Longtime Deflationist Now Fears Inflation More | Lacy Hunt

**SPEAKER_1** (0:00)
Hey babes, it's Paris Hilton. So I was checking my points balance in the Hilton Honors app the other day. And yeah, I've got about a billion, which feels excessive, even for me. Just kidding, you can never have too many Hilton Honors points. And I want to do something iconic this summer, so I'm giving away all my Paris points. Just find somewhere you've always wanted to stay, then go to my socials or Hilton's and tell me about it. Just make sure you're a Hilton Honors member, and I might be sending you Paris points, because when you want points that make your summer even hotter, it matters where you stay.

**SPEAKER_2** (0:36)
Take your flexibility beyond the mat with PayPal.
Pay nothing at checkout, then enjoy a flexible monthly payment plan that works for you with no sign up or late fees. Find yours in and an easy way to pay with PayPal. Download the PayPal app to get started. Subject to approval, pay monthly consumer loans made by WebBank. Available through PayPaling and MLS 910457 Learn more at paypal.com/paymonthly.

**Lacy Hunt** (1:01)
The events that occurred there with the fall of the Iron and Bamboo Curtains really resulted in an unprecedented increase in labor availability and a shift in the supply curve. It was enormous, and that process is no longer in shape.

**Adam Taggart** (1:29)
Welcome to Thoughtful Money. I'm Thoughtful Money Founder and your host, Adam Taggart. Welcoming you here for a special report with the great economist Lacy Hunt. Lacy, thanks so much for joining us today.

**Lacy Hunt** (1:45)
Yeah, you're too kind, Adam.

**Adam Taggart** (1:48)
Not at all, Lacy. I don't think there are enough superlatives for your career, and you certainly have a massive and well-deserved fan base amongst this audience here. Folks, this is a special report. As you know, I am off this week, taking a summer sabbatical, going hiking and celebrating my 25th anniversary with my wife.
And the only person who could pull me out of that would be Lacy Hunt. And Lacy released a very, I think, seminal and important report recently. And he called me up yesterday and said, Hey, Adam, I'd really like to be able to sort of expound on my thoughts on that report. Can I come on your channel to do so? And I said, Lacy, absolutely. So you're getting this bonus video here while I head off for the week. But Lacy, I think this is a very important one that may be taking a lot of people by surprise who have known the arc of your career.
You've developed a reputation in later years as being more one of the noted deflationists, sort of disinflationists. And in this report, you are making a very strong case that you think the risk now going forward in the future is on the inflationary side of things. So if you don't mind, I would love to walk through your new report with you. And I think it all starts with the changes that you see in the production function. So why don't you start by describing that for people who don't know what that is, and then explain how it is shifting from, say, how it's been for the past couple of decades?

**Lacy Hunt** (3:29)
That is the key, Adam. The production function is one of the fundamental concepts in economics. And by the way, it's validated in both the micro-economic level and the macro. I can take your production function and mine, we can aggregate them together, all the way up the chain to the global. And the production function says that economic output, real GDP, is determined by the factors of production, interacting with technology, and the factors of production are labor, natural resources, capital. And from the fall of the Berlin Wall and the bamboo curtains, there in the late 1980s and early 1990s, we had a very favorable production function.
We brought in an unprecedented pool of new labor, low-cost labor. In addition, firms could obtain natural resources at the lowest price anywhere in the world.
And so costs were going down. And in addition to that, when you're producing products, you have a broader market to sell over. You have economies of scale, one of the most important concepts in economics. And so, the globalization error, the emphasis was on cost minimization. And now, however, the goals are shifting.
And we're entering into a period of time in which we've seen that globalization has consequences in a lot of different situations, in wartime, national emergencies, in health, the breakdown of some of the historical treaty relationships among countries. And so we can no longer have cost minimization as the goal. And so in the global era, what you've had is you, we, for example, take in the form of semiconductors, for one. Like a lot of different manufacturing operations, you start with design and engineering, and then you have to go through the development stage, and then you have to buy the raw materials, bring the raw materials together. Sometimes there's fabrication, then you do the assembly process, the testing, and finally the packaging. And so, in the global system, the functions were allocated based on comparative advantage. But now, you have to be able to do something of everything in the production chain. And that means that you no longer honor the invisible hand. And so, in the old system, you could have very large enterprises operating at high capacity, spreading its fixed costs, and now you get a lot of smaller operations with lower capacity utilization rates. And that changes the whole mixture. And so, we're moving from a globalization era into post-globalization. It's already changed in many respects. And I'm remiss in fully understanding how rapidly it was changing.