The Debt Crisis Nobody Wants to Talk About | Dr. Lacy Hunt

Most of today’s economic debates miss a critical point: the real danger isn’t just high debt or rising interest rates — it’s how history warns us about the true cost of overleveraging. 

Renowned economist Dr. Lacey Hunt shares eye-opening insights from his 57+ years in finance, revealing how governments’ reckless borrowing, demographics, and inflation are pushing economies toward irreversible damage. 

In this episode of The Most Important Thing, Hunt breaks down the deep-rooted link between debt, demographics, and economic growth, illustrating why high debt levels trigger diminishing returns and declining living standards worldwide. He explains how overreliance on fiscal stimulus and monetary expansion — especially during crises like COVID — undermines the very foundation of sustainable growth, leaving nations vulnerable to inflation, liquidity crises, and geopolitical risks. You'll uncover:

• The historic role of political leaders and central bankers in fueling debt cycles, from William McChesney Martin to Paul Volcker, and why bipartisanship has historically been crucial for stability.
• How excessive government borrowing hampers innovation and productivity, leading to lower per capita growth — and why current policies risk repeating the failures of empires past.
• The fundamental importance of demographics in economic vitality, with aging populations in China, Europe, and Japan threatening future growth and social stability.
• Why modern monetary policies and inflation fears are masking the true danger: a potential spiral of liquidity collapse, capital flight, and economic shutdown.
• The rising threat of international protectionism and tariffs reminiscent of 1920s mistakes — and why protecting trade may accelerate decline, not prevent it.

This episode is essential listening for investors, policymakers, and anyone questioning the sustainability of today’s economic policies. Hunt’s insights challenge conventional wisdom, urging a re-examination of how debt, demographics, and politics threaten the fabric of global prosperity. Whether you’re concerned about your retirement, national stability, or the hidden costs of monetary easing, you’ll walk away with a clearer understanding of where we’re headed — and what can be done to avoid catastrophe. 

Dr. Lacey Hunt is a leading economist, senior economist at Hoisington Investment Company, and former Chief US Economist at HSBC and Fidelity. His peer-reviewed research and historical analysis provide a rare, sober perspective on the systemic risks overlooked amidst today’s headlines. Prepare to see the economy through a new lens — one that uncovers the structural vulnerabilities shaping our world and highlights the urgent need for responsible fiscal stewardship. This episode might just change how you think about money, politics, and the future.

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For individuals, families, and business owners seeking professional wealth management, estate planning, and long-term financial stewardship, please contact Muriel at muriel@priyawm.ie to arrange a private consultation.

Transcript

SPEAKER_01 0:00

The production function is one of the most important concepts in economics, which says that economic growth is determined by technology working with the factors of production, land, labor, and capital. And if you overuse one of those factors of production, initially the GDP rises sharply. But if you continue to overuse that factor of production, then the GDP flattens out, still overuse it turns down. The Ricardian law of diminishing returns. And we're seeing that with the overuse of government debt. And we're seeing not only in the United States, around the world. Look at Japan, look at China, look at the EU, look at the UK. So as the debt builds up, you trigger the law of diminishing returns. And you also then begin to accrue greater and greater interest expense. And the interest expense on federal debt becomes a net weight loss, dead weight loss. And that aggravates the impact of diminishing returns.

SPEAKER_00 1:01

Welcome to the most important thing. The podcast where leading voices in finance, economics, investment, and geopolitics share the one idea they believe matters most. Renowned broadcaster Ivan Yeats and finance expert Dr. Alan O'Sullivan will uncover for you what actually matters. In a noisy world, clarity is power. Here, we focus on the principles and insights that endure long after the headlines fade. This is the most important thing.

SPEAKER_03 1:31

So let's get straight into our next guest, who is Dr. Lacey Hunt. He's a rather elderly gentleman. He's talking to Alan from uh Austin in Texas, and he has 56 years experience. And what, Alan?

SPEAKER_04 1:49

Okay, so Lacey Hunt is one of the foremost monetary economists in the world, very, very well known, very well respected. You mentioned 56 years. He actually started his career in the Dallas Fed Ivan way back in 1969. Do you know who the president was in 1969? Lyndon B. Johnson, right? That's how long of a career Lacey Hunt has. And he's still working. He's still working with Hoysington Investment Management in Austin, Texas. Fascinating character.

SPEAKER_03 2:17

And there's an Irish connection with his backstory of his grandfather.

SPEAKER_04 2:21

Yeah, it's really interesting. And your racing background, you like this story. His grandfather was a well-known horsing trainer, okay? Donnie Gallman was an orphan, ran away from an orphanage in Dublin, ended up in America, okay? And within two generations, from an orphan to the world's, one of the world's pre-most monetary economists. It's a really fascinating story.

SPEAKER_03 2:45

So what has been his day job? Is it with an economist with Hoysington Bank?

SPEAKER_04 2:50

Yeah, so Hoisington Investment Management Company, they manage about 5 billion in predominantly pension funded Treasury uh bond managers, uh, predominantly Treasury bonds, U.S. bonds. Um, but Lacey has had a historic career. I mean, he was chief economist uh with uh Fidelity Bank, he was chief U.S. economist with HSBC Bank when they were the largest bank in the world. Um so uh really well respected. Um uh and again to be working full-time at 83, you have to hat off to Lacey.

SPEAKER_03 3:21

So give us an overview of some of the core themes that emerge from what we're gonna say.

SPEAKER_04 3:25

So, I mean, we talk about debt, we talk about demographics. I mean, why does debt matter for nations? And Lacey is a fin is a student of financial history. And you know, we look at David Ricardo, we look at David Hume. Uh these these uh were economists in the 18th century. So why is that relevant? Because their writings were pivotal. There wouldn't have been uh the Enlightenment without David Hume. There wouldn't have been Einstein's uh motivation for the theory of relativity came from David Hume. So these you know, these principles are really important in today's world where debt is such a huge problem.

SPEAKER_03 4:02

Okay. Well, that's just to whet your appetite. After we play out this interview, we will dissect and analyze the key aspects of the most important thing. From Dr. Lacey Hunt, take a look.

SPEAKER_04 4:23

The Most Important Thing podcast is sponsored by PRIO Wealth Management. For those watching or listening who are serious about building, protecting, and structuring wealth, professional advice can make a meaningful difference. At PreoWelt Management, we work with individuals and families who want a considered, discrete, and highly personalized approach to investments, pensions, and long-term financial planning. If you would like to discuss your own circumstances in confidence, you can book a call directly with me using the details in the show notes. Now, back to the show. I'm joined now by Dr. Lacey Hunt. And for Irish audiences, you're in for a real treat here. I've been following Dr. Hunt for the last, you know, 10, maybe 15 years. Based in Austin, Texas, in the United States, currently Lacey is the executive price president of the Hoisington Investment Company. That's a firm that manages close on over 5 billion US dollars, mostly pension funds, endowments, insurance company money. Lacey has been the author of numerous peer-reviewed articles, published two books, one as far back as 1976. Uh so he's he's been around a while. In terms of previous roles, very senior positions as chief US economist with the HSBC Bank, also executive vice president and chief economist of Fidelity Bank, previously also vice president of monetary economics, of Chase Econom Econometrics. And most interestingly for me, started his career after he picked up his PhD in 1969. Like you think about it, 1969, in in a c in in a couple of years, Lacey, that's 60 years advice, you know, in markets and managing money, maybe not all the time, but policy. It would be really interesting to get a sense of, you know, looking back now, it's a big question at the start, but if you could talk to the young Lacey Hunt, what would what would you say?

SPEAKER_01 6:18

Well, I was one darn lucky fella. I was in a lot of the right places at the right time. It was not by my intent, it just sort of happened when I went into the Federal Reserve. William McChesney Martin was chairman. And people don't even remember his name, but he was the second longest serving serving Fed chairman. Um and and you know, what I observed during that time period was something that was very unique and I think very critical to the way America used to function and the way it no longer functions. But Martin was a Democrat. He had been undersecretary of the Treasury under Harry Truman, and he had worked with Mariner Eckle Eccles to free the Treasury market from the controls that came about as a result of World War I. And he reached an accord with the with the Fed. And he, in working closely with Harry Truman, he worked on Truman for the job. And when Eccles retired, Truman picked his close associate. And what's very, very interesting is that Martin put country first. And even though he was a Democrat, he was able to work very closely with President Dwight Eisenhower, who had commanded our Allied forces during World War II. Eisenhower, a Republican. But they worked for the good of the country. They put their political differences behind them. And it's rather ironic that late in his tenure at the Fed, Martin became enemy number one of President Lyndon B. Johnson, a Democrat, because Martin could see that the Vietnam War was allowing inflation to get out of control. And Johnson didn't want interest rates to go up because he was increasingly unpopular because of the war. Martin took some pretty serious abuse from Johnson. But Martin stood up and tried to do what he could. He didn't accomplish what he wanted to because of the interference from Johnson. But it just shows that to be successful, you you need the president of the United States to be able to work with the chairman of the Federal Reserve and vice versa. You know, we had that happen one other time, and it worked to the benefit of the country. When Ronald Reagan came in after the 1980 election, he was a Republican, very popular president, achieved quite a bit for the country. But he was dealing with the Democrat as chairman of the Fed, a good friend of mine, Paul Volcker. I adored Paul Volcker. And one of the things about Volcker and Reagan is identical to what we saw with Martin and Johnson. I mean Martin and Eisenhower. They were able to reconcile their differences and work for the good of the country. And unfortunately, today we don't have that. Our political divide is too great. And the rhetoric is too extreme. And America's not that much of a civil place anymore, and sadly so. But I've seen the very best. And I'm glad that I have. And I hope that someday we'll be able to go back to that. But I don't think it's going to happen anytime too soon.

SPEAKER_04 9:11

It's very interesting listening to you and the parallels between Johnson and what's what's going on today with Trump uh putting pressure on politics. I mean, when when did this spasm start to open up between the two main parties that has led us? It didn't happen overnight. I mean, Trump is a is a product of his environment.

SPEAKER_01 9:30

But did you start noticing its earlier Well, I believe that economies undermine their ability to grow when they take on too much debt. And when the when the government sector becomes larger and larger and the private sector shrinks, we don't do as well. I think the studies, numerous studies, including work that I've done myself, show that when you begin to take on excessive amounts of debt, to analyze the impact of the economy, you have to think about the production function. The production function is one of the most important concepts in economics, which says that economic growth is determined by technology working with the factors of production, land, labor, and capital. And if you overuse one of those factors of production, initially the GDP rises sharply. But if you continue to overuse that factor of production, then the GDP flattens out, still overuse it, it turns down the Ricardian law of diminishing returns. And we're seeing that by the overuse of government debt. And we're seeing not only in the United States, around the world. Look at Japan, look at China, look at the EU, look at the UK. So as the debt builds up, you trigger the law of diminishing returns, and you also then begin to accrue greater and greater interest expense. The interest expense on federal debt becomes a net weight loss, dead weight loss. And that aggravates the impact of diminishing returns. And so as we have moved our gross government debt ratio well beyond 80 and 90 percent, which I consider to be the deleterious impact range, the per capita growth rate, the real per capita growth rate, starts coming down. And when that happens, diminished growth in the standard of living forces a change of behavior, and particularly on the demographics. And so the growth rates are coming down after the debt levels have risen to higher levels, the expenses, interest expenses have risen to higher levels, and and the birth rate starts coming down dramatically, and uh the population growth rates are coming down, and this feeds back into the effects of the debt burden. We we have a record low birth rate in the United States this year. Our demographics are not as bad, not nearly as bad as they are in Europe or Japan or China. And uh in in China, of course, they they have a complete mismatch between young women and young men, but and the young women are in great demand, but they they refuse to get married, and then when they get married, they refuse to have children. And it's because the economic outlook is so poor. The same thing is true in in Europe and and China. Now, right now, of all the major economic powers, the United States is still the youngest. The average age here is only about 38 and a half now. But in China, you're at 42, and every every two years, the average age in China is going up one year. And as you know, the European average age is in the mid-40s, and and Japan is 50 or maybe even higher. And um, I agree with the great French philosopher, August Comte. To name people forget, August Comte was one of the originators of the movement toward positivism. You know, Milton Friedman was a great positive economist, not a normative economist. In other words, the the idea is that you want to be able to verify your propositions by empirical analysis. And Comp said that demographics is destiny. And the birth rate's coming down, the uh average age is coming down, getting a distribution between young and old. To have vibrant economic growth, you need family formation, you need young, vibrant societies. And I don't think this happened by any accident. I think it's a direct failure of government fiscal policy in conjunction with an enabling monetary policy.

SPEAKER_04 13:14

So the root the root of all these problems that money is the root of all evil for some maybe debt debt is the evil. The love of money is the root of all evil. And the debt is the root root of all evil in the context of poor government policy because and just for our listeners, just so we get this, that when governments have to service debt, that's not money going on social programs or positive policy moves. It's it's uh dead money essentially, right? It's servicing debt. And then interest rates rise.

SPEAKER_01 13:44

All of us are being heavily financed by other countries too. It doesn't even stay in the country. So that's it's it's a major problem. And and you know, I think there's a fantastic paper written maybe 15, 20 years ago by the great Scottish economic historian Neil Ferguson called Empires on the Verge of Chaos. And um this was a award-winning article by Ferguson, probably our greatest economic historian currently living, formerly at Harvard, now at Hoover Institute at Stanford, wrote a great book called The Ascent of Money. Anyway, what his point is that is that the the triggering factor uh in the fall of of Mesopotamia, Rome, the Bourbons of France, the British Empire was the fact that they became so overindebted they they could not sustain their empires. Mostly generally speaking, they they fell in violent terms. The British Empire at the end of World War II was so weakened uh they jettisoned their empire. England survived, the British Isles survived, but the empire was gone. There's a lot of evidence to corroborate this. One of I think my favorite intellects of all times is another Scotsman, David Hume. My professor Ingrid Rymo said the Enlightenment could not have happened without David Hume. He, of course, mentored Adam Smith, and Smith knew all the great figures of the Enlightenment, including Benjamin Franklin, who discovered electricity, and he knew Voltaire. And Smith said that Hume was the s the greatest of us all. Hume was tremendous. In in 1752 and 1753, he wrote three papers that anyone who wants to know economics should read them. One was called Of Money, Monetary and Fiscal Policy. You can call it that, of money, of federal credit, and then on of international trade. And then, of course, his great work was Treatise on Human Nature, written in 1756. In there he discusses a topic in physics called Time and Space. And it was Einstein, after reading Hume on Time and Space, that he said that Einstein that Hume gave him the inspiration for the theory of relativity. And and in the paper of federal credit, Hume wrote, and of course he was only he was only able to look at Rome and Mesopotamia and some other smaller examples of the Bourbon Empire still not collapsed, nor the British Empire. But Hume had ended the paper with uh some very clear words. And he said, when a country has mortgaged all of its future revenue, the state lapses into tranquility, languor, and impotence. And that's where we're headed, unless we can reverse it.

SPEAKER_04 16:28

And I don't know that we can. It's so it's it's kind of worrying when somebody, I suppose what your pedigree pedigree says you're concerned that we can't fix this thing. Um I think I think looking back at what you said there, Lacey, and listening to you, we often blame the citizenry or the pot or the populace for for the mistakes. There was a lot of blame to go around in 2008. We recklessly, particularly in Ireland, uh uh there was a lot of blame thrown at you know normal people, let's say. But you go back to David Hume, with what what his his sample size was that driven by reckless governments? I mean, is there a common trend here of recklessness through the government structure? Like, is this just going to constantly recycle and rinse and repeat? When you have human nature, when you have the political structure with its get re-elected, don't serve the people, is there this constant uh recycling inevitable?

SPEAKER_01 17:26

Yeah, well, I think it's happened under both dictators and democracies. But people need things and politicians want to deliver. You know, back during or right after the Napoleonic Wars, the British Parliament went to the great David Ricardo, and they asked Ricardo, would it have been better to have financed the Napoleonic Wars with taxes or with debt? And Ricardo thought about it, and he wrote a very brilliant paper in the 1820s, and he said that they're the same, that it doesn't matter whether you raise taxes and drain resources from the private sector, or you borrow and drain resources from the private sector. And he gave that people later on called that the Ricardian equivalence theorem. Now, Ricardo was very a forthright fellow, and he also said that he didn't know whether this theoretical assumption was valid. And that was a very candid statement because there was no way for him at the time to prove that statement. We didn't have the mass computers, nor did we have the continuous data series. The economics profession follows Ricardo all the way to 1936. J.M. Keynes, the general theory. And Keynes says Ricardo is wrong. There's this magnificent fiscal multiplier. You can engage in deficit spending and you you will get a dollar's worth of GDP and then you'll get a multiplier of another four or five dollars. Keynes didn't admit that he didn't know either, because we still weren't at the pay at the state where we could analyze it. And now what do we what do we know today? That the government expenditure multiplier is not the four or five that I was taught when I was in graduate school in the 1960s. But the latest, the best latest work shows it's minus point three. In other words, if you engage in a dollar of deficit spending, at the end of three years, you will have reduced the GDP by one dollar and thirty cents. You you may get a transitory boost if you do it, and the boost will be even greater if you get the Fed to print money alongside it, of course. But at the end of the day, you're no better off. And and so we're we're following Keynesian economics with the very deleterious effects. And we're not able to to reverse what what what Hume so fully understood in 1752 is that there is really no difference between the way in which a a a household manages its affair or a business manages its affair, than the way in which a modernized industrial economy manages its affair. You have to live within the principles of reasonableness.

SPEAKER_04 20:06

That gets that really gets to the number of it. So so what Hume was saying is that inflationary and that you're you're taxing spending and in i uh by you know borrowing, you're borrowing from your future self. You're essentially, you know, putting your future spending i i in chains. In relation to, you know, the law of diminishing returns, which is what you spoke about, where one dollar of debt might have produced four dollars of GDP uh forty years ago, and now it's it's a negative figure. Um I presume this is much worse in the context of a an interest rate regime that's rising. You know, that uh we have we have the disinflationary regime, the great moderation, as Bernanke called it, but we're having a reverse of that. So and this gets us into the situation where where does this go?

SPEAKER_01 21:00

Uh in the great heyday of American economic growth from 1870 to 1970, our economy grew 2.3% in real per capita terms. The studies by Reinhart, Reinhart and Rogoff, uh I'm talking about the peer-reviewed study, show that when gross government debt goes above ninety percent of GDP for a sustained period of time, that you will lose one-third of your growth rate against trend. So in the last twenty years, the real per capita growth rate is one point two percent per annum. There are two really outstanding Swedish economists, both of which started Harvard for a period of time. Hendrickson and Berg. And they looked at it from a slightly different angle, but algebraically they're almost the same thing. And so they looked at what was happening to the growth rate in real per capita terms as the share of government activity of GDP. GDP is rising or falling. And what they found that every 1% increase in the government's share of total GDP, that your real per capita growth rate falls 0.1%. 1970, for example, the 20-year growth rate in real per capita GDP was 2.3%. Same as we had done going back to 1870. In the latest 20 years, government and in 1970, the government's share of economic activity in the U.S. was 25%. Today it's 35%. That's 10% points. It gives you 0.1 for every 1%. So you lose 1% of your growth against trend from 2.3% to 1.2. Same basic calculation, looked at it from a different angle. So if you take on the debt, what it basically means is you're probably going into a greater command and control economy all the way. The impact on economic conditions is almost imperceptible over the short run. You have to be able to take this perspective and look at it against these long-term trends. And as the growth rate comes down, then it undermines your demographics. And then that presents a whole new set of problems.

SPEAKER_04 23:14

Yeah, it's very interesting. I mean, the the intersection between debt and demographics, your your baby boomers are retiring, they're leaving the party, they're leaving the workforce. Then you at the same time as your debt situation is getting worse. I think the elephant in the room, which is which what I I don't hear commentators and economists talking about, is this the whole problem with the sustainability of the entitlements program, right? And we have it in Ireland, even state pensions. I mean, people are living longer, the pensioner support ratio has declined dramatically. So the number of people working for every pensioner has reduced. So isn't the anticipation or the expectation people have in their retirement is simply unrealistic? Or is that is that too simple?

SPEAKER_01 24:02

No, it's a very serious problem. What I would do is I would take all I would recommend taking uh uh or not taxing those that are full eligibility for Social Security and continuing to work. In other words, if they if they stay on the job and do not take Social Security, their pay rates will not be taxed for Social Security. That that actually will save a lot of funds because the government won't be paying benefits. They'll be sort of kicking the can down the road because if you stay on the job, you'll increase your future payments once you do retire. But we have to encourage, we have to find ways to encourage people to work longer, incentivize them to do so. But that won't stop the problem if the birth rate continues to go down. And the birth rate, in my opinion, is going to continue to slide as long as the real per capita growth rate comes to. So you're going to have to reverse the whole movement into greater and greater government. And that that's simply not doable, in my opinion. I will tell you that the Nobel laureate Milton Friedman began to see as we went through the 70s that we were on were gearing toward an unstable, unsustainable path. And he developed a constitutional amendment, which there was a lot of actual bipartisan support. And this constitutional amendment, they held hearings on it in the House and the Senate. And if you if you'd like to see it, see those, you can probably find them. It's particularly interesting when you locate the questioning of T Senator Ted Kennedy of the Nobel laureate, Milton Friedman. But this measure passed the House, passed the Senate, but it required a two-thirds vote to go to the state for ratification. And it would have required that the government run a balanced budget unless there was a 60% vote. In other words, you just couldn't have a deficit in any time. It would have to be some clear-cut national emergency. We couldn't even no one would even take that bill up today. There's no there's no bipartisan support for it. So we've had our opportunities, and so our growth rate is coming down, and now the United States is beginning to splinter even more, and you know, we're we're seeing the emergence of of candidates that espouse European socialism. And they want even bigger government, and uh that will influence the process. And uh, you know, there's there's a small group of people that that tried to reverse it. There was an opportunity in the discussions with the one big beautiful bill act to try to deal with our longer-term debt problem. And, you know, there were some in Congress that favored it, but in the final analysis, they were too few. And so here we had an opportunity once again to address the longer-term debt problem, and we didn't do it.

SPEAKER_04 26:51

There seems to be a complete lack of political leadership globally on this on this debt issue, and not just in the US, I mean the UK, as you mentioned, French debt to GDP is through the roof as well. I think it's the political infrastructure where the system is you have to get re-elected. You're a career politician. Yeah. And I think unless and until that is reformed somewhere, it's not going to change. That's my own personal view.

SPEAKER_01 27:17

Yeah, and I think that's that's why in the uh in the days of Newt Gingrich, one of his proposals was to vote in strict term limits so that you constantly have a new group of people and they can only go there and they have a limited time to get their agenda done. Now they go up there and they their only agenda is to get re-elected. And so we don't really deal with the problems. Whenever uh people are not willing to um look back at history and see these parallels, and it's it's it's almost an impossible story to tell. People hear me out. I think because of my age, you know, and I've been around a long time and I've got I have I've probably pointed to these problems, and and they can see that there's some merit in it, but it it's also um really more of a humoring of me, I guess, rather than any seriousness, seriously intention to delve into dealing with the problem. And of course, then you have the people that say, well, if we can't deal with the debt problem or the economic growth, we can always inflate it away. That's a wonderful answer. Which is we we tried that, and the the world tried that during the COVID. We engaged in tremendous monetary and fiscal coordination. We ran unprecedented deficits, which we now we can't reverse the debt levels that we took on during the pandemic. But we also got rampant inflation, which is a reminder that when you when you go down the path toward high inflation, that this uh devastates virtually everyone in the economy, particularly the modest and moderate income households. And then you have to reverse it. And then that's that's a problem. And so we we had inflation move off the charts there during the pandemic, and economists focus on the inflation rate. But the price level is also important. And as a result of it of COVID and the way in which it was dealt with, we have very, very high price levels. And the homes and the new cars are just really not affordable because they escalated so rapidly during the COVID response. And even looking at the income gains, which have not really been that robust, but we've had them at least until very recently, they have not dented this gap between median household income and the average car price and or the average new home price. And so when you go down the inflation path, you just absolutely clobber the critical households that you require, or the society requires, that they go to work every day and they raise their house their children, and that they provide the glue that keeps the economy going. And they're the ones that are suffering the most under this policy. And so the the government programs were well-intended. No one's questioning the fact that they were well intended. And on the surface, they seemed like a solution to the problem. But what they all they've done is aggravate the problem.

SPEAKER_04 30:22

So this is this cumulative uh inflation, really, that that's what you're talking about with the price level. Okay, the rate, the the rate of change may be decreasing or increasing, but the price level, the level, this cumulative inflation has has been extreme since COVID. But but just going back to your earlier point about Keynes, Nasy, if I can bring you back to that. Uh yes, and I've heard you say before COVID was a tragedy, uh, government stepping in was socially and morally the right thing to do. Say the first round. Yeah, yeah. It seems that there's this common trend of like the response to 2008, okay, maybe QE1 was had to be done, but two, three, and four was just pure crazy mistakes.

SPEAKER_01 31:10

Is the absolute excellent comparison. In other words, you know, they tried not to get back to the they they wanted to they wanted to restore the the vibrancy of the economy. But you see, what uh QE1, two, and three were designed to do was to encourage further leveraging of the economy and a further undermining of the law of diminishing returns, the overuse of debt capital, and the buildup of interest expense.

SPEAKER_04 31:39

I interviewed um Professor Campbell Harvey a couple of weeks ago. Or more recently, he has published a book on decentralized finance and has talked a lot about how artificial intelligence may solve the productivity puzzle we're all facing. And I know you'll be familiar with Professor Robert Gordon as well. He has done fantastic work on productivity. There's a lot of noise around artificial intelligence insofar as that it is going to solve the demographic issue. What's your sense of that?

SPEAKER_01 32:11

Is it as simple as this? It's a very complex matter. It's not simple at all, unfortunately. Well, first of all, let's talk about Robert Gordon. He wrote a tremendous book, U.S. Economic Growth. He looked at what made that idyllic age from 1870 to 1970 so special. And he said that we had five transformational inventions that were carried over to innovation. Um the combustion engine. Build the combustion engine, then you need a highway system. You need to have a distribution system to make the cars and the vehicles, the transmission of electricity. We knew of electricity since Franklin, but we found a way to transmit it, which means then you didn't have to locate a plant near an energy source. And then there was modern sanitation, Dr. Gordon calling it moving the outhouse to the in-house. We had to redo all of our houses. Then modern communication and then pharmaceuticals and chemicals. These were transformational. And what what Gordon's point is, if I may take the liberty to give you my interpretation, is that each of these innovations greatly enhanced the demand for all the factors of production, land, labor, and capital. So it gave us this robust growth. And with the exception of some very fleeting episodes, there was never any buildup of debt to speak of. There was uh there was some chicanery in the way in which we financed the building of the transcontinental railroads, which resulted eventually in the panic of 1873-75. But they were not terribly great, nor were they that long lasting. And so the issue about AI, and I'm not an expert in AI, but this is the question you want to ask yourself. Is AI transformational in the sense that it will lift the demand for all the factors of that's the critical question. Now, and I don't know the answer. But if if it if it is if you're going to be able to do it with limited demand for labor or reduced demand for labor, which some people are saying, then it's not going to be transformational. It'll be more evolutionary. And and and I think only time will tell. But that would be Gordon's test. Evolutionary versus transformational.

SPEAKER_04 34:29

Yeah, so I'd highly recommend anybody that is listening to watch Robert Gordon's Professor Gordon's uh TED Talk. He did a TED Talk in 2013, it's on YouTube. And it's only 15 minutes, but it's really, really interesting where he talks about the just everything you spoke about, the four headwinds in terms of debt demographics, inequality, technology as well. That add the kind of headwinds to to the kind of growth that we've seen in the 19th century and more probably more important, the 20th century. He talks about electricity and how that created hand tools and we had the elevator, and we, you know, it was it's really, really interesting.

SPEAKER_01 35:08

It was a tremendous book. You know, Robert Gordon has really done so much for economics. Um when when the concept of the national income and product accounts was developed, they are really during the wartime years or in the late 1930s, and we first started publishing. We didn't have data going back prior to 1929. But in the 70s there, early 80s, the National Bureau of Economic Research funded Robert Gordon to recreate the basic four components of GDP and GDP back to 1870. And he they also funded Christina Roomer to do the same thing. Now, if you look at their two series, they don't look alike. So what most economists, including me, uh are forced to do is I average Gordon's GDP series with Romers, and that allows me to look back. But but Gordon has really helped the profession a lot. I've learned a lot from him, and I learned a lot from his father, who was an outstanding student of the business cycle. In fact, I my first course in business cycle was by his father. So he's he's an outstand an outstanding scholar, and uh I never saw the the YouTube uh the the TED talks that he did, but uh I'm gonna hope you'll send me the link because I want to look at it. I read the book. The book is a must-read for any serious economist.

SPEAKER_04 36:37

So, Lacey, we were speaking earlier about uh I posed the question about artificial intelligence. I'm just wondering how you think it relates to economic theory in terms of the research. As a lecturer myself, I know it's a there's a big problem with plagiarism in third-level institutions and colleges. What's your view on on this area?

SPEAKER_01 36:59

Okay, well, I did do a little experimentation with with chat GPT. And so this is this is the procedure I followed. I asked a a general question in theory, and I was not very precise. It's it's the kind of question that perhaps a student in econ 101 might ask his professor about something. In other words, I was in the range, but not making it very clear, and the answer comes back and it's wrong, in part because the question is not answered correctly. And then I clean the question up a little bit and ask them to re-answer, and they still don't get it right. And they go through a couple of other iterations, getting more and more specific, and eventually I lead them to the correct answer. So the notion that you're gonna be able to settle a thorny matter dealing with precise issues without having a fundamental understanding of the issues at work in the terminology, they're not gonna be able to answer the question. But they they can answer it, but it it it does require some knowledge. And um I'm I'm concerned. I I saw this recent interview from Emily Bender, Stanford PhD in linguistics is not the University of Washington, and which she is says that the artificial intelligence is nothing but a plagiarism machine. Yeah. And so but I I don't think critical insights are gonna be made. I think they can't answer tough questions and probably faster once they have the issues down, but it's gonna require some some help to them. So I won't be out of a job for another couple of years, hopefully.

SPEAKER_04 38:35

I think the clock is ticking, but uh I I'll I'm I I'm do my best to specialize in something. Just in that's very interesting. Just in the the era we're in, they see, with you know, increased nationalism, isolation is mercantilist politics. You're obviously a keen student of history, and no, you go back to the Smooth Hawley Act. Like again, we're looking at history repeating. What's your sense of the damage this is potentially doing to, you know, the global economy?

SPEAKER_01 39:05

Well, I think that what people need to understand is that when you you start raising tariffs, it's not a single event because it invokes retaliation. And we know in from a lot of examples in history, and in particular the period between the mid and late 1920s all the way to the start of World War II, that the process can go on for a long while. So when an instigator country raises tariffs, if you think in terms of the microeconomic demand curve, that shifts the micro demand curve inward. And uh then the supply curve lifts up, shifts inward, and you get a higher price and a lower quantity demanded. Now, most of the goods that are traded internationally are what we call highly price elastic. There's only only a few items that are price inelastic. Energy products, certain pharmaceuticals, maybe some rare earths. So you have a very, very flat demand curve, micro demand curve. But when a retaliator country raises tariffs also, what that does is it is it shifts the upward-sloping demand curve inward. And unless you have this limited case of a highly inelastic demand curve, the prices will fall back below the level where they started. And you get a very substantial decline in total revenues of the exporter and importer countries, depending upon whether you're in the instigator country or the retaliator country. But the process doesn't start there because you now have to make a shift from the micro level to the macro level. Now, the demand curve slopes downward in microeconomics because of the law of demand, which is the substitution effect. But on the macro level, we have to take into account the income effect. We can't measure that in terms of the two quadrant, the one quadrant supply and demand curve relationship. So when the price level rises, you reduce real income growth. And the the aggregate demand curve is determined by the income effect. In other words, when the price level goes up or down, the export effect, whether something moves, exports up or down, the real wealth effect where the value of wealth goes up because the price level goes up or down, and that's why the aggregate demand curve slopes downward. But there's no substitution effect occurring at the aggregate level, and there is no income effect occurring at the micro level. So when you begin this process, what happens is the price level goes up initially, but the real GDP declines after the retaliation takes forward. But then there are other second, third, and fourth round effects. And one of the most important is that, and people don't really understand this or cannot put it together, is that the trade deficit and the capital account are the inverse of each other. And the capital account is also called net foreign investment. So when you go down this process and you begin, if a country is able to, to shrink its trade deficit, then it reduces the net foreign investment. Now, and and for example, if you if you want to verify it, this what you can do is you can you can chart the trade deficit in real dollars versus the net foreign investment in real dollars. And you'll see they're mirror opposite of each other. Now, as a result of the fact that we have run these large trade deficits over the years, the funds have come back to us. And um as of the latest count, the foreign sector owns 17 trillion of equities. Some of that's pretty price appreciation. But the original sources came from the trade deficits. And they own over 7 trillion treasuries and 2 trillion agency security and almost 5 trillion of corporate bonds. So if you're able to reduce the trade deficit by raising tariffs and causing a decline in global economic growth because of the adverse income effects, you shrink capital flows. The same thing. He wrote over 20 books, maybe 30, I don't know how many. His textbook in international economics was the one I used when I was a graduate student at Temple University. He wrote Manius, Panics, and Crashes. He taught Ken Rogoff. He also wrote a book, The World in Depression, 1930 to 1939. And he described this Kendallberger effect. And so one Once the capital flows begin to retreat as international trade comes down, which is what's going to happen in this process, trade volumes are going to come down, capital flows are going to come down. The process greatly absorbs liquidity. This is where you're going. Now, if you go back to the 1920s, up until the need for a reserve currency had really not surfaced until the 20s. Prior to the 20s, prior to World War I, the Bank of England was the reserve bank, the reserve currency of the world. And the Bank of England basically functioned as the world's central bank. But after the devastating effects of World War I, England was no longer to play that role. And so as the downward spiral of trade and capital flows is continuing and going forward, liquidity is collapsing. And the Bank of England could not come in because of their diminished capacity. The U.S. Federal Reserve could have, but they didn't understand the complexity of the problem and they didn't weren't looking to become involved in international affairs. And so as the Kendallberger spiral is taking place, the central banks allow it to happen. And you have a massive destruction of liquidity, which completely exacerbated the downturns in economic activity, the length of the downturn. So what do we have today? The Federal Reserve is saying that the tariffs will be inflationary. And they certainly are in the first round. That's what I just described. But as the prices go up, it starts a process of demand destruction. And when the when there is retaliation, the prices go up further and you create more demand. I mean, you you you shrink demand and that causes prices to fall back. So as as international trade comes down, capital flows come down, the central bank of the world has to step in to offset the destruction of liquidity. And the European Central Bank, the Bank of England, are moving, but they're not the central bank of the world yet. That's still the duty of the Federal Reserve, who's sitting on its hands. And so I believe that it is very important that the Federal Reserve be moving to provide additional liquidity. They have to look through the first round effects and look to the second, third, and fourth round effects, which are contractionary and deflation.

SPEAKER_04 46:24

There's a big view out there of, you know, this is all inflationary, tariffs are inflationary. It's kind of the easy answer. But when you dive behind it and look at liquidity, as you've mentioned, and look at the reaction functions of all these second, third driver effects, then yes, deflation makes more sense, which is why bonds lot the inflationists are saying stay away from bonds, and long-term bonds are toxic for a portfolio because as rates as inflation rises, rates will have to grip. But your view is sympathetic to owning long-term bonds. Now I'm not I'm not saying that's a recommendation, but I'm just saying that it is certainly sympathetic to it, yes. Yeah. But I I I want uh people to understand as well that I reached out to you and you were very gracious and very uh welcoming. But maybe it was because of my Irish connection, because I learned something very interesting about your background and a certain William Patrick Mullen.

SPEAKER_01 47:22

First more, please. Yes, that's my grandfather. His parents were from County Donegal. He was actually born in a workhouse in England, northern England, that they were thrown into his mother and father because of their debts. And his father died there. And my grandfather ran away from the orphanage when he was a young teenager, maybe even only twelve years old, we're not exactly sure, and worked as a galley mate on a schooner. And he did that until one day in this lengthy trip around the world, they landed in the Hawaiian Islands, and uh there was a lot of cattle ranching and the need for horses. And um he um went to work for the most prominent family in cattle raising business, uh training horses for them to use herding their cattle. And eventually he went on to San Francisco and he continued breaking horses, and uh he was well known for that. And um his he had a business card, Professor William Mullen, San Francisco, and he wrote a book about horsebacking. In the Library Library of Congress, there's still copies of the book around. And um he uh he was called to do the Lord's work and he he saved his funds to go on the Transcontinental Railroad from uh San Francisco to Washington. The Jesuits at Georgetown turned him down because he didn't have a high school diploma. And so he didn't have enough funds to get all the way back to to San Francisco. He could only get to Chicago, he had to stop there to work off to accumulate funds. And um he became familiar with uh White L. Mooney of the Mooney Bible Institute. And um after a long process I won't go into yet, he was given the high school equivalency exam. It allowed him to go to Mooney Bible, he was had a scholarship student in missionary work. He returned to California. And um when his children, one one of which was my mother, his youngest daughter, uh asked to join the local Presbyterian church, my grandfather said he'd have to think about it because he didn't think about denominations. He finally agreed to do it. He wrote the moderator of the Presbyterian Church, and this is being the late 1800s, if they would accept his credentials. And the moderator said yes, they could do that. The precedent had been established, and the moderator of the Presbyterian Church in Atlanta took the train to it to San Francisco. He gave my uh grandfather the first test more the morning was the test on the Bible, and Reverend Mullen knew the Bible very well. That's one of the main activities in an orphanage in Ireland back in that day. The afternoon was on church doctrine, and um the when when the test was over, the moderator said to my grandfather, Well, you asked all the questions on the Bible correctly, you have a tremendous knowledge, but you you missed the question on on the uh sacraments of the church. And uh in the in the Protestant uh Christian church there's just there's just two sacraments. There there is uh baptism and communion, whereas in the Catholic Church, I believe you have seven. My grandfather listed seven anyway, but it's probably the best thing for me that he became a Presbyterian minister rather than a Catholic priest. But he he I never knew him, but I adored him and I love everything about him, and I'm glad to be one quarter Irish.

SPEAKER_04 51:01

I I think it I think it's just a fascinating story, and uh we've had a lot of interesting things today, but the fact that uh a young twelve-year-old Irish boy from Dudegal can come to America and in just what a couple of generations produced, you know. And I you're very you're a very humble man, Dacey, and I I know I know, but like you're you're one of the the most outstanding economists living in the world, and to have the roles you've had, I'm sure he would be very proud of you now. So I want to congratulate you.

SPEAKER_01 51:37

Thank you. You're very kind, you're too kind. You're a great interviewer, Alan. I'm so glad to know you.

SPEAKER_03 51:49

That was Dr. Lacey Hunt from Texas, a proper Texan speaking to Alan. So let's try and deduce and distill from that what his key messages were. In context of debt, um, so I'm looking at a situation. Ireland's national debt is about 120% of GDP. The European average sovereign debt is 32,000 per capita. In Ireland, it's over 40 grand per capita. Should we be worried about government debt and how does it affect our day-to-day lives?

SPEAKER_04 52:23

I think every country needs to be conscious of their government debt. There's different types of debt. There's personal debt, which we each have. There's there's corporate debt, which companies need if they raise the debt in the debt markets, but there's sovereign debt. And that's where governments borrow to run country, to build infrastructure, to pay the civil servants, etc. Globally, there's been a debt splurge uh over the last 10 years, Ivan, right? And Lacey Hunt has said we're at a tipping point here, insofar as the law of diminishing returns. In the interview, he referenced this. When you abuse one of the production functions, uh you get diminishing returns. What's the uh production function? You've got land, labour, capital. We have massively abused cap uh the capital, okay, by uh debt and uh government debt. And that means that you're mortgaging the future sustainability of the next generation. We see it in Ireland. You you meant your point. Absolutely. Someday the debt has to be paid. Uh and he he his his big point is that there is a consequence for all this debt. It's weaker growth into the future.

SPEAKER_03 53:34

Let's focus on American federal debt. So today it stands at in excess of uh $37 trillion. The cost of debt servicing that, the interest rate payments are $900 billion a year. Which is more actually than the defense budget of $880 billion. Surely that's unsustainable. And given that the dollar is the key global anchor currency, surely it's inevitable. If it's not sustainable, that there's going to be a crash.

SPEAKER_04 54:09

Yeah, I mean it's hard not to argue that we're we're facing this. This is another one of these large imbalances that we see, okay, debt demographics. Looking at the U.S., $37 trillion, that's the on-balance sheet liabilities. But what about the off-balance sheet liabilities? What do I mean by that? Entitlements like pensions, Medicaid, these government programs.

SPEAKER_03 54:33

There's some estimates that that's over.

SPEAKER_04 54:42

Well, you can say that. I couldn't possibly, okay? But debt and demographics are linked. And Lacey got into that in the interview, right? He spoke about how when you have excessive debt, you have less growth. When you have less economic growth, you have a declining birth rate, leading into demographics. It's a negative feedback loop. So you get less births, less productivity, uh, and you don't solve the debt problem. So they're all linked, Ivan. And that was the real fascinating thing for me.

SPEAKER_03 55:12

So let's move from sovereign debt to corporate debt. Uh when I look at a balance sheet of a company that I might invest in, I look at the debt-equity ratio. Explain some of those financial dynamics at corporate level.

SPEAKER_04 55:26

When you are investing in a company, a company has a capital structure. It has debt. How does a company raise finance? It either issues shares, which is equity, or it issues debt so that debt markets will fund the company. Now, you hardly would blame companies for the last 10 years when interest rates were zero to issue a lot of debt. You had big tech companies issuing debt at zero, which means they were getting funding and taking that and investing it into the markets. Like, who would blame them? But that's a distortion. We spoke recently with Dr. David Kelly, and we talked about central banks and how perhaps they have distorted things. When you cut interest rates and actually negative rates, you definitely lead to market distortions. And we saw that with corporate debt issuance.

SPEAKER_03 56:13

The amount of debt issuance by corporates was excessive. The other final piece of the debt jigsaw is personal household debt. And one of the reasons why people reassure us that we won't have another crash here is that the capital adequacy ratios of the bank have changed. But householders here have savings of 165 billion euros. What is it, 1.3 million households and so on. And that people say that this money should be used for housing, for leveraging other things. But they importantly say prior to the crash, everyone was over-leveraged and had a lot of debt. Just talk us through household debt.

SPEAKER_04 56:54

It's cyclical. Okay. Debt, like a lot of variables in economics, is cyclical. When you get burnt, which a lot of people did, unfortunately, during the crisis, you deleverage. So people don't want debt. So personal on the personal balance sheets were cleaned up an awful lot. So citizens uh pay back their debt, reduce their debt, and were very slow to take on more debt. So there is there isn't really, to your point, there's a massive savings boom there. And there's there's a lot of wealth in Ireland. It's the same in the US. There's a lot of savings amongst the upper middle class and upper class in the United States. And that's what kept the economy in the US robust for the last couple of years. But the problem is in the corporate and the government, particularly the government uh sector in terms of debt. We've got debt to GDPs, well over 100% in some countries like France is a big problem, obviously, um the US. But China is a is a country that doesn't get a whole lot of attention in terms of debt, but its total debt to GDP is just below Japan in terms of the highest level. So again, we will get into that at a later point. But debt is going to be a dominant factor in the next decade for sure, Ivan. And it's going to dampen growth, is what we really look at. Well, the law of diminishing returns, as Lacey Hunt said, is that when you abuse one of the factors of production, you enter the law of diminishing returns, where one dollar of debt doesn't produce ten dollars of growth. It actually produces 50 cents. So it's a deleterious effect. It's got a negative effect.

SPEAKER_03 58:27

All right. Thank you, Alan. Well, that concludes this episode of The Most Important Thing, uh, featuring an interview with Dr. Lacey Hunt, who has almost six decades of financial and fiscal and debt experience. Do join us again on the most important thing. And if you would like to get further wisdom to be gleaned from these episodes, do please look out for the Truth Series, which is an e-learning model in relation to finance. Until the next time from me, Ivan Yates and Dr. Alan O'Sullivan, thank you for joining us.

SPEAKER_04 59:04

So thank you for listening or watching on YouTube. I sincerely hope you found this episode useful. This podcast is about slowing down the conversation, of focusing on first principles and long-term thinking and the ideas that shape outcomes over time. Because when everything feels important, knowing what matters the most is your edge. It is the most important thing. It should be said and important to say that this podcast is for information and educational uses only and does not constitute financial advice. All views expressed are those of the guests and the hosts. Although I am a qualified financial advisor and I am a certified financial planner, everyone's circumstances are unique. So before you make any decision in relation to your finances, investing, or financial planning, please seek a qualified financial advisor. There's loads more to come on the most important thing, and we can't wait to see you next time. Thank you.