Lacy Hunt: The World Economy's Terminal Case Of Debt Sclerosis

Tyler Durden's picture

Submitted by Adam Taggart via Peak Prosperity,

Today, the world economy is in uncharted territory.

Never before has the developed world carried this much debt. Never before have the central banks of those same countries expanded their balance sheets so much. Never before has so much sovereign debt been outright monetized. Never before have major financial institutions been officially designated as “too big to fail” and thereby been granted special license to assume gigantic risks.

Dr. Lacy Hunt, economist and current executive vice president of Hoisington Investment Management Company, expects the macroeconomic situation to get worse from here:

The main problem is that we have too much debt. We have too much of the wrong type of debt. That’s not very well understood.


The great Austrian economist, Bohm-Bawerk, said that Debt is an increase in current spending in lieu of a decline in future spending. Fisher modified that a bit and he said that it ultimately depends on whether the debt is productive or not. If the debt generates an income stream to repay principal interest, then you're OK, you don’t have a down cycle later on. But unfortunately as the debt levels have risen higher, more and more of it has become consumptive in nature or financial speculation; neither of which will generate a sustaining income stream to repay principal and interest. That’s the difficulty: there’s a light side to credit and debt, and there’s a dark side.


Now it’s been emphasized that business loans and consumer loans are going up this year. There have been articles about how credit standards are being lowered to make mortgages and automobile loans. The banks have confidence. And the percentage of subprime automobile loans has returned to the peak of a decade or so ago. The problem is that there’s a dark side. Martha Olney at California Berkeley wrote a book a number of years ago called Buy Now, Pay Later. You take on debt to buy now, but you have to pay later. Many presume that you never have to pay later -- but that’s a faulty assumption. That’s the difficulty that we have, and we’re trying to solve an indebtedness problem by taking on more debt.


Not only is that the problem in the United States, but it’s also the problem around the rest of the world. We’re all trapped in this debt sclerosis. U.S. public and private debt is about 346%; it’s been rising now for three quarters, we no longer de-leveraging here. And the Eurozone, in all in the 17 countries there, the debt figures are a hundred percentage points higher; higher still in the UK. And then in Japan, public and private debt is about 650%. What’s significant is that the countries with the higher debt levels are performing the worst, which is very consistent with the academic studies. I mean Europe is in the process of triple dipping. Japan remains mired in difficulty; their economy declined in the first half of the year.


Over-indebtedness is the basic problem. And we don’t really have a way out of it because monetary policy is not really suited to address such a problem.

Click the play button below to listen to Chris' interview with Lacy Hunt (44m:14s):


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disabledvet's picture

Meh. This why you NEVER NEVER NEVER EVER bail out Wall Street.

"It's a debt machine."

Debt "free of charge" happens all the time (take a look at the market right now!)...what you can't do is take what's on the private balance sheet and put it on the public one (too big to fail.)

This is why a gold standard is absolutely necessary in my view...the fact that "2008 can't be repeated!" has not meant an end to a belief in Space Aliens as our savior.

Sure...Teslas and Nissan Leafs are having a major impact on our "economy." But economics is well nigh mum on whether said impact is bad or good...merely "impacting."

Of course you can just call it "good" or "a good" or "a goody" or something and go from there...

max2205's picture

Load up on debt. Can't pay it back? Charge a nail gun.

Long Home Depot!

RaceToTheBottom's picture

The solution to too much personal debt is traveling light.

If it works for Morgan Stanley (which defaulted on Realestate trxs), it should work for John Q Public

stocktivity's picture

Blah, blah, blah...until the Fed stops printing, It's All Bullshit!!!

disabledvet's picture

Nay, veerily...this isn't true either.

"The biggest debt sinner is America"...and which economy of the Big Three (Four now?) has suffered the least? The one that had "Helicpter
Ben" in charge of monetary policy! The one that literally said "I have a printing press and I intend to use it."!!!!

Who couldanodeit?

trulz4lulz's picture

I have a question!!!! If the money isnt actually real and it wasnt created on the basis of commadity or future wealth creation through production, how is it really debt? Isnt the debt as fake as the money?

Cthonic's picture

Watch your six for PIMCO drones.

trulz4lulz's picture

<pewpewpew!> <pewpewpew> <making fart like booming and explosion sounds> <pewpewpew!> Im Dyyyying.....ahhhh the HUMANITY! Im Dyyyiiiinnnnngggg.......<fade to black......fade into white.....slide out of bleeding, stretched, and broken vagina....repeat>

Whaaaaa...<slap><suck suck suck>

disabledvet's picture

See below (I would rephrase and say "is it debt if you never had the ability to repay to begin with") and the say "I think even God himself is wondering about this one."

OC Sure's picture


The answer to your question comes from the essential difference between Full Reserve Banking and Fractional Reserve.

An honest loan (real) is represented by the wealth of productive work that has already been performed (Full Reserve).

A dishonest loan (fake) is represented by zero wealth and the expectation that productive work will be performed (Fractional Reserve).

Tasty Sandwich's picture

Is it really debt if you never intend to repay it?

trulz4lulz's picture

Its like digging a hole, letting it fill with rain water, then promising the clouds that you'll repay them. Thats about as best as I got it figured out.


Tasty Sandwich's picture

Greenspan: US can always print money to pay any debt.

That look on Austin Goolsbee's face - can't believe Greenspan said it.

disabledvet's picture

It's like digging a hole and imagining the steam 426 AD.

Oh the wonders!

CHX's picture

They will repay, but only with devalued currencies. #GOT MONEY ?

himaroid's picture

Thank you Mr Hunt. I have followed your writings for many years. You have been the rightest, the mostest, the longest.  I wish I had believed you earlier, but for the long while that I have, I have had Wall Street and DC over a barrell and been humping them hard. Thanky, thanky, thanky.

From Texas....

Sam Spade's picture

I agree, Lacy is the Man.  He's unique in that he's both a superb economist and a historian of the US Treasury market.  For those who aren't aware, you can read his quarterly reports (usually only 4-5 pages each) at the Hoisington website for free.

GooseShtepping Moron's picture

That was a great show. There is nothing better than listening to (or reading) an intelligent and experienced person present their knowledge in a clear, honest, and engaging manner.

Radical Marijuana's picture

The only politically plausible way out of the runaway debt slavery systems generating numbers which have become debt insanities are for that to provoke death insanities. Inside that context, "PeakProsperity" routinely tends to grossly underestimate the degree to which we are actually headed towards Peak Insanities.

mvsjcl's picture

Sorry Radical. That was peak huh? to me.

The Big Ching-aso's picture

I think he needs to lay off that shit.

Radical Marijuana's picture

Silent Weapons for Quiet Wars

"Energy is recognized as the key to all activity on earth. Natural science is the study of the sources and control of natural energy, and social science, theoretically expressed as economics, is the study of the sources and control of social energy. Both are bookkeeping systems: mathematics. Therefore, mathematics is the primary energy science. And the bookkeeper can be king if the public can be kept ignorant of the methodology of the bookkeeping. ... In this structure, credit, presented as a pure element called "currency," has the appearance of capital, but is in effect negative capital. Hence, it has the appearance of service, but is in fact, indebtedness or debt. ... if balanced in no other way, will be balanced by the negation of population (war, genocide)... They must eventually resort to war to balance the account, because war ultimately is merely the act of destroying the creditor ... War is therefore the balancing of the system by killing the true creditors (the public ...)"

world_debt_slave's picture

saw dead end and then necroeconomic

q99x2's picture

This is the NWO attempt at conquering the world without war. But FRAUD is the worst sin. Worse than war.

teslaberry's picture

9/22  he talks about 'strong political leadership not being an option anywhere'. 


there is a reason for this; democracy. democracy is corrupt by nature and our democracies are even more corrupt than those that start out pure of heart, young from fledgling revolutions. 


our corrupt and obese and old democracies cannot be made whole. democracy must end to fix anything. 

Radical Marijuana's picture

It is ridiculous to describe our actual system as "democracy," since the methods of organized crime have been applied to the political processes in order that the creation of the public "money" supply has been 99% privatized!

"Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile … Once a nation parts with control of its currency and credit, it matters not who makes that nation’s laws … Usury once in control will wreck any nation.”

--- Canadian Prime Minister William Lyon Mackenzie King

"The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of the government but it is the government's greatest creative opportunity. By adoption of the these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity."

--- American President Abraham Lincoln.

Creating the money supply, as a public utility, should be government's supreme prerogative, and greatest creative opportunity, and its most conspicuous and sacred responsibility. Instead, giving away the power to make money out of nothing to private banks was the most insane domestic policy that a government could ever adopt! However, it is easy to explain the history of how that actually happened. It was simply the history of the application of the methods of organized crime to take control over governments, in a runaway spiral of the success of fraud enabling those who did that to constantly be able to get away with even more frauds. That started more slowly and secretly. However, it was on an exponential growth curve, so that it now is becoming blatantly obvious to even mainstream morons that the banksters have become the new royalty, who are above the law, because they effectively control the political processes.

Salah's picture

Meanwhile, Cameron tells the Tory Conference that Brussels must....

"Give back powers to Britain or we will leave the EU"


edwardo1's picture

It's not the debt, or the kind of debt that is the problem, it's the $IMFS itself that is the core problem. All else, particularly the immense debt, -debt that will not be defaulted on, but, equally has no hope of ever being paid down, either through economic growth, or theft (aka bail outs or bail ins)- is but a symptom, albeit a pernicious one, of the monetary derived ill that afflicts humanity from New York to New Zealand. When the dollar based internaitonal monetary system gives way to the next system, which will come about as the world gradually (and, then, not so gradually) learns to not save in debt -which is what is behind the runaway debt creation we have experienced planet wide- many of our present ills will, at a minumum, subside.

q99x2's picture

Ok Lacy Hunt is smart and Chris Martenson asked important questions. but after reading so many ZH articles I believe Hunt is too optimistic because he has clients and therefore must speak logically but not from what he truly believes. I don't think we have as long to go as he suggests to before the bang because of the amount of FRAUD upon which economics is now based. The questions at the end that Chris asked relating to Russia and China brought out the black swan concern on only two issues there are so many more that are possible.

My suggestion is get your guns food and gold together and head for the hills because no one will know the exact time when the bang hits. And if heathens would have listened to the advice about usury we wouldn't be in this mess. Unfortunately heathens are what we are surrounded by M'Fers.

Great presentation with lots of reference material to research.

Sam Spade's picture

If you're skeptical of Lacy Hunt and Van Hoisington, you might give this Forbes article from July of 2007 a read, in which Hoisington predicted both a recession the following year and a dramatic drop in treasury yields (all of which happened, of course):  

I consider anthing these two men write or say must-reads...

pashley1411's picture

The solution = no debt gets paid.   The Demos decides to take now by borrowing, and the Demos decides not to repay by defaulting. 

The essential flaw of the investor is the inability to properly calculate risk, even where, as here, default is ridiculously obvious.   Because risk is not static, but a time deteriment vector.   And investors are predisposed to not look beyond the end of their noses.

knowshitsurelock's picture

Let me see if I got this straight.  A bunch of elite globalists decide to create money out of thin air, charge exorbitant interest for it, without risking anything of value, without any skin in the game, and if there is a default, they get to keep all of the tangible goods?  Is this what you mean by debt?

I propose that there is no debt, only gloabal elitist narcissistic thieves who sold us a huge lie and ran off with all the wealth and left the rest of us with nothing.

Fuck um.  Stop paying everything to them.

Gunga's picture

I agree. We the people are not liable for the onerous debt contracted by corrupt politicians with criminal international financial institutions.

robnume's picture

OMG! Tasty Sandwich, watched that video. You are right; the look on Austen Goolsbees face is fuckin' priceless! Wonder how the cameraman knew to get a reaction shot right then! That the world economy is gonna melt down like Fukupshima seems to me to be an understatement.

esum's picture

too big to fail... really 

so in other words the taxpayer takes the risk and the banksters take the profits...and big bonuses for inflicting major damage via fixing libor, fixing metals, fixing the market, flash trading, dark pools and working  hand in hand with the fed bankruptng the world... 

perhaps its time people take waht money they have out of banks and out of the market and let em and DC fail........ 



Hohum's picture

GDP = F (debt).  Reduce debt radically, reduce GDP radically.  It's not a groovy situation, but it's what we have to address.