Earlier this month, Wealthion (a new YouTube channel featuring interviews with today’s top experts in money & the markets) hosted its first online conference, at which economist Dr Lacy Hunt made a strong case in his keynote presentation that deflation — not inflation — will win the day going forward.
He predicts that much of the sudden sharp rise we are seeing in input prices will indeed be transitory. And he presented a parade of econometric data that show many historical precedents why this is likely to be the case.
Of course, the current debt, demographic and technological trends are very deflationary. To those who think that the flood of new $trillions in monetary and fiscal stimulus will trump these, Dr Hunt shows how much of that money just isn’t making it out into the real world.
Instead, it’s pooling up within the banks as massive excess reserves and the banks aren’t lending enough of it out, as shown by the plunge in the Total Loan to Deposit ratio:
So while the money supply (M2) has skyrocketed over the past year, money velocity is lower than it has been in over a century:
This reveals an important limit of central bank policy. There is a point of diminishing return at which the Fed is truly “pushing on a string”. It can shove as much new money into the banking system as it wants, but there’s no guarantee that money will make it out into the economy.
And as some of that money invariably finds its way into asset prices, causing them to inflate, corporate executives have a mal-incentive to invest their capital into financial assets vs productivity. The end result is that overall economic productivity is depressed.
Dr Hunt concluded with a warning: deflation will win out unless the rules are changed. If the Fed’s mandate is altered, as some are now advocating for, to become the “spender of last resort” and able to monetize its liabilities as legal tender, then that would change the game and runaway inflation would ensue.
Wealthion has just made the video of Dr Hunt’s masters-level presentation available today to the general public.