Wonderful interview! Thanks Lyn, Eric & RV!

Really great interview, both Lyn & Eric providing incredible knowledge and analysis!

A farmland reference, nice Lyn. Gold with a dividend.

A clear and rational framework, if perhaps a bit conventional. To play devil's advocate with some off-the-cuff thoughts, I see evidence that traditional macro frameworks are headed for a crisis. By that meaning, many standard assumptions about how things work in a macro sense could be turned upside down, blown sideways, or otherwise completely invalidated by new developments in the next few years. To possibly spur some conversation, here are a few hypotheticals as to what I mean: — Structural inflation destroying the all-weather approach. The whole concept of a 60/40 portfolio, and the risk parity / all-weather concept in general — where bonds provide ballast for risk assets — is dependent on a disinflationary environment (where inflation levels are falling). The whole risk parity approached worked because it was conceived and executed in a disinflationary, lowflation era; with inflation rising and yields rising, it doesn't work anymore as a concept because the bond component is no longer desirable. And so, if we enter a period where inflation levels and interest rates rise structurally over a period of years, the 60/40 portfolio concept will die, because 1) bonds and equities will start moving lower at the same time, rather than bonds moving inversely and 2) the bonds will provide downside risk, but not upside return (as inflation erodes their value with interest rates rising, not falling, in a multi-year or multi-decade trend). — The tech deflation thesis up-ending socio-economic stability assumptions. If Jeff Booth is right about the accelerating pace of technology in areas like renewable energy, machine-learning, automation and so on, we are going to start seeing mass job losses at the margins (including in white collar jobs, as the top quartile triples its productivity and the bottom half gets fired) in the next few years. The tech deflation thesis is also a huge driver of wide inequality, favoring capital (those invested in technology / shareholders with a piece of the digital machinery) versus labor (those without jobs or a invested savings). The tech deflation thesis is accelerating by nature as computation power increases at a geometric rate; that means it could start up-ending societal assumptions as we know them (via extreme inequality and job loss) in the next few years. This will also happen around the same time a multi-trillion pension fund crisis kicks in (likely in the next bear market) and with 50% or more of baby boomers heading into their retirement years with no money. Basically, due to the tech deflation thesis, imagine inequality levels so extreme (far moreso than today) that the societal structure as we know it from the 20th century no longer works — because too many people are unemployed and angry for society and democracy to function. Such a setup would demand an intervention for democracy to survive. Which leads to... — Forced MMT. I would argue we will enter a period of what one might call "forced MMT," in the sense that MMT will be coming whether we like it or not. This will happen because the tech deflation thesis will drive ever-greater levels of inequality to ever-greater extremes, and the millennial generation — which is basically broke — will increasingly vote for pro-MMT candidates and MMT-like policies. Indeed we are already seeing the early seeds of de facto UBI in repeat-structure fiscal stimulus packages. The people like $2,000 checks whether Democrat or Republican; they will want them on the regular; so the question then becomes what does MMT do to the macro when it gets here. The upside of this is that pro-MMT thinkers, if perhaps naive, are a lot smarter than most of their critics give them credit for. One could see a provocative marriage of pro-MMT policies and Central Bank Digital Currency (CBDC) innovations, for example, where the Treasury uses CBDCs not to just hand out money, but to, say, fund municipal programs where work programs are created at the local level, in response to local needs. The idea behind Forced MMT is less to endorse MMT than to say, "hypothetically assume this is coming no matter what; what would that mean and how to make the best of it?" — Structural inflation generated via policy reaction function to the tech deflation thesis (forced MMT). I am becoming increasingly convinced that the long-run forecasts for deflation are wrong because deflation will be too big a dragon not to slay, and governments will go overboard by necessity in slaying it. To put it another way, the deflationary impulse of the tech deflation thesis will be too big for governments to ignore; that in turn means that governments will overshoot the mark in fighting back, which means you get structural inflation as a result of their overshoot. To wit, if the tech deflation thesis and aging demographics creates nasty deflation, the government winds up fighting back with various forms of MMT, which becomes ever more politically popular as millennials replace boomers in the voter rolls; that in turn is a forecast for structural inflation, because the medicine ultimately becomes stronger than the malady. — Fiscal dominance for the next few decades. Fiscal dominance — the paradigm in which fiscal spending dominates everything else, and the job of the central bank is basically to manage the fallout from heavy fiscal spending as artfully as possible — could become a major theme for the next 10-20 years, for reasons just described. Forced MMT and prolonged fiscal dominance are basically the same thing; the tech deflation thesis could necessitate the arrival of both as a means of keeping society from tearing itself apart due to rampant inequality issues, as the haves see an ever-widening gulf with the have nots. — Monetary velocity becoming irrelevant. Oh, and last not but least, traditional measures of velocity could become useless very soon, if they are not useless already. This is due to the outsized influence of the shadow banking system (which traditional velocity measures do not track) and the added outside influence of a crypto-based decentralized finance system (which traditional velocity measures also would presumably not track). One could argue velocity as it stands is more of a red herring than a useful indicator, to the extent it doesn't even include really important activities like mortgage lending, and to the extent the shadow banking system may be adding cash to the system, suppressing traditional velocity measures even further; this gradual degradation of velocity as a measure might explain why M2 velocity has been falling since 1997 — it's broken as a measure and will only get more broken. https://fred.stlouisfed.org/series/M2V

What if someone told you that money velocity (i.e. GDP/money supply) should naturally fall over time as money supply is increased drastically? If true, that assertion would reveal just how flawed money velocity is as a measure of economic activity or of inflationary forces vs deflationary forces. Consider the following simplistic ratio: Economic Engine/ Money Supply. Now lets use conventional economic factors of production to approximate the numerator, Economic Engine (E): E = (Land + Labour + Capital) x Technology Innovation Factor. Of these factors, the one that can be most quickly and directly increased is of course Capital (debt + equity). If you need to see how quickly the capital factor can be increased, just look at some of Lyn Alden's charts of how quickly govt and corporate debt has increased of late. Well, with that increase in debt (to finance Covid assistance programs and deal with what is hoped to be short term liquidity issues), the money supply has also sky rocketed (see Lyn's charts again). The result is that only 1 factor (capital) of the 4 factors of the Economic Engine has been immediately and significantly increased. That is only 1 of the 4 parts of the numerator in our equation has increased: E= (land + labour + CAPITAL) x tech innovation factor. By extension, the productive capacity of the Economic Engine has only been 'fractionally' increased with the instantaneous injection of capital. Thus GDP will have only 'fractionally increased' with the injection of 'Covid Capital'. At the same time, the denominator (i.e. MONEY SUPPLY) in our money velocity equation has increased much more in percentage terms than the numerator (GDP). The result is falling money velocity. So in a time of rapidly expanding debt and money supply it is a mathematical truism that money velocity should fall. Money velocity is a flawed concept: it doesn't say a damn thing about whether the new debt is used productively or not and whether price inflation occurs or not. All it tells us in a time of rapidly rising debt and money creation is that the economic engine and economic production capacity of that engine is smaller relative to the supply of money.

Goodness gracious. This interview is SO GOOD! Eric is going on my radar right along with Lacy Hunt and Lyn Alden.

This interview is wicked smart. Lyn and Eric are both such good communicators. Eloquence, man. It's real.

I need Raoul interviewing Lyn or vice versa! Lyn has became my fave! Thanks

Two of my favorite young, very bright and energetic people. Lyn is great on either side of the interview.

Brilliant

Lyn - would love to hear you talk to Russell Napier. He did an excellent MacroVoices interview last week. I think the two of you would have a fascinating conversation, particularly as it concerns inflation. Would be very illuminating for all of us here on RV, I suspect. Thanks & Best, Jesse.

Very interesting point on farmland prices, and their correlation to the broad money supply. Thanks, Lyn.

Good conversation, and interesting thinker / analyst, but many theoretical assumptions being made here which do not correspond to the real world of human behaviour and economic history. One case in point: to say that an investment is "productive" if it has a good money multiplier and generates an uptick in velocity is an oversimplification, I think, as it does not account for periods of economic history where systems are chaotic, dysfunctional and cronyist (like today), where e.g. storing one's wealth in precious metals is wise, despite generating probably a low money-multiplier and relatively little velocity. There are those funny times in history, and we are IN one, where seemingly "unproductive" investments like precious metals, land, food, etc., with zero or low yield but greater security, independence and value, are actually productive in nature in the long run. This is by no means a criticism of the guest, just a statement that one has to be very mindful of the limitations of economic modelling and metrics. I know this first-hand, given my own career background as an engineer. Thanks again, Lyn and Eric. Best regards, JH.

All signal. No noise. No hat. All cattle.

Great interview. One question on the End Game. What is the end game? Will the same thing that happened to Europe happen in US, more taxes, more social programs and wealth gap narrowing. I feel that seems to be the end game . It might take 20-30 years for that to happen though

Tremendous! Emerging human talent treasures for your generation!

Brilliant discussion!!!!

With about 49:30 left: 'If US ran less of a trade deficit, or foreigners bought less of our debt, that would need to come out of our GDP equation and I believe it would come out of our private domestic investment'. This is straight out of conventional economic theory's "National Saving and Investment Identity". https://opentextbc.ca/principlesofeconomics/chapter/23-4-the-national-saving-and-investment-identity/ Seems harmless enough to use this identity because we've been trained to believe that money for investment comes from saving (like a household). And over a long time it sure seems to make sense even for a govt to adhere to that kind of discipline.......... But money is created out of nothing by private banks, who are being incentivized to make loans by new and inventive govt guarantee programs. Or the govt gets involved directly through special lending vehicles with equity from the Treasury, juiced by FED loans to the SPP. And then there is good old fashioned Fed monetisation of Treasury deficits to fund unemployment benefits or a big infrastructure package, etc etc. I don't think the text book "National Saving and Investment Identity" limitations can hold up in the short term to the new world of govt directed loans and Fed facilitated govt spending. I'd guess that Real Gross Private Domestic Investment could hold up for quite a while if the 'new paradigm' money creation continues. https://fred.stlouisfed.org/series/GPDIC1

I always read Eric's article's on seeking alpha on a regular basis and I encourage people to do so. He provides lots of excellent information and research. Please bring back Eric to RV. Make him a regular guest on the platform. Maybe we can ask him to contribute to "the exchange" if he is willing.

Really surprisingly excellent interview. No fluff, no ego, no unsubstantiated statements. Just really targeted questions followed by well informed answers. This guy has such a solid understanding of economics, markets, and human behavior. I never comment but this one merited it. I need to subscribe to whatever he is putting out. Lyn also does a great job bringing the best performance out of her guests and stepping out of the way so they can shine. Two very gifted people here.

Lyn and Eric, thank you both for the great discussion.

There will be forced austerity ahead. Eric and Lyn do a great job in this interview, though. I can absolutely see upwards of 40T debt for the US ... but then currency crisis is in full play. Fortunately, BTC will be worth towards a half a million by that time, and people are still sleeping ...

During a pandemic/economic crisis the main goals are to end the emergencies while keeping citizens alive through to recovery. Populist on the Left and the Right will not succeed. If we cannot govern from the middle, we will fail. DLS

Outstanding interview and interaction !!

Thank you. A very smart interviewer and a very smart interviewee (sp?) led to a 1 and 1 =3 outcome. One of the best. Did you notice they never mentioned bitcoin?

Well done. Strong analysis. Thanks. DLS

Great interview. Bring Eric Basmajian more often, he explain his view very clearly. Thank you Lyn for this interesting interview.

Sounds like a Hedgeye subscriber. GIP!

This pretty much aligns with Hedgeye quads framework

Excellent interview! Great macro pairing

2 of my favorite people to listen to! Thanks realvision!!!!

One of the best interviews recently, thanks Lyn for bringing Eric into the fold. Be great to see a real time breakdown of how Eric is using economic data and his models to construct a high conviction longterm trade.

Lyn knows her stuff, and I found this interview to be illuminating particularly the part that butressess a longer-term thesis of mine regarding cities and how demand in housing is being pulled forward. I'd love to see Lyn do more in the crypto channel - they need her kind of analysis, its a bit of a dog's breakfast in there.

The velocity of money is just nominal GDP divided by a money supply. Dr. Friedman agreed it is interesting - maybe Oedipal economist; the game is afoot. It is funny how anecdotal economist choose thesis confirming statistics. Thanks for sticking up for the velocity of money. It is just one of many things to look at. DLS.

I would suggest that total debt during a pandemic needs to be adjusted for all debtors trying to remain solvent for the expected length of the pandemic. This is especially attractive at very low interest rate on long term borrowing. A simple example would be a corporate treasurer cutting expenses and borrowing on the B/S to remain solvent for at least three years with ten year loans. Any excess after the pandemic will be paid back to more operational debt level. If the GDP is falling the debt/GDP ratio is affected even more. I cannot quantify, but this should be part of the thinking. DLS

Excellent Interview!

Excellent interview - jam packed full of actual data and analysis! Please have this pair (specifically this pair as they go so well together (they both have an excellent handle on specific data)) back on RV on a quarterly basis for timely updates. Thanks!

Wow. Concise, linear and full of insights.

AWESOME INTERVIEW!! SUPERB!! CHEERS!@!