broadcasting from Baltimore, Maryland and New York City. You're listening to the Stansbury investor our tune in each Thursday on iTunes for the latest episode of the Stansbury Investor. Our sign up for the free show archive. But investor, our dot com here are the hosts of your show, Buck Sexton and Porter Stansberry. Everybody welcome back to another episode of the Stansbury Investor. Our I'm nationally syndicated radio host, former CIA analyst and semi professional Bacon Chef Buck Sexton with me here today, the founder of Stansberry Research, Mr. Porter Stansberry.

Hello, Good sir. Bucket. That reminds me we slaughter two of our Berkshires and I have some homegrown bacon that I would be happy to share with you.

That sounds amazing. And I would like Teoh. I got Doc I freak. Last podcast setting me his wine. This podcast. You're setting me bacon? A country club guy. What do you got for me? You got some good gin or something? Come on. Actually, I dio I have

a lot of gen He's got a new

boat, Jim. Mm that the back of the bottle is flat, so you can lay it on the table, not worried about it. falling over. That's

what I did last weekend,

the I mean genius Amos and maybe named for whisky. But I know he's a gin drinker. I can tell what I see. What? Um, so, anyway, let's get it to all the latest here today in the show we welcome from the Great State of Texas Doctor Lacey Hunt. Dr. Hunt is an internationally known economist and vice president of Hoisington Investment Management Company, an Austin based firm managing nearly $6 billion for pension funds, endowments and insurance companies. Lacey is the author of two books and articles appear in Barron's, The Wall Street Journal, the Journal of Finance and the Journal of Portfolio Management. In our last episode, you heard Porter refer to Dr Hunt's work discussing the effective concurrent consumer and corporate debt loads on inflation and economic growth. So we're happy to have him here today to talk with us about his current view of the markets and economic environment. And with that Mr Porter

G E. Yeah, let's talk about G. The big rumor on the street is that Buffett's going to buy G, and I want to take this on because I think it's really funny. And

it's the way he may have heard that Bok bought some G. Like like a few dozen shares of

it. Yes, that was much earlier this year. Uh, yes, part of this year.

Earlier last year? Yeah, earlier this year. Earlier this year. I sold it.

Yes. Well, uh, you should have read one of the dozens of essays I've written about gear in the past 20 years warning folks that it was in a debt driven death spiral. But you didn't book and

you've learned a lesson. I did. I did. You burn your hand on the stove once. It's not your fault.

So two things about this, First of all, let me just back up for one second and tell everybody the guests we have on the podcast today. Dr. Lacey Hunt is someone who is incredibly important and whose ideas have been completely ignored by the major mainstream macro economic community, but whose ideas have become mawr and more influential in the financial community. So this is not the kind of economists who writes textbooks, is the kind of economists who guides lots of billions of dollars of investing, and he has been very successful So you know, one of the things you very rarely see is a rich economist because his buck points out economists of an awfully hard time predicting the future. But not this economist. So this economist manages six or $8 billion personally and advises hundreds of billions of dollars, maybe trillions of dollars globally. So I would urge everybody to listen carefully to this interview and I give you a warning. I expect the conversation to be a little more technical than I would wish. I'm gonna try to keep it in terms that everybody can understand. But you're dealing with a guy who has spent his entire career studying data and macroeconomic models.

So it's not gonna be as plain English as we would like. I hope that you will listen carefully and try to get something from it. Now about G. The I've written about G for so much, and we had a great discussion on the podcast about GE recently. I forget what episode it was, but I'm sure someone can put a link into it. The problem with G E was really simple and and also magnificent because G took every single accounting angle every single game. You could play with that and share count. They took it to the absolute largest extreme. So let me give you an example. One of the things that happens when you have an economy like ours that's based on paper money and where interest rates are set by the central bank and manipulated heavily to the benefit of asset holders. You have a You have a big gap in the yield curve, and G exploited that gap more so than any other business in the world. So what's that buck? What is the largest scale, highest interest rate lending environment that is exists in our economy, where two people borrow the most money at the highest possible interest rate?

Payday loans?

You got me. They did. G did not do payday loans, so I'm But there's not a lot of volume there. I want to talk about large volume. Trillion dollars in outstanding loans,

corporate debt, no credit cards. Oh, okay. Close

enough. All right. So you're talking about annual interest rates on GE's book credit card debt of around 20% and nobody knew that G was in the credit card business because they would do. They would have fronts so they would by the credit card receivables from Target from other retailers. I happen to know Target because there was a big particular credit card deal, remember? But they would Okay, so they had they had credit card debt, high yield credit card debt they would buy. They would also by a lot of subprime auto loans. And eventually, of course, they got into subprime mortgages as well. And again they went to extremes. They're not just doing subprime lending in America. They're doing it in Poland they're issuing. This is true that issuing mortgages the Polish borrowers on Polish property,

but they're using the Swiss franc is the currency. What could possibly go wrong back? Any ideas? So you just saw them take every bit every financial game they could to it extreme. Meanwhile, on the on the funding side, where did they get the capital? Well, they again. They went to the extreme they did. They funded billions and billions and billions of these investments using 30 60 and 90 day loans, they had to constantly roll over. And this all was how they monetize their triple A rating. People thought that G was in the business of building light bulbs and dishwashers and and playing engines. They weren't those things existed. Toe earn a triple A credit rating,

and all of the money they were making was coming from the exploitation of that Triple A credit rating. And it was clear to anyone who bothered to look at the business that all the money they're making came from finance. So that worked great from the early 19 nineties, all the way to about 2007 as that credit bubble built and built and built and then burst. So by the year 2000 G was the largest publicly traded stock in the world, had the largest market capitalization. But almost all of its profits were coming from financial gimmicks, not because they really had great businesses, and this enormous increase in debt made a hero out of Jack Welch. But all he did was borrow more and more and more money, and it worked great as long as that financial bubble was building and the moment it crested and turned over G was cooked. Here's interesting question for you. If you look to the 10 largest sovereign borrowers in the world, so entire countries that have the power to tax G was number 10 on the size of their debts. G E right, a publicly traded private business,

made no sense. And so they're still suffering the hangover from this gross success. And I would argue as I did, and 2010 and 2011 and 2012 and, as I warned about, are starting his earliest 2002 that there is no way this company is actually solvent. It may be liquid still, because they can still borrow money to pay their bills, but it is not solvent. If you were to liquidate the entire company, what you would oh, be worth more than what you owned. And of course, their accounting did not reflect that, as I showed for many years, and it still doesn't.

But the truth of the matter is they've sold all of this stuff they can sell, and what they're stuck with is the problems. The idea that Buffett's gonna come into that morass is crazy. G can't earn enough money right now to pay its bills. It's going to have to do another equity financing. It's going to have to dilute its current shareholders There is no way Buffett is going to buy this stock. No way. Zero pus it chance. Look, that's the company. You bought a smart decision

and sold. I will have, you know. So, yeah, I now I just can't think of the show. Ah, what is it? Ah, 30 rock. The same way. Because they have a character based on Jack Welch. He's supposed to be this finance genius guy, but apparently not.

You know, it's interesting about Jack Welch. I really don't know what the end of the day if he really even understood what was happening. Because he wasn't the guy who's running G capital. There was another guy, and I can remember his name right now. Country club guy, I'm sure can pick it up for us. But if you guys remember from the early two thousands, the guy who ran GE Capital was involved in a divorce and at the time was the most expensive divorce in history. So when a guy working for you is paying $300 million to divorce his wife and you your executive at a publicly traded private business, what the hell is going on? How did it employees make that much money. It's just nuts. And the answer is because G Capital was delivering all of GE's earnings and and they had they were playing all kinds of games, which are now under SEC investigation. But here's what they would do,

Buck. They would say to somebody, Hey, we really want you to buy some of our airplane engines. And the guy would say, Well, you know, your airplane engines, a really expensive in Rolls Royces over here in Europe and I was thinking I was gonna buy their engines and you ago. No, no, no, no, don't do that. We'll give you all the money that you need to buy those engines. What do you mean?

Yeah, well, we have this thingy capital, and so we go borrow money in the 60 day paper market. We pay, like a point and 1/2 and we'll just give you all that money that you need, and we'll keep borrowing to make sure that the loan doesn't get called, so you'll be fine. Well, are you gonna give me all the money? I will give you all the money. Well, then I'm gonna buy your aircraft engines. Okay? Great. Now those aircraft enders get sold and get booked as a prophet to G E.

But where did the money really come from? G Capital. OK, now how is that loan structured? Well, that's what gets tricky. It's not structured as a loan. It's structured as a long term service agreement. We're going to provide service on those engines for 20 years, and that's our price. To do that. It's just a loan to buy the engines. All that stuff has been papered over and lied about, and I know about it because people Aggie reached out to me and said when I was talking about how much leverage they have, they said, You don't know the half of it.

You gotta look into the service contracts and you know that. You know the guy that, finally, the regulator that finally caught the rial corruption of G was a Kansas insurance regulator. Now, let me just point out to you that I don't think the sharpest minds and finance are working as a regulator at the Kansas Insurance Department. No offense to folks from Kansas. I'm just saying that that's not where all of the world's hedge funds find their sharp minds. So my point to you is if it took a regulator from Kansas Insurance Department to finally blow the whistle on G. Imagine how many people in New York were in N on this in some way or another. Either their banks were lending G money or they were financing these agreements or they were getting commissions on the sales. G was the largest company in America, and its accounting is complete. Bullshit complete. How much the Jack? Well,

to know I really don't I have no idea. I don't know. The only time I ever had a conversation with Jack Welch was that a play or a musical? Rather in Manhattan many years ago, almost 20 years ago. Now you guys remember the Producers. It was the hot of the hot show in New York for a season, and

hockey Broderick was

in it. A few broader. Yes, and the heavyset gay singer and dancer Nathan Nathan Lane. Yeah, it was great show anyways. Ah, that was right around when I have started my own business and I had some. I had some cash in my pocket for the first time ever in my life. And so I took my wife for a fancy holiday weekend in New York and we saw the show and I got it's good seats. Anyways. Jack Welch was sitting next to us, and so at intermission we all got up to use the facilities and I end up in line directly behind him. And I don't know if you guys have ever seen him, but he's about four feet tall. I'm not getting and I'm not. I'm not small.

So I just felt like, you know, I was tiring over this guy and we're crunched into this line. The bathroom. And it's, you know, it's a little awkward when you're going to the bathroom and you're like smashing like sardines and everyone's trying to be polite, but it's too crowded. You keep bumping into the guy, and I finally like, you know, basically like knocking him over because some was pushing me from behind and I just looked at him and I said, Jack, this must be one hell of a show if you're in line to pee And he said, You got that right. That's the only interaction I ever have.

A Jack Welch. So but But you know, just the idea that Bubba is going to step into the situation and buy it when it's under SEC investigation. He knows that the county is a bunch of bunk. That's just no chance.

M. It was tied with Obama, right? I remember that there were a few CEOs. I think Burke, who was the head of Comcast, he was very tight with Obama and was animal type of Obama that we

used to refer to. G is the for profit wing of the Democratic Party,

right? I just would wonder if you were to look back in and now with more of the truth out there on more of a recognition of what really happened, how much favoritism. Aiken, just from the government side, know that it was a lot. How much favoritism in terms of policy was? Oh, sure was. So,

like I said, Like I said, when the Kansas Insurance Department is the guy who catches the $15 billion fraud AGI, which is

on Lee, one

of G's problems, that's an enormous fraud. Things for a second right? Enron was the largest bankruptcy of the time. That was 60 billion. That's a whole company going bankrupt. We're talking about $15 billion in losses and fraud from one insurance product at G, which at one point had $600 billion in financial investments. The scope of what is going, what on a G, we're we're nowhere near knowing. We may never know and how many investigations, how many enquiries, how many problems got squashed because Immelt and Obama said, Let's not let's not bring that up now we're in the middle of financial crisis. We need to sweep that under the rug. I don't know,

but I'm sure there was a lot. And who knows, maybe a subscriber, A podcast listener. Maybe someone's out there because,

as you know, Miller,

when a there's no way to hold conspiracy and forever. Eventually it unravels, it comes apart. Everyone starts pointing fingers. Truth comes out.

G had the 57,000 page tax return back in 2011 right in the middle of the Obama administration. If you recall 57,000 page tax return zero taxes on $14 billion in profits, that's pretty amazing.

That's that's pretty amazing. They also had your call. It wasn't enough for ML to fly around the world all the time, on a giant, gigantic Boeing corporate jet,

right? He had to have another one behind him. That's like Saudi royal family stuff right there.

There's there's an extra plane that follows me wherever I go, just in case there's a problem and I can't be delayed.

Is it in F 16? You know, just in case things get spicy up there?

I don't know. I don't think so. It was just another some kind of another corporate jet. Enough was another Boeing or another Gulf Stream or something. But just think about the imperial attitude of these of these people. Do you think that anyone was thinking about the shareholders at that company? Anyone? Do you find the name of that G

Capital guy? George George, George Wendt. George went, Yeah, yeah, we'll do. You find ironic the what Jack is doing now. He's Ah Jack Welch Management Institute MBA program. You know the slogans are become a great leader and help your company win. He's teaching others. I'll sign up tomorrow. I also think that G probably Porter was able to get away with a lot more the safe you're talking about for a long time because it's G E E people think of it like,

you know, they're a bunch of guys, you know, What I liked was that my buddy Jim Grant, Fantastic newsletter writer, he pointed at the For many years, G's corporate slogan was imagined. Imagination at work, and he was like, Well, at least in the accounting department. So here's another thing I want to point out to you guys. This is a little controversial, and I think there's a lot of people out there who would who would argue that this is not the right way to think about things. But it's always occurred to me that if a guy can't be honest with his wife, where if a guy's personal life is sort of always in shambles, that he may not be the person you want running your company,

you know? I mean, I understand. I'm gonna argue that there's no real difference the train, public ethics and private ethics. And you know Jack Welch just I mean, the stories of him interviewing that woman and cheating on his wife and all that drama right when he was putting out that book from the gut, all that stuff,

it's OK because he end up marrying her. I don't

I don't know if it's OK or not. I just I'm just It just occurs to me that a lot of times people that have a hard time managing their private lives I also have a hard time managing fiduciary obligations. That's my only point. And listen, you never You're never inside someone else's marriage. You can't know what what's really going on, but when you've had four of them, let's just say the odds are the problem. Wasn't with the woman just a thought

This week on the Stansbury Investor, our We're joined by Dr Lacey Hunt. Dr. Hunt is an internationally known economist and executive vice president of the Hoisington Investment Management company in Austin. Based for managing nearly $6 billion for pension funds, endowments and insurance companies. Lacey is the author of two books, and his articles appear in Barons, The Wall Street Journal, the Journal of Finance and the Journal of Portfolio Management, just to name a few. He also spent time is chief U. S. Economist for the HSBC Group, one of the world's largest banks, and is an honorary life trustee of Temple University, a native Texan Dr Hunt has served a senior economist for the Federal Reserve Bank of Dallas. Please welcome to the Stansbury investor, our doctor, Lacey

Hunt. Dr Hunt Porter. Stansberry here. Thank you so much for joining us. I want to introduce you to our audience by telling ah ah, story that's weekend details about your general investment philosophy. So please forgive the quick summary. I know I'm skipping over lots of nuances. But folks, the reason why Dr Hunt grabbed my attention is he has had a long term bet and a huge investment and the very long end of the sovereign credit yield curve. So for decades, he and his investment firm have been very well known for owning the longest term US debt that you can buy. And they have written that investment all the way from when yields were very high. Doctor will have to fill in the details about this, but over 10% annually. So where they are now and again, doctrine will have to forgive me for not knowing the exact details.

But where these yields on long term debts got down to around 2% so that those are enormous gains. He's he's done very well for investors. And he's done so and probably the most contrarian way I can imagine by developing economic theory that says that as economies become over leveraged and over indebted, that additional stimulus that has additional government debts do not actually provide further economic growth. They retarded it, and that has allowed him to confidently stay at the far end of the yield curve where any outbreak of a large inflation would be devastating to his investments. Dr. Hunt, can you please, on the most easy and least technical way possible, tell our audience about how you became convinced that long term interest rates and long term inflation was going to decline and how you've been right and why you stuck with it for so long, even till today? Well, I have been trained that was trained in classical neoclassical economics. And, um,

long ago I was introduced to the Riccardi in equivalence. There, um, David Ricardo was one of the great minds, and economics probably did more toe establish. Economics is a profession than even Adam Smith. But, um, Ricardo was asked back in the 18 twenties whether it would have been better to finance the British wars with Napoleon by raising taxes are borrowing issuing debt to cover it. And Ricardo, um, I thought the matter through and he concluded that they were the equivalent. The either way, Um, you either tax the funds from from the private sector, are you bar the funds from the private sector.

Now, Ricardo was, um, candidate enough to know to say that he didn't know and there was no way that we could empirically test whether Ricardo's proposition was right. The economics profession follows Ricardo all the way to 1936. Wouldn't J. M. Keynes reverses Ricardo, and he advocates that there is a significant multiplier that if we engage in deficit financing to of tax cuts or expenditures ah, that we will have this multiplier where $1 of of deficits will boost GDP for $5. Keynes was not candid to say that he didn't really know, and he could not answer the question because at the time, we didn't have the statistical techniques and a computer capacity that we do today. But as a result, off of ability to create long running statistical, Siri's,

analyze them very quickly and test them using sophisticated methods. Ah it. In my opinion, the academic research is unequivocally clear that Ricardo is right and Keynes's wrong, that there is basically no benefit engaged in deficit spending, our financing of other government activities with tax cuts. And in fact, I myself, ah, have published information that shows that if you relate per capita changes in GDP to per capita changes in federal debt that basically what you have is essentially a flat line, actually, the lines slightly negative. In other words, we lose something by engaging in the process. But essentially, Ricardo is right.

And, um so the other side to this question is that not only is there no benefit other than for perhaps a very fleeting period of time, um, a build up of debt has to meet very stringent tests. Uh, debt is an increase in current spending in exchange for a decline in future spending. Well, the debt can be successful, be profitable to those that engage in it to the economy as a whole. But it has to generate an income stream to repay principal and interest. And if that does not do that as you move to higher and higher levels of debt, you will produce weaker and weaker economic growth. And that's another consequence that we have. We have. The academic studies show that when debt rises when government debt rises above 90% of GDP for more than five years, that the economies lose about 1/3 of their trend rate of growth,

well, we moved above 90%. Um, a long time ago. We're currently at 107% by before the end of the next decade because of the debt financed tax cuts. And expect this mammoth budget. It was just this mammoth bipartisan budget. It was just enacted. Ah, government, that is going to be approximately 120% substantially higher than it is today. The academic research indicates that when you're thes high levels, economies lose about 1/3 of their trend rate of growth. From 17 90 through 1990 when we moved into these high debt zones, the per capita GDP growth was about 2.1%. We should have we should have moved down to a trend rate of growth of 1.4.

However, we've we've dropped even more than that. The trend rate of growth now is only about 1.1%. But there was an outstanding academic study done by, led by Dr Philip Rather, who was head of the fiscal affairs, um, Department of the European Central Bank, that when government did moves into these high zones above 80 to 90% of GDP, that the effect becomes nonlinear, that too, you you lose growth at an even faster pace. So, uh, growth, uh,

dead is very detrimental. There is little, if any, gain over the near term, and the build up of debt cuts into economic performance. Now, in just the past several months, I've thought of another way and a simpler way of expressing the problem. And that is to use, ah, the law of diminishing returns, which you start with an economy's production function in production is a function of the factors of production are inputs that would be labour capital. Natural resource is and what the law of diminishing returns says is that if you increase one of the factors, let's say dead capital, uh, substantially,

in the beginning, there will be increasing returns to scale. Our output will rise very rapidly, But as you continue to make disproportionate use of debt capital. The returns will start diminishing than they will flat out, and then they will go negative. And I believe that this is the more comprehensive way to now Look at the problem. And what it suggests is that we're on the path to economic decline. It will occur gradually, and there may be some cyclical interruptions, but the trend is not a healthy one at all. Dr. Hunt, I've got to ask you the obvious question, because when I first heard you explain this thesis and show this data, I was really awestruck and shocked by it. And I It makes so much sense. And the data is so convincing

that I immediately I begin to wonder, you know, why haven't more people thought of this before? And for me, the big breakthrough came after the enormous

monetary stimulus of 2009. When I saw that the Fed was buying up huge amounts of Treasury notes and bills and bonds, I like so many other people, thought, Oh, my Lord, this is gonna be very inflationary. Um, and I expected to see negative returns in the bond markets. And as you know, that's not what happened. The long bond has has has rallied considerably since, you know, wherever the highs were in yields, maybe in 2012 or so and then you saw yours go to new all time lows sense and I imagine that you were still along those instruments and have done very well with your investments. But the question I have for you is what is the difference between the kind of financing that we have engaged in in America and the kind of financing that they have engaged in and Zimbabwe or in Venezuela? Why has our,

um why has the increasing amount of government debts and the monetization of those debts through the central bank not resulted in a loss of confidence in the currency and an end in runaway inflation? Well, it's an excellent question. Um, the there is an outstanding model which is used in all of the leading macroeconomic textbooks of money supply, determination, bank credit termination. It was developed by the late economist Carl Bruner and Allan Meltzer, and what they were able to show is that of the money stock. Him, too, is equal to the monetary base, which the Fed controls times the money multiplier. Now the Fed does not control the money multiplier. The money multiplier is dependent upon on algebraic set of known determinants. The excess reserve ratio,

the currency toe ratio of the time, deposit pressure on the Treasury deposit ratio and what happened? The Fed expanded the balance sheet pie by four times, but the money multiplier, which is an equal partner with the monetary base in the in the money and credit determination process, fell from roughly 9 to 3 and money supply growth did not accelerate. We saw this same pattern in the Great Depression. The Fed can inject the excess reserves into the system, but the banks have to have the capital and you have to have the unlevel ridge balance sheets in the household and business sector to be able to absorb more debt. And so um, the base quadruple. But money supply growth, um, basically remained around the trend rate of growth from from 1900 which is around just slightly below 7%. There were a few times when they were able to get it up a little bit, but then fell below trend,

and so money supply growth did not accelerate. But but money supply itself does not determine GDP. You have to take into account what happened. The speed which money turns over the velocity of money, keeping in mind that the money multiplier and the velocity of money or different concepts and so money supply growth was basically at trend in this expansion. But the velocity of money fell to basically the lowest level since the 19 forties. And, um, velocity is not a very well understood concept, and there are many, many factors that influence it. But the overriding one is the productivity of the debt. In other words, if you if alone is made to someone and the loan generates the income stream to repay principal and interest than the velocity of money will be stable or will rise. But the clock, the massive decline in the velocity of money was another consequence of the fact that we were extremely over indebted.

And so the, um, when when you become extremely and over indebted, not only do the debt policies not work other than for a very brief period of time, and then they create this longer term drag but highly leveraged economies, monetary policy becomes asymmetric. Ah, when the Fed Titans as they are now. In fact, the extreme leverage facilitates the damage that the Fed can do to the economy. And I think we're going to see that if this year plays out. But, um, when when the Fed is trying the feds tools are extremely ineffective, extremely ineffective, Um,

in the current situation, and that will remain the case. Unless, of course, we, um, revoked the Federal Reserve Act of 1937. The Federal Reserve does not have the ability to print money. They do not have the techniques to print money. They do not have the mechanisms to print money. They can increase the monetary base. It will, but that's not tantamount to increasing the money supply. Um, their skills, however,

are still intact. In fact, their skills are intensified whenever that they are engaging in a tightening process. And then the reason they're the skills air intensified is that when an economy is heavily endeavoring to small, increase in interest rates results in a step substantial increase in interest expense. So the indebtedness has many consequences. And as time goes by, the extreme over indebtedness, um, results in some longer term problems of the growth rate comes down, um, family formation population grow. The birth rate are all very sensitive to economic growth. So it we see historically in Japan and other cases that the growth rate comes down in the face of too much debt. Then you get a baby bust, household formation,

bust of population growth, and that serves to to reinforce the weakness. Another consequence. Another symptom of the extreme over indebtedness is that the productivity falls and that's happened if you go back to 1950 when the quarterly data start, productivity has grown by about 2.1% per annum. The latest five years is the lowest five years of productivity growth. Ah, since since 1952 when the data originates and then the weakness in productivity. Ah then undermines the standard of living, which is really disposable per capita income. And if you look at the 10 year rate of growth there, it's now under 1%. It's historically been 2.1% per capita terms, so the standard of living erodes on then that reinforces the negative demographics in the economy. Ah, the economy goes into a long term funk.

And so this expansion was um it was a long running one, but it was the least satisfactory to to people, to their hopes, their aspirations and the debt That was the center part of the problem. Dr. Hunt, Um, I want to get to one other big, big idea big topic. Besides the negative money multiplier and the likelihood of weaker economic growth going forward. And that is I want to explore to two topics that are related. I want I want to know what role you think. Paper money, as opposed to a gold back system has played, if any, and the widening of the wealth gap in America.

And I want to know your thoughts on the likelihood or risks of a debt jubilee in America. Ah, and I think those two ideas there are are fundamentally related. So the first question is, do you think are central banking system our monetary system that has been in place on various degrees since 1913 but a full paper way since the 71? I believe Do you think that is contributed to the the collapse and correlation between productivity and wages and our economy and in the resulting wealth gap? Well, if we go the most critical step. And this is an excellent question. A porter. Ah was really 1971 when Richard Nixon, um, and taking undertaking the new economic programme closed the gold standard. And I will tell you in all candidness a. So I was two years out of my PhD program. I supported,

and it was a great thing. I believe in free markets, and I wanted the currency markets to fluctuate like everything else. Unfortunately, when when we were taken off the gold Reserve standard, um, it puts the fluctuations in the dollar on the back pages of the newspapers. And so it has been freed, Ah, Congress and the monetary authorities to really make bad decisions because up until that time, when bad decisions were made, the dollar fell and the policy makers took note of it. And so one of the unintended consequences of closing the gold window was that it resulted in increasingly poor monetary and fiscal policy decisions, something that I didn't anticipate. Neither did Professor Friedman. In other words,

the one Rutter, the one barometer of while of sound or unsound policies was gone. And so I think that the floating exchange rates Standard did not work well for us, did not work well force at all. And what was what was the second question again? Portal. I wonder about that specifically about a feature of the failure of the system in my mind has been the the strange and amazing collapse between between correlations between the tight correlation between productivity and wages. So you've had now a 40 year period where wages in real terms haven't increased at all flatlined for four decades. But productivity has maybe not at the former pace. As you pointed out, that productivity has continued to grow. Ah, it's it's ah, it's been a very, very strange gap in the way that our economy usedto work. I make I make as a possible to give you an example.

I would make the point that what resulted in the end of slavery around the world was not really morality, but economics, that as productivity increased, people couldn't afford to have slaves anymore because, you know,

the the slaves were the least productive of the workers, and the other workers were too valuable,

so we had to free them so that they could be productive. And so you know, this increasing human productivity has played a huge role in human history, development, economic growth. Well, it's It's the source of all these things, and our wages no longer transmit that growth equally and are fairly among always earners. And I see that the that break in that correlation in the early 19 seventies and I don't believe it's a coincidence. Well, here, here, um, you make a sound case that there is clearly a link between the ability of firms to pay higher wages and the rate of growth in productivity. And I have estimated a lot of those functions myself. I was trained in Econometric model building built, large scale models for more than a decade.

My career. My doctoral dissertation was large scale econometric model. The, um, the key factor. Ah, is the rate of change in productivity. It's not whether it's going up or down, but it's the speed in which is going up or down. And if we have some time, I'll sit down with you and show you some of this work. And so the Aziz we've come down from rates of gang that were well above 2.2 point 1% in the fifties and sixties. Toe where we are today running 10.9% that tens over time to limit the rial wage gains. It's not the only factor. There's a lot of moving parts, a lot of moving parts.

But in more recent years there is, um, the the impact of the aggregate supply and area demand model. Now, Hagrid supply curves like all supply curves, air upward sloping firms. They're gonna provide more goods and services. The higher the price theory demand curves downward. Sloping agri demand equals GDP. But GDP also equals money, times velocity and so algebraic lee. In the final analysis that aggregate demand curve is whether it shifts outward and produces higher inflation, including higher wages, or whether it shifts inward, ultimately is going to be determined by what happens to the radio growth in the money supply and velocity. It's just the same thing and in.

And in fact, if you were to ah, look at the, um, uh one of the leading text in macroeconomics by former chairman Ben Bernanke and Professor Abel, a warden, when they draw the downward sloping demand curve. Ah, the algebraic Lee show that in the final analysis. It's equal to money. Times velocity. Well, I have to admit, I have to admit, Dr Hunt your your way up of my head, but it's it's a point that everyone needs to understand.

And so what's happening is that money supply is not above trend. It's now well below trend because of the tightening process. But the velocity of money is declining, which means that over time the aggregate demand curve is shifting inward and all prices will rise at a slower weight and include including wages. In other words, the weakness in wages is another symptom of the extreme over. And did I have? I have a simpler way of understanding it. I'm sure that if you drew a bunch of algebra around what I'm saying and and curves we we'd end up at the same idea. But it seems to me it seems to me that when in our economy, when things happen like companies taking on huge amounts of additional leverage to buy their own shares, that the benefits of those decisions in the real world accrue toe asset owners and that asset inflation is enabled by the paper standard because credit can grow way in excess of savings because of that. But those same benefits, even if their temporary do not accrue to the average wage earner. And and I'm sure, like I said,

if you were to map all that out economically or econometric Lee, we'd end up in the same place. But the rial riel, point me. I think we're on the same wave link. I absolutely do. Thank you. But the real crux of this issue is the second point of my question, which I wanted to give you time to respond to. And that is that. I know the is a growing sense in our country that the social construct in America is not fair, that people see some folks the Diderot e, if you will on the financial leaders of our country and the CEOs just enjoying unprecedented prosperity and wealth. Hell, they've got cars that can drive themselves and solar panels on their roof. But the average worker,

the 60% of America, if you will, because I don't believe in the 1% 99%. That's nonsense. But the the 60% of America has seen its standard of living decline for 40 years and The question I have for you is these policies whether, whether you think fundamentally they're triggered by central bank policy or whether there or whether they're triggered by just over indebtedness, regardless of who is responsible. Ah, those have rial political and social consequences. And the question I have for you is in your studies about over leveraged economies, what role, if any, does it debt Jubilee play? And that idea I'm sure you're familiar with it is that maybe you can reset the economy just by allowing certain borrowers to further debts to be completely forgiven. And and do you think that is something that could ever happen in America? I do not unequivocally,

I do not because you would collapse the banking system because the banking system, the insurance, financial institutions, all whole home have issued the debt and it would not be not be sustained would be a chaotic situation. Now, if you go back and look at um so you look at the mess, but a me in and Roman empires and some other smaller dictators, um, these these economies basically were very great, very flourishing world empires the time, but they collapsed under debt. Now um as they were building the dead up. There were instances in those cases where there were dead jubilees in some kind. In some cases, the there we didn't have banks in those takes, but we had money.

Lenders. We have money, lenders and what the emperors did or the dictators or the kings, Or what have you did? In some cases, they were building up the debt. Ah, they would. They would kill the money lenders or the equivalent or force them to do these changes. But as as time went by, uh, no one would lend to them in the future. And, um, let me just give you a more recent example. We we have.

We've had earlier periods of extreme over indebtedness in the United States. We had a massive build up in debt in 18 twenties and 18 thirties. The panic year was 18 38. Martin Van Buren was president. He had no idea what hit him. We had another massive build up of debt. In the 18 sixties and 18 seventies, it started building the transcontinental railroads, and then the industries that fed them was over speculation over consumption, much as we see today just exactly the situation you described. Ah, there was extreme inequality. The panic year was 18 73. Grant US president. He has no more of an idea what hit him than men. Buren did in 18.

38. And, um ah, lot of the debt was actually, um, underwritten by state and local governments to participate in the railroad boom and so forth. And I just had has had the canal building and the building of the original steamship lines and railroads in the 18 twenties and 18 thirties. And, um, a lot of state and local governments failed. Federal government did not fail, but state and local governments failed. And, um, has a consequence. Um,

several things happen. Number one when the state and local governments, um, I had to rewrite their constitutions and agreed to operate with a balanced budget. But even with that credit was denied to them for many years. Creditors memories air very, very long and, um of eventually we forgot that experience. But, um, in my in my view, given the complexities and the wealth laws and the undermining of the financial intermediaries and even the corporate sector, which are all job providers that that's simply not a viable solution. Well, I don't know if it is viable or not, and I certainly hope that it doesn't occur.

But I think you're going to see more and more political demands for it. I think you will, because the social, the social fabric, is frank. No question that it's frank and you have and you know what we're seeing. We're seeing a major divergence between the standard of living on the top quintile and the upper portion of the second quintile compared to all the rest. And that's not only evident in what they're earning, but also in what they're saving. We. The saving rate currently is is just slightly above 3% since 1900 its averaged around eight a half percent, which is bad enough in its its own right. But the evidence indicates that all of the saving at all of the 3.33 point 4% of saving is in the top quintile. No net saving in a lower for so that all of this doctor hunt leads me to my ultimate question. I know that's something you must think about quite a bit. You we have this economy that is unsustainable,

and that has a nugget of multiplier. Therefore, as the trend line extends its, it's heading to crisis. And at what point do you therefore abandoned your long held investment and the sovereign long bonds? Well, it's conceivable I This process of, um of ah, debt decline is very, very long. And the it would remember that the the the element that would destabilize it would be a protracted weakness in the dollar. But the dollar is, ah, funny animal. I mean it. Ah,

and the way the dollar is viewed. And although our situation with regard to debt is much worse than it's been, historically, we're not, uh, even close to being the most over indebted country in the world. Our public and private debt in the non financial sector is about 250%. China has surged above us. It's a 300. Yeah, the dead growth in China the last decade has just been maybe unprecedented history. Have you ever seen anything like it? No. And by the way, if if I'm correct, the law of diminishing returns applies to the build up of debt and the increasingly weaker and weaker returns to GDP than it does not matter that the Chinese over the debt largely to themselves and they have the command and control economy,

their results are going to be weaker. And the dead in Europe is higher than it is in China, and the dead and in Japan is the highest of all. And so the in the in this terrible choice, when investors look around the world that these fundamentally, longer term trends there is not a compelling case to be made for selling the dollar. Now it would become spelling if, um, the the U. S. Economy became mawr highly leveraged than the others. And the dollar could then go into a tailspin and that that could lead to, ah, what has been referred to as the bank point and that that would be inflationary. Um, I would just give you one little quote from pretty smart fellow.

Um, His name was David Hume. My professor said that the Enlightenment could not have happened without David Tune. Hume was mentor to Adam Smith Smith, who was smart fellow, uh said that Hume had the greatest intellect of anyone that he met Human New Benjamin Franklin, the neuvolt Airy knew all the other figures of the Enlightenment. Um, Hume. It was assumed that Albert Einstein gave credit for the inspiration to the theory of relativity. Human was not just a political scientist economist, but human knew everything there was to know in the world his father and it had insisted that he be this type of person. And in 17 52 Hume wrote to papers you can easily obtain one called of money. The other called of public finance enough money he gave us, um, the equation of exchange.

He didn't write the equation of exchange down, which says that G p equals money, times velocity. But he clearly understood the concept. Fisher wrote the equation down in 1909 but he also wrote a companion piece of public finance, and he looked at all of these great examples of extreme over indebtedness, particularly in Mesopotamia and Roma, as well as a number of lesser known cases that none of us remember exactly. And toward the end of public finance, Hume left us with a summary conclusion, and this is what he said. It's a very precise statement when a a state has mortgaged all of its future revenues. That's to me a pretty clear statement indication of, ah, a sharp mind when a state is leveraged all of its future revenues, the state by necessity,

lapses into tranquillity, Langer and impotence, which is consistent with, of course, the evidence that we're receiving today using much more modern techniques. It's one of decline, and at the very end of the process you can have a bang point and rising inflation. But in the current international settlement, in a current international situation, the dollar is a least. The U. S economy has a least worrisome debt situation in China, Europe in Japan. So we're relatively less broke than everybody else. That's correct. Their smaller countries that are better off,

but they're not in a position to absorb the the flows. I'm gonna go ahead and say that Dr Hunt is by far the most intelligent guess we've had on the podcast to date. And you have it, you giving that you've given us much to think about. Maybe in the future, someone will say the What's the current version of the Enlightenment that the technological revolution would not have been possible without the thinking of Dr Lacey hunt. Sears. Sincerely, thanks very much for your time today. I don't know what I had been asked. Better questions, more thoughtful questions. I'm flattered, and I'm looking very much forward to having you other conference and being introduced, being able to introduce you to our audience in person. So thanks again for joining us. I'm looking forward to it as well. All right. Thanks again, Dr Lacey.

Thanks everybody for writing to us this week in the mail bag, filling up our inbox with useful feedback. People like Mike L. John W. Stephen W. Blaine, B. C. J. And Dennis H keep the comments on questions coming. Please. We love to hear from you feedback at investor our dot com, and we even got some other ideas to get some other ways of hearing from all of you. We should set up a Stansbury Facebook account. By the way. Porter, we should get that going.

So Larry from Maryland is coming in coming into the mix here. He writes, Porter, you have been a student of buffet for some time and produce some insightful analysis. What is your prediction for Berkshire when Buffett and Munger leave? Will they break it up. Pay out a large dividend. Thoughts would be appreciated.

Uh, when they leave, they're going out in the box. I'm pretty sure, um Unger's 94 buffets 87. I don't know what their life expectancy is, but they've got They've probably each got a 10% chance of dying at any at any year. I mean, that's the normal mortality for those kinds of ages. Um, by the way, I don't I don't wish them death. I mean, I think they're both very nice people. I just think that they have made some very important mistakes and how they've allocated capital. And I think the solution is very simple. I don't know what will happen because I don't have any insight to the board members at Berkshire,

and I know that Buffett would prefer the company not be broken up, But I think you could make a very compelling case that would be much better for shareholders if Berkshire were splitting to businesses. One is a industrial conglomerate, essentially an unlevel General Electric. So the railroads, they car manufacturing, they what do they are? What's up? They make all kinds of stuff. I don't want to get into the details. They are industrial businesses, and that probably is worth something like 150 billion. Something like that. Oh, they got the big energy company, too.

So that's a very highly capital intensive, very secure business that you would that you could load responsibly, not like G did. You could load responsibly with long duration fixed rate debt so you could leverage that business 75% to equity. So you know you then you have a very good business because, yes, it has maybe a 5% return on investment capital. And it has maybe, ah, 10% or 12% return on equity because of the leverage. So it's it's a It's a nice, very stable business that's growing alongside GDP and pays a big dividend. So it's the kind of business you'd want to own if you were retired and you needed safe income fine. On the other hand, there there Ferrari is there. Is there insurance companies and their best in class consumer brands,

businesses and those businesses Air typically owned is equities not directly, although see's Candies under claiming there's exceptions. But basically you're talking about your American Express, your Coke um, your Apple stock, all that stuff and your insurance companies and that company you you can't leverage at all because it has to have all that insurance float ready in case of a catastrophic insurance claim, and so that business would be very different. That business will be very volatile, and it would revolve around insurance underwriting and investment returns. But that business is the one to own. That business is the one that can that can really double your capital every five years if they're managing it well. And they did for years and years and years. I know someone could do that again for them, but that that company can't deliver growth to investors as long as it's shoehorned alongside that big giant anchor of those industrial

businesses. Next up, we've got James, which fun fact is actually my first name as well, Hello, Porter and Buck. I can't remember which guessed it was that mentioned Boeing, but it was Porter himself that brought up Facebook in a recent episode, in particular that it's correction provides a good opportunity to buy more shares of a capital efficient company. Here's the rub. I get the impression that Porter is somewhat libertarian. Many libertarians condemn war on the military industrial complex as they do big brother style surveillance. Boeing and Facebook are prime examples of what libertarians seem to be against. So how does Porter approach this subject? Is investing a politically and morally neutral sphere of your life? I'm not passing judgment. I just want to hear your thoughts. Keep up the great work, James.

That's a great question, James, I will tell you that I don't perceive Facebook is doing anything immoral whatsoever. Facebook certainly doesn't make any weapons, and it doesn't force anyone to agree to its terms of service. So if you choose to allow yourself to be monitored, then that's not surveillance. That's just participating in a a marketing company. And I actually appreciate Facebook tracking me and watching what I'm clicking on and understanding what my friends like and knowing what demographic I'm in because they conserve me, adds that I'm gonna find more attractive and more useful. And I don't I don't object to any of that advertising on Facebook. I never have. It seems totally innocuous to me. You know, people believe that Facebook is going to manipulate my political views That's just nonsense. I don't I don't buy into that all. I've had the same political views since I was 24 years old,

and I can't imagine them ever changing. Maybe they will. But it won't be Facebook that does. It will be a book that I read or a person that I meet or a place that I go and regards to Boeing. I think you make a much better point, and I I don't have any defense of investing in Boeing. I personally probably would never own Boeing because I would have a lot of more moral qualms about owning a business that designs weapons that air used for aggression. And I can imagine the folks who were military folks in America going crazy. You know, um, if if And this is a big if, you know, if we lived in a different kind of country where we armed our citizens and we defended ourselves and we didn't attack other countries and we weren't militarily aggressive, uh, you'd be, you know,

would be much more comfortable, their own Boeing on the eso. Then there's 1/3 thing, which is that nobody pays me for my morality or my ethics. They pay me for my financial research. So as a professional, I leave all that stuff aside and I tell people what stocks I think you're going to go up the most. It's that simple. And then I leave the ethics and morality up to the reader. Just kind of like I I would about, you know, Jen, I I like alcohol. I drink gin. Not every day, but what I drink.

I I'll have a gym, but I don't smoke marijuana. I can't defend it. It's It's just just how I It's just what broke down to me. It's what made sense to me. I like this drug, and I didn't like that drug, and I'm not pretending that they're they're any different or that one's better than the other. It's just my choice. But if I was writing a spirits guide, I wouldn't worry about the ethics of whether you smoke pot or you drink Jen. I'm just providing a guide, and that's what I do in publishing. I provide a guide to finance how you use that, whether you do so ethically or morally, and and how you set up those rules for yourself. That's just none of my concern.

All right, Last one for this week, Brian writes in Buck Porter and Bill Shaw. Bill was featured on your podcast sharing what he witnessed in subprime auto loan markets in Baltimore. What caught my attention was that most, if not all, vehicles being pounded due to loan defaults were junk cars with over 100,000 mileage. Maybe the used cars with relatively much lower mileage are being bought by legitimately qualified consumers and that the banks or the lenders already factored this into their strategy. Your input will be appreciated, especially at this time when the stocks, like car C A R H t z f, are climbing up fast.

You lost me on the stock symbols. What, uh, you mean Ford F and car is Hertz or Avis? Avis and Hertz is HDZ. Okay, Um, so it's a very, very interesting observation, and I would tell you that the reason why most of the cars that are repossessed have over 100,000 miles or are our old for both is because that entire business is just a giant fraud. It's not a real business. Those air, not real buyers and those are not real cars, and this is a whole game of what? Of what people call predatory lending. Now I don't believe in predatory lending, so I know I'm now talking out of both sides of my mouth.

What I'm saying is that this this business has no functional economic redeeming value. It's not helping the lender. It's not really helping the borrower. It's It's kind of like the payday loan business, right. It only exists because people are desperate. They're not making any kind of sensible financial decision. They need a car this month, period. They don't expect to keep it same thing with the the rent to own furniture places. It's just it's a kind of business that we don't really understand, cause we've never been that financially desperate. Do I think people should have the freedom to engage in these transactions? Yes, I certainly do. You should be responsible for yourself,

and if you want to borrow money at 600% interest rates, knock yourself out if you are. If you are dumb enough to lend to people in those terms, you're going to spend the rest of your life chasing them, and that's what that's what these people do, it's it is a business, and it's part of a free society. But I think it's abhorrent for both. For both people. I think it's a waste of time. So I don't invest in these kind of companies because they never last. They was like, As I like to say, guys doesn't scale. Can you make a lot of money with a payday lending operation or subprime? Otto operation?

Yeah, if you're a local business and you really keep your costs down. Yeah, you can. You can make a lot of money doing it. Can you scale that to a national chain? Can you become the Starbucks of payday lending? No, it doesn't scale. You end up just having all kinds of problems because you're dealing with the worst kinds of people, both your employees and your customers. So my advice to you is the same advice that and Ran gave on the Donahue show many years ago. Phil Donahue, famous talk show guy Buck way before your time asked I and ran. She was explaining her philosophy of freedom and Objectivism, and Phil said,

Well, what about the poor and I and said Don't be one of them. The poor have always been with us. They will always be with us. But you don't have to be one of them. And that's the advice I have to tell you about sub prime borrowing of subprime lending.

That's gonna be it for the mailbag this week. Everybody, keep your feedback coming right to us. Feedback at investor our dot com. We use your question. We will send you some goodies, courtesy of Stansbury Research. Love us or hate is just don't ignore us. Thank you for listening, Mr Porter. Thank

you, sir. Mr. Bucket was always a pleasure. And guys, thanks for listening, toe Lacey Hunt. Um, we probably won't have many economists on, but I hope that you'll think deeply about what he's saying in general, about the way that debt is forcing our economy into a death spiral. And take heed of that advice and think about it and use it in your investing. That is all. And

with that cheery note, we will see you all next time. Thank you for listening to the Stansbury investor. Our to access today's notes and receive notice of upcoming episodes. Go to investor our dot com and enter your email. I have a question for Porter and Buck. Send them an email at feedback at Investor our dot com. If we use your question on air, we'll send you one of our studio monks. This broadcast is provided for entertainment purposes only and should not be considered personalized. Investment advice, trading stocks and all other financial instruments involves risk. You should not make any investment decision based

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