Lacy Hunt: The Economy Is Seizing Up While The Fed Dithers

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**Lacy Hunt** (0:55)
And so I believe a significant illiquidity process is emerging.
And it will only become more evident as time passes. And I think that that is a deflationary event. And I think the Federal Reserve is behind the eight ball, way behind the eight ball.

**Adam Taggart** (1:26)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. It's an especially confusing time for investors, given how divided the experts are on whether resurgent inflation or disinflation-deflation is more likely from here. Your answer to this question determines whether you think the Federal Reserve starting to cut interest rates is a good idea or not. Today's guest has very strong views on this matter based on a lifetime of study. For perspective, we've got the great fortune to sit down with one of the greatest living economists, Lacy Hunt, former Senior Economist for the Federal Reserve Bank of Dallas and current Executive Vice President of Hoisington Investment Management Company. Lacy, thanks so much for joining us today.

**Lacy Hunt** (2:11)
Glad to be here. Nice to see you, Adam.

**Adam Taggart** (2:14)
Always wonderful to see you, Lacy. Thanks so much for joining us. I know I stand between you and your Labor Day weekend, so we'll wrap this up as quickly as we can. And first and foremost, I just want to let folks know we're going to talk about your thoughts on current Fed policy here, Lacy. But this really is just the appetizer, even just the amuse-bouche, if you will, to your appearance coming up at the Thoughtful Money Online Fall Conference, where you give really a graduate level walkthrough on where you see things headed from the macro perspective. You walk through a ton of charts that you create specifically for that event. So I'm not going to dig too deep with you on these issues because we're going to get a chance to do that in real depth at the conference. That being said, let's get started.

**Lacy Hunt** (3:02)
I might go deep, however.

**Adam Taggart** (3:05)
You do whatever you want, Lacy. You always have carte blanche to do whatever you want. So let's kick it off here. What is your current interpretation of the status of fiscal policy today?

**Lacy Hunt** (3:17)
In one word, it's extremely restrictive. I know that that's not the general view, but let's just look at some of the facts here. So according to the Congressional Budget Office, the Big Beautiful Bill Act will add $3.4 trillion over the next 10 years. That's $340 billion per year.
However, imbedded in that number are roughly $3.3 trillion of let's call them accounting tax cuts, accounting as in terms of stipulated by the law and the procedures of the Congressional Budget Office. And in addition, there are $3.3 trillion worth of expenditure reductions. So, the net increase in federal stimulus, measured in this very narrow sense, for the 10-year period is $400 billion, or $40 billion per year.
However, that is, while all factual, not very useful. Now, the S&P Global, who recently reaffirmed the credit stating of the United States, said that the fiscal situation is stable, that it's neither improving or deteriorating, in spite of the calculations of the CBO. And the reason that they said that is that it looks like a reasonable assumption is that over the next 10 years, tariffs are going to add $3 trillion in revenue, or $300 billion per year. And so if you have a net 3.4 stimulus and you have $3 trillion in tariff revenues, you're almost in balance, more or less. It washes each other. But that is a simple mathematical calculation that is not the dynamics of the economics. And the reason is that of this $3.4 trillion in stimulus in the Big Beautiful Bill Act, is that $3 trillion was a mere rolling over of the 2017 tax cuts. Right. The tax rates that are in effect this year and went into effect eight years ago are the same tax rates that will be in effect in 2026 and for the nine years afterward. So there's no net benefit in any sort of macroeconomic sense from extending the tax cuts. So the way I look at it is that there is roughly three trillion dollars of expenditure reductions plus the restrictive effect of three trillion dollars over 10 years in tax revenues. Now, and that's why the S&P Global can say that they're in balance.