Lacy Hunt: It's Not Inflation But DEFLATION That's The Real Threat To Our Economy
Jan 30, 2025
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Lacy Hunt, Executive Vice President and Chief Economist at Hoisington Investment Management, shares his deep insights into the current economic landscape. He argues that deflation, rather than inflation, poses the real threat to our economy. Hunt discusses the potential inaccuracies in inflation data and the alarming rise in factory idleness. He also highlights the impacts of recent monetary policies and tariffs on trade dynamics, predicting rising unemployment and challenges for monetary stability ahead.
Rising costs of living and limited savings among Americans contribute to widespread financial discomfort, emphasizing economic instability.
The shift from 'handout' to 'hands-up' fiscal policies aims to enhance productivity and growth, though short-term challenges are anticipated.
Deep dives
Impact of Inflation on Everyday Life
Inflation continues to affect consumers negatively, even as it gradually decreases. Basic necessities remain costly, which creates a sense of financial discomfort among households. Notably, many Americans struggle with limited savings, as reported by surveys indicating that a significant percentage have less than $1,000 in emergency funds. The higher costs of living, particularly in areas like housing and essential goods, contribute to this widespread sense of unease about economic stability.
Economic Trends and Capacity Utilization
The global economy is facing considerable challenges, with signs of declining capacity utilization indicating that factories are becoming increasingly idle. This trend is concerning, as reduced capacity utilization is closely linked to rising unemployment rates. Despite the prevailing belief that the worst of the labor market issues are behind us, data suggests emerging pressure on job prospects, which could imply rising unemployment in the near future. The discrepancy between job openings and downturns in the labor market poses a worrying outlook for economic growth.
Monetary Policy and Market Conditions
The current monetary policy environment is characterized as tightening, which may be adversely impacting the economy despite recent interest rate cuts. The rising costs of borrowing for small businesses and consumers hinder their ability to invest and spend, thereby exacerbating economic strain. Moreover, liquidity in the monetary system has been contracting, influencing both domestic and global economic conditions. This contraction could lead to a delay in recovery, as the effects of previous monetary policies take longer to materialize than anticipated.
Shifts in Fiscal Policy and Economic Outlook
Recent shifts in fiscal policy are moving from a 'handout' towards a 'hands-up' approach, promoting productivity and long-term economic growth. While short-term disruptions may occur as these changes are implemented, the expectation is for positive benefits over time, similar to the tax cuts experienced during the Reagan administration. However, the transition may be challenging, and consumer sentiment is currently low, introducing risks to the economy in the short run. Ultimately, the success of these policies will depend on how effectively they balance spending cuts and tax reductions while managing public perception and economic growth.
Recession fears seem to have faded from the headlines, as the "no landing" scenario seems to have won out -- on Wall Street at least.
Attention is much more focused on a possible boost to economic growth from the policies of the new Trump administration, as well as concern that inflation could prove stickier and more stubborn to tame than the Fed hopes, resulting in higher for longer bond yields.
So, were the deflationists wrong?
For a true expert's view, we have the great fortune to sit down today with one of the greatest living economists, Dr. Lacy Hunt, former Senior Economist to the Federal Reserve Bank of Dallas, as well as several of the world's largest global banks. He now serves as Executive Vice President and Chief Economist of Hoisington Investment Management Company.
WORRIED ABOUT THE MARKET? SCHEDULE YOUR FREE PORTFOLIO REVIEW with Thoughtful Money's endorsed financial advisors at https://www.thoughtfulmoney.com
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