Last week, we began a three-part series on whether or not inflation was going to be a major problem for the US economy and its consumers over the next 3 to 5 years. We framed this in a Point/Counterpoint manner similar to the way 60 Minutes, and in a satirical way, Saturday Night Live, used to do back in the 70's.
Last week we took the side of why people may have fear, uncertainty, and doubt (FUD) about the impact a future inflation spike may have on them and how bad things could get. This point of view was reinforced by this week’s CPI report, which showed core inflation running at the hottest level in nearly thirty years.
Today, we take the alternate side, the counterpoint, and discuss why inflation fears may be overblown due to longer-term structural issues. Dr. Lacy Hunt of Hoisington Management has been consistently right about inflation and interest rates for decades. Dr. Hunt, whose firm oversees more than $5 billion of investment assets, received his PhD in economics in 1969. He has had a front row seat to the economy and investment markets for more than five decades.
Dr. Hunt believes that the largest issue we are facing is the fact that excess global debt reduces future economic growth. This lack of growth and aggregate demand does not allow interest rates or inflation to rise over our secular horizon. You can see just how much global debt has risen over the last 20 years in the chart below. He believes we now have too much debt to fix this structural issue.
Source: Hoisington Management
As an economic historian, Dr. Hunt has studied this phenomenon. Since 1800, the United States has experienced five major debt bubbles. As you can see in our second chart, each of the previous debt bubbles has led to periods of deflation or disinflation.
Source: Hoisington Management
A third point made by Dr. Hunt is that even though the US government, and governments around the world, are printing money with abandon, you also need money to circulate to create inflation. Our third chart shows that the velocity of money, the speed at which money moves or multiplies in the economy, is at an all-time low. It is very difficult to have inflation with these conditions.
Source: Hoisington Management
There are two other factors that led some to believe that inflation may not be as big of a problem as many think it will be. The first is demographics. David Rosenberg, an economist from Rosenberg Research, shows that birth rates in the United States and across the globe have fallen dramatically over the last 40 years. This leads to less demand and less inflation.
We also now have a much older population. The United States population had just above 10% of its population above age 65, fifteen years ago. We could see this grow to more than 20% of our population being above age 65 by the end of the decade. You may wonder why this is important? Consumer spending life cycles show that as people age, their spending tends to slowly decline. This means less potential economic growth and inflation in the future.
Rosenberg also points out that nearly 30% of US household income over the last year has come from government stimulus checks and enhanced unemployment benefits. He points out that as the stimulus checks move to the rearview mirror, organic real incomes are still contracting. This could lead to lower growth in the future, which would definitely not be inflationary. Rosenberg believes that some economic projections for corporate earnings and GDP growth are too rosy and are based on the artificial sugar high of stimulus, which will not likely continue.
The final issue relates to the ongoing advances from technology, artificial intelligence, machine learning, automation, blockchain, etc. We have shared before how Moore’s Law means that the speed of technology doubles rapidly over time, while the price of this technology, and the enhancements it brings to life, gets cut in half at a similar pace. All of this will continue to cause costs to go down over time.
So, which view, Point or Counterpoint is correct? We will discuss this in our third and final installment of this series next week. Please know that we are researching, watching and paying close attention to these trends, and the impact they may have on the financial lives and resources of you, our trusted friends and clients. It is very important to be aware as we continue “Moving Life Forward”.
© 2021 Jesse Hurst