Lacy Hunt and Van Hoisington at Hoisington Investment Management haven’t been shaken from their bullish outlook for long-dated Treasurys for three decades. And with the 10-year yield at a tiny 0.7%, they’re still bulls, arguing that deflationary forces continue to overwhelm inflationary pressures.
Speaking to Bloomberg, Hunt says current fiscal and monetary pump-priming efforts are a just a larger continuation of past policies, i.e. the piling on of more debt on top of debt, not for the purpose of boosting productivity, but to keep the economy afloat. That ultimately means even more years of slow economic growth and potential disinflation.
Hunt: “The pandemic will eventually go away, but the debt will remain. It’s been my view that over-indebtedness ebbs economic growth. Debt is a double-edged sword: It’s increasing current spending in exchange for a decline in future spending unless it generates an income stream to repay principal and interest.”
The “great risk” to that outlook is that the Fed listens to the Modern Monetary Theory folks, and instead of only lending, it turns to actually spending. Consider, for instance (your editor talking now), Ben Bernanke’s helicopter money, or maybe adding a zero to the end of every checking account balance in the country.
Hunt again: “If that happens, then the inflation rate would take off. However, in very short order, everyone would be totally miserable because no one would want to hold money. You would trigger Gresham’s Law — people would only want to hold commodities they can consume and commodities that can be traded for others.”
He notes that the Bank of England appears to have already taken a small step in that direction, and others – frustrated that issuing more debt isn’t helping – may want to try.