we had during the ' 07 period 07089 period uh we had sigma an eight sigma era which the BLS took a lot of heat for >> and so they what they did is they re uh revised the birth death model but they didn't change they didn't kill the birth death model and go to a different approach. When when they did that, the BLS said we solved the problem and right now we're supposed to be getting an error of plus or minus onetenth of 1%. But we we have the similar uh uh size error as we did apparently during the time period of the great financial crisis. They didn't solve the problem. That's the bottom line. >> That's the bottom line. So, you know, obviously um when you run an economy using flawed data, it's not that dissimilar to a pilot flying a plane with erroneous instrumentation, right? very bad things can happen with bad data. Um, so in your case here, you think we're flying into, and you haven't used this word, but I'm going to use it and let you correct me if you disagree. We seem to be flying into a recession. Um, not realizing that we're doing that. >> I feel that we are um, you know, based on on what I see, um, we grew at a 1.4% annual rate in the first half. To me, it looks like that if you exclude the AI, which is hard to do, and you get into a debate as to what you exclude, it appears that all of the gain in GDP in the first half, the 1.4 was due to the AI, maybe. And without it, you might have had an actual decline. It's close enough to it was either a wash or a negative. And um so we're here in the we're here in the third quarter. It looks like the economy is is just creeping along. The two two numbers that I kind of trust maybe three that this is based on July preliminary information. Real personal consumption expenditures in July are at a 1.3% annual rate above the first second quarter. >> Okay. >> But the trade deficit is subtracting like 04.5%. And government spending, US federal government spending appears to be down. I don't have any additional information that tells me that based on those numbers that the US economy is positive but not by very much. >> And if you rearrange the the components a little bit and just rely on hardcore things like domestic final sales that's also only growing around a 0.5 or 6% annually. Not very much growth. >> Not very much growth. Right. And and not very much growth. So this is where I think the difference between averages and median is important. Um that growth which is an average of the activity across the economy to your point is largely being driven by the AI sector. Right. So >> yeah. So so it's a it's a small sector that's doing a lot of the work right now. So if you if you >> go ahead my my I guess my point is is I if you remove that part if we're only kind of growing kind of anemically uh because the AI sector is keeping us positive. If you look at the rest of the economy, it therefore must be, you know, growing very poorly or in contraction because despite the AI numbers, we're still only, you know, only kind of muddling along. And where I'm going with this is it's that rest of the economy, which is where all the jobs are, right? The AI part of the economy doesn't have a ton of jobs in it. So, I'm concerned about if if we go through this Kindleberger spiral where you talk about, you know, tariffs causing the the margin squeeze, demand goes down, and companies that are caught between rising costs and having to to cut costs because of reduced demand, we're going to we're going to see a bunch of labor shedding in that that long tail of the part of the economy that's not doing well very well right now. Um, and who knows may maybe we avoid going into recession on average, but to many many people it may feel like a recession because personally they've lost their jobs. >> Well, Adam, your point is very well taken. Um, do do you uh have you ever interviewed Peter Bookwire? >> Yes. >> Very astute analyst. Uh really digs into the data um in detail. Um Peter calculated that um if you look at the core um capital good shipments and orders um that the number we had a pretty pretty good rise you know from June to July and and you look at the the first you know the first seven months of the year. Uh Peter uh believes that um that uh excluding the AI categories uh that there was a net decline in everything else. >> Yeah. >> And it requires a lot of effort to to do the calculation and have a lot of confidence in Peter. But I another good friend of mine, David Rosenberg, >> who has really outstanding team and staff. Uh I asked I asked David uh whether Peter's calculation was correct and uh he had one of his top flight economist and statisticians run the numbers. And it was very complicated because we're you're dealing with 12 different NIC codes. But they confirmed that Peter's calculation was correct. And it doesn't matter whether you look at core um orders or core shipments. Um once you exclude the NA, you're you're negative. In other words, the AI is booming and everything else is collapsing. >> Is collapsing. >> That's the basic picture. and and that that indicates that that everybody says capex is doing well. This is an early sign uh that the u immediate expensing you know that's part of the the the big beautiful bill. >> Y >> is it work? Uh, no. I think it's strictly AIdriven and I don't believe that the immediate expensing works in an environment when you're when you're when the capacity use rates and in the manufacturing economy is declining and and we're seeing an overall decline uh which means that excluding AI it's dropping pretty significantly. I think the pressure is already there. people typically when when you begin to deteriorate you you try to hold on hopefully that it's it's a temporary event but in this particular case I don't believe that it's temporary it's temporary okay um all right well lookie there's a bunch of key questions that uh you know everything we've talked about tee up here um how how bad could this get how prolonged could it be um what what do we expect to happen to interest rates and bond yields which are an area of expertise of yours. Um what will be the knock-on effects in the financial markets? Um how might this impact treasuries which obviously you know that's what your firm Hoisington specializes in. Um, we are going to get into all of that and more uh when you uh appear at the uh thoughtful money fall online conference coming up in just it's it's coming up fast just what a little over a month from now, month and a half. Um and then also you will be joining us uh live after the official presentation and fielding live Q&A from the audience. So folks watching if you have unresolved questions here uh you'll be able to ask them. favorite things to do. You have such a great audience >> and >> thank you. It is uh it's such a joy to watch, you know, the smart people in the audience get to ask questions of one of the smartest economists out there and you're so generous in in your time uh and in sharing your expertise, Lacy. So, it's just it's such a pleasure to watch. >> Well, thank you. I have to be really on the top of my game because it's it's like a batter who's getting u fast curve balls coming in on the inside corner. >> Well, you have feel you you you've been batting a thousand so far in your previous appearances at this Lacy. So, as we start to wrap up here, um, knowing that we're going to get into all that stuff, is there anything else that's really kind of weighing on your mind or or burning brightly on your radar right now that we haven't talked about that's worth mentioning here? >> Well, one of the things that we we don't don't know is um uh whether what the courts are going to say about the constitutionality >> of tariffs >> on the tariffs. We don't know that. Um uh I personally think the administration had full authority under the 62 act to raise the tariffs at least 15% and their sector tariffs were I think I think there's legislative legislation that supports them but I'm not a legal expert. I don't know but I would have people to be aware of that. Um uh I I just really don't know what they would do. Um it's a incredibly uh a difficult issue. Um but um assuming that we we go forward with the tariffs, um there is going to have to be a great deal of of monetary support in the form of lower interest rates. Um, and I think that will reverberate across the curve. >> Okay. Um, I've had a lot of questions for you about that, but I'm going to hold off on them for the conference. Um, last question for you, Lacy. Um, just before I begin the wrap-up, um, what are you optimistic about right now? We've talked a lot about pretty heavy things. Is there anything uh on the macro stage or even just life in general uh that uh that you that you've got some optimism around? >> Well, let me just I'm not very optimistic right now. And one of the things that it's gnawing away at me u and this also goes back to Kendallburgger and mania's panics and crashes and Kendallberger said that in mania what happens is that you you see valuations go to extreme levels. >> Mhm. >> Sometimes they're record, sometimes they're not record. >> Yeah. >> Which, sorry to interject, but right now we can say check. >> I'm going to run down them for you here just to answer. This is a great question. And also, there are significant risks that that people dismiss because everything's so good and looks so good. But but but let let's look at look at certain valuations though. Um Bert Malciel wrote a piece in the New York Times just in the last two weeks. Bert who I've had the pleasure of knowing wrote a great book, A Random Walk Down Wall Street, PGes at Princeton. uh his work led to the creation of the index funds knows the stock market very well. Um he said that uh the price earnings ratios are amongst the highest in the last 230 year history. Um, uh, another really astute money manager and recognized thinker, Howard Marx. I don't know if you know that name. >> I do. He's he's phenomenal capital manager. Very bright man. >> He he calls the price earnings ratios Pete a tentpole. Tentpole. and um he cites work that um looking at the forward PE ratios um they don't go back as far um only to the mid80s uh but um the last time they were at these levels um the return on the S&P for the for the next 10 years was confined to a range of plus or minus 2%. Howard also reminds us of where the um where Buffett's favorite measure is, which is the um market capitalization to GDP. That's at an all-time high. Um and um you know another thing that typically happens in mania is that you get extreme financialization. >> Mhm. >> And and u people begin to use new instruments that presumably protect you from any risk. Um well >> like the portfolio insurance of the late 90s, right? Yes. And and other forms of financial, you know, I mean, uh there was very creative stuff being done, new stuff, uh and the refinancing of the railroad railroad boom in the 1870s and they kept the thing running for a while, but ultimately the truth prevailed. And even in the time of of John Law and the Mississippi and Louisiana bubbles, you know, there was financialization. Well, one of the things now is this this use of um of um private equity capital. Um um my good friend Jim Grant been talking about it. Um the default rates have risen a great deal in the past year. Um in addition um a lot of the firms um no longer paying interest. They're um doing these so-called pick extensions. >> Mhm. >> Paying in kind. The vault rate according to the latest calculations I've seen from the grant team is that it's now over 11%. >> Um I mean there there are risks um there are risks that the the tariffs are moving in the wrong direction. Another risk uh that people never talk about in terms of economic performance uh is the disastrous demographics. >> Right? >> We we have weak dem we're going to have one of the slowest growths in population in US history if not not record probably you know very close to it. Uh the birth rates are coming down all over the world. world econom glo the key economies of the world are becoming older you want young economies that's another risk um another thing that's happening that everyone is ignoring uh is that um the major economies are becoming are shifting more and more into command and control >> and what what command and control economies do is that they make economies is more inefficient, less productive and and so we have these significant risks, but no one is concerned about them because prices are high for a lot of things. Makes people good. They feel that if the markets if it's okay with the markets, it's okay with me. But but I I would recommend them to go back and read Kendallberger. Um because I mean these these kind of uh mania situations can go on for a long while. But the thing that Kendallburgger demonstrates is that after the mania you have panic and then you have crash. >> No one can time them. Adam, no one can time them. But it it seems to me that that's the model that people need to be looking at very very closely. >> Okay. Uh, super helpful. Um, all right. So, I I I asked about optimism. You were kind enough to say, "Hey, look, I just don't feel that optimistic, and here are the reasons why." Um, I'm going to put an optimistic spin on this. you you you tell me if I'm I'm grasping for straws here, but it's that um while while all that is true that Lacy has just mentioned and and things may play out the way that history predicts they should here uh so that you know uh the financial markets, the the economy, the average investor um may have tougher times ahead of them. uh you as an individual who educates yourself and positions prudently in advance of what it is likely to happen from here, you can potentially change your destiny here to not become collateral damage to a lot of these concerns that Lacy mentioned. So that's the positive spin I want to put on here, Lacy, which is thatation and some productivity >> trying to to ex to to have these very difficult complex issues explained and the educational service that you provide is exceptional and I want to applaud you and I want to tell you that I'm I'm proud to be your guest again. >> Well, thank you, Lacy. That's a huge honor and I am very proud uh that that you were a part of this movement and uh and even more proud to call you a friend. So, thank you. >> We are good friends. >> All right. Well, let me let me wrap up here. >> Good friends. We've broken bread. >> We have. And I'd love to do it again. And you know, Lacy, at some point, there are some topics that you and I talk about, you know, when when we're off camera or hanging out or breaking bread that I would love to have a conversation on camera with this audience at some point in time. and I don't think we're getting a chance to do it at the conference, but things like um you know, you and I have talked about wealth inequality and the growing wealth gap and I know that that's a very big concern of yours for just American you know, America's future socially. One of the problems of of you see what here here's here's I've talked about this in the past but historically um from from 1870 to 1970 we grew in real per capita terms 2.3% per 20 years we've only grown 1.2% 2% per hour. >> Yes. >> And and it it the the government share is going up. We can see in in great statisticians such as Hendrickson and Berg have shown that as we move into command and control that the growth rate ticks down. It's it's only ticking down of onetenth of 1% for every 1% increase in government. It's very imperceptible. But we've now lost 40% against trend. And and unfortunately whenever this happens, it exacerbates the income and wealth abise. It undermines your demographics. And and so we we have to understand that in actuality for the last 20 years the US economy has done very very poorly and we've left a lot of folks behind. And I don't I don't think this is healthy. >> So I'm right there with you as you know and I do think that topics like this are big topics that really deserve more more time. So I'd love at some point to sit down with you and then just do a you know discussion around these things. Um, another one that comes to mind is uh on the demographic side is um and and this this could be a sensitive discussion, but I know that you could handle it very well, which is okay, now that we've essentially closed the border and we are um we're we're you know in the process of of deporting some percentage of the illegal immigrants that have come here. It is whether you support that or not, it is it is giving the opportunity to sort of say, okay, well, going forward, what should America's immigration policy be? And I don't want to put words in your mouth, Lacy, but um demographically, it's it's very hard to see if we want the economy to continue to grow anywhere near rates that we had in the past that we're going to be able to do that just with natural-born citizens, at least at this point, with these low birth rates. So, we're going to need immigrants and immigrants have always been an important part of the American economic story. And I'd just love to hear your thoughts in greater detail than we have a chance to go into right now that if if you were given control of shaping policy going forward, what would be the key tenants? No, we we we have to find a way to be able to to um to scrutinize uh applications um determine who coming here seeking economic opportunity, who is coming here to work with the system, expand the system, and not to destroy the system or lean on the system for support. Um I'm I'm reminded of Milton Freriedman was such an economist. He was such a great economist and he wrote on so many things. But one of the things that he said is that immigration has always worked to the United States advantage when people came here seeking economic opportunity. Mhm. >> And we've got to find a way to do that in the concept in the in the in the terms of the fact that we are a nation of laws and we want to do this in accordance with the legal process and we it's going to be one of our highest priorities and and it's one of the ones that we need to be turning our attention to as soon as possible. >> All right. All right. Well, look, my friend, um, after the conference, after maybe the holidays, at some point in time, uh, I'd love to roll up our sleeves together and dive into this and maybe even do it in in in a live setting so that the, uh, the audience gets a chance to ask you some of those curve balls and let you take a swing at them yourself. But that's that's down the road. But folks, if you've had interest in that, let us know in the comments section below. So, in wrapping up here, Lacy, first off, thank you. And everyone, please thank Lacy how much you appreciate him coming on by hitting the like button and clicking the subscribe button below. >> Um, you know, if if you want to hear Professor Lacy Hunt go through his master class and what's happening in the macro world and and tackle those larger questions that I I I mentioned we're going to tackle in the conference. Um, then please run don't walk to go sign up for the conference now. And you do that by going to thoughtfulmoney.com/conference. Right now, you'll get the lowest early bird price discount that we're offering. So, do it quick. Get there quick and buy your ticket quick. And if you are a premium subscriber to our Substack, don't forget to look at your email. I've sent you a code that you can use to get an additional $50 off of that price. Last point, if you are >> Can I Can I do a little advertisement here? No. >> Absolutely. Go ahead. >> Here's a great book. Can everybody read the title? >> Hold it up just a little bit more. There you go. Kindleberger. >> You see the title? >> Yes. The world in depression. This scares me because I think you're going to tell me this is going to be really relevant for the next issue. >> Well, it's it's why why we need to understand that working it it we we don't have the same system. Then we didn't have unemployment insurance. We didn't have social security. We didn't have bank insurance. So, we wouldn't go to depression. But um it it's the process of what happens when you have an extended period of beggar thy neighbor policies. And I it's it's it's a great book. It's a very learning process from >> I'm making a note to myself right here to to go literally buy that on Amazon the second I get through with you here, Lacy. I think a lot of other folks watching will do so, too. So folks, we'll read it all together. And from those of you that are feeling a little uneasy perhaps about your personal financial situation, um, if the future plays out the way that Lacy thinks it may, uh, then highly recommend, uh, you consider benefiting from the guidance of a good professional financial adviser. Um, but most importantly, one that takes into account all the macro issues that Lacy has teed up for us here. Uh, and have them help you, you know, come up with a a portfolio strategy and then execute that for you. um that in a way that hopefully will help you um avoid the worst of what might lie ahead and maybe even position you to profit from some of what might happen. Um if you've got a good financial adviser who is doing that for you, great. Don't mess with success. But if you don't and you like a second an opinion from one who does, uh then consider scheduling a free consultation with one of the financial advisory firms uh that Money endorses. These are the adviserss you see with me on this channel week in and week out. To schedule one of those consultations, just fill out the very short form at thoughtfulmoney.com. As a reminder, these consultations are totally free. There's no commitment to work with these firms. It's just a free service they offer to be as helpful to as many people as they can be. Lacy, look, um I just cannot thank you enough, my friend. Um it's very important time uh to get the experience, insights of of longtime experts like yourself. Very much appreciate you coming on, sharing so much with us. >> I'm glad to do it. you're such a friend and you such a a great professional and I'm glad to be associated with you, Adam. >> Yeah, it's such an honor, my friend. All right. Well, look, look forward to seeing you at the conference, but until then, uh, have a wonderful Labor Day, Lacy, and everybody else. You, too, as well, and thanks so much for watching.