This past December, ahead of the 80^th anniversary of John Keynes’ General Theory, I sat down with renowned macroeconomist and investment manager Dr. Lacy Hunt to talk about debt accumulation, slowing aggregate demand (he says the two are closely linked), and the possible ways both can be overcome.

Because Keynes’ ideas of using monetary and/or fiscal policy to stimulate an economy worked through debt-financed spending, it should be no surprise that debt has risen relative to the income that services the debt.

Debt accumulation tends to become a large claim on future income, which reduces future spending. Lacy argues debt is associated with a slowing of aggregate demand, making it disinflationary in nature, which in turn depresses growth, inflation, inflation expectations, and interest rates. Presently, $2 trillion of US debt is scheduled to be refinanced in the next two years, but if it’s refinanced at a mere one percent higher rate, it would reduce economic growth by 1 percent of GDP.

This is exactly how debt slows an economy.

What’s more, diminished growth rates depress population growth and productivity because of a lack of business investment. So, the full range of effects are not just to aggregate demand but also to aggregate supply.

The debt load has transformed the economy into something we are not familiar with — a sluggish stuck economy. Furthermore, debt accumulation compromises further use of monetary and fiscal policy as the standard multipliers have been defused, if not turned negative.

Given these difficulties of generating growth in aggregate demand, President Trump’s proposals that speak to aggregate supply hold more promise than debt-financed spending.

These are the cyclical issues, but debt accumulation raises many core secular problems as well. In the larger picture, debt has accumulated to the point where it has created a self-reinforcing process of giving rise to yet more debt. Given the propensity of debt to generate more debt, Lacy and I discuss likelihood that markets could price sovereign risk rendering the debt less sustainable.

Given those possibilities, Lacy addresses the means by which government debt might be contained or dissolved, as well as the ramifications of money issuance as an alternative means to handle future unfunded federal obligations.

Additionally, debt loads are also affecting other countries. In that regard, Lacy contemplates the benefits to some EU members if they were to withdraw from the Euro.

Lacy Hunt has been called a bond guru. He’s the chief economist and executive vice president at Hoisington Investment Management in Austin, but he cut his teeth during the days of Richard Nixon and the Great Inflation. Here, he offers his frank and forthright assessments of the issues facing the US economy and all of its participants. His insights are nothing short of profound. Click the image below to watch the full interview or read the transcript that follows.

Lewis Spellman