Recent discussions in the macroeconomic field have highlighted contrasting views on inflation trends, particularly considering interviews featuring economists Lacy Hunt and Steve Hanke. Hunt is known for his deflationary outlook, while Hanke advocates for a slowing of inflation, and their analyses challenge the mainstream narrative of persistent inflation. In a detailed conversation on the Thoughtful Money platform between investor Lawrence Lepard and host Adam Taggart, Lepard criticized these perspectives while outlining his own expectations regarding monetary policy, asset prices, and economic cycles.
To gain a more comprehensive understanding of these viewpoints, we need to review the current macroeconomic environment. The U.S. economy is facing challenges of high debt levels, trade tensions, and shifts in monetary policy. The Federal Reserve's interest rate path, fiscal deficits, and global geopolitical factors are all shaping inflation expectations. The views of Hunter and Hank represent a cautious stance, while Lepard emphasizes potential inflation risks. By examining these debates, we can better grasp the uncertainties of the economy and provide guidance for future decision-making.
Criticism of the Outlook for Hank's Inflation Slowdown
Hank's perspective emphasizes the slowdown in inflation, attributing it to factors such as debt burden and reduced consumption after excessive borrowing. He points to historical examples, such as the 1929 stock market crash, where debt deconstruction led to deflation. However, Lepard questions the applicability of this framework in the current environment, arguing that central bank and government policy responses often counteract deflationary pressures through aggressive monetary expansion. This reflects the role of interventionism in the modern economy, contrasting with the laissez-faire policies of the past.
The core of the disagreement lies in the measurement of inflation. Hanke relies on official Consumer Price Index (CPI) data and suggests that a money supply growth (M2) of about 4.5% is insufficient to meet the Federal Reserve's 2% inflation target, and that M2 needs to expand at a rate of 6% to achieve sustained inflation. Lepard counters that the CPI underestimates the true inflation rate, citing examples such as electricity prices rising more than 3% annually. He believes that M2 growth itself is the core driving factor of inflation, showing uneven performance across different sectors, including the expansion of asset prices during the low interest rate period following the 2008 Global Financial Crisis (GFC).
This divergence highlights a broader debate on monetary indicators. Historical data shows that M2 has averaged a growth of 7% over 50 years, consistent with long-term inflation trends, but short-term fluctuations—such as a peak of 9% during COVID-19 followed by a contraction of 4.7%—complicate predictions. Lepard's analysis indicates that the face value acceptance of official indicators overlooks structural biases, which may lead to an underestimation of inflation risks. For example, asset inflation, such as stock market and real estate bubbles, is not adequately reflected in standard CPI, yet significantly affects wealth distribution and economic stability.
To further expand this view, we can examine the historical evolution of monetary theory. From Milton Friedman's monetarist perspective, the money supply is the primary determinant of inflation. Hank, as a monetarist, seems to partially agree, but his focus is more on short-term adjustments. In contrast, Lepard adopts a stricter monetarist approach, emphasizing the asset inflation channel. These channels were evident in the quantitative easing of the 2010s, leading to a booming stock market while consumer goods inflation remained moderate. This suggests that inflation may shift from goods to assets, challenging the effectiveness of traditional indicators.
In addition, the current global environment has increased complexity. Supply chain disruptions, geopolitical tensions (such as the Russia-Ukraine conflict), and energy transitions are all driving up costs. These factors may amplify Leipad's concerns that official data fails to capture the real economic pressures, thereby misleading policymakers.
Discrepancies and Agreements with Hunter's Deflation Argument
Hunter's deflation forecast is more pronounced, predicting a price decline due to fiscal dynamics and external shocks. He believes that the U.S. fiscal situation is more balanced than generally thought and criticizes the Congressional Budget Office for accounting errors in its forecasts of recent legislation such as the "Great Beautiful Act." Hunter estimates that tariff revenues exceed $300 billion, which could offset the deficit, reflecting an optimistic assessment of trade policy.
Leopard challenges this optimism, pointing out that recent tariffs have been imposed at about $20 billion per month, annualized to $240 billion – lower than Hunter's predictions. He emphasizes the potential additional spending under the bill, estimated at $200 billion to $600 billion, and warns that an economic slowdown could worsen the deficit by reducing revenue and increasing safety net costs, as seen with the rise of deficits to 6-8% of GDP in 2008 and 2000. This fiscal deterioration could amplify cyclical risks, leading to a more severe recession.
However, Lepard agrees with Hunter's reference to the Kindlerberg spiral, citing historical tariffs from the 1930s such as the Smoot-Hawley Tariff, which averaged 19.7%—similar to the current U.S. level of 18%. Tariffs, as a form of taxation, reduce demand, trade deficits, and foreign investment in the U.S. market, potentially leading to deflationary pressures. A weaker dollar may further deter foreign capital, as currency losses offset asset gains. This is already evident in the current market, with a slowdown in foreign capital inflows.
This section consistently reveals subtle points: while tariffs may induce short-term deflation, Lepard emphasizes the possible policy response—aggressive monetary easing—to prevent system collapse. Hunter calls for a rate cut of 100 basis points in line with this, although Lepard points out that the Federal Reserve faces "fiscal emergency" in its restrictive stance amid rising rate costs. This highlights the policy dilemma: short-term stability vs. long-term sustainability.
To deepen the analysis, the Kindleberger spiral originates from the works of Charles Kindleberger and describes how financial crises are amplified through feedback loops. Applied to the current situation, tariffs may trigger a contraction in demand, leading to a reduction in global trade and capital outflows. This is reminiscent of the Great Depression, when protectionism exacerbated the economic downturn. Leperd added that a devaluation of the dollar could amplify these effects, as foreign investors face exchange rate risks, further weakening market liquidity.
The common ground lies in the recognition of structural risks, but the divergence is in policy flexibility. History shows that central bank interventions, such as the Federal Reserve's quantitative easing in 2008, often reverse deflationary trends and shift towards re-inflation. This may repeat in the current cycle, especially in an era of fiscal dominance.
Broader Impacts: Inflation, the Fourth Turning, and Asset Strategies
The discussion expands to the long-term cycle, framing the current era as the "Fourth Turning" (2008-2038), characterized by institutional turmoil and potential monetary reset. Lepard anticipates a significant inflation event within three years, driven by fiscal dominance, where money printing covers interest payments. Historical parallels, such as the post-World War II yield curve control leading to inflation peaks of 17-21%, support this outlook. This reminds us that historical lessons of monetary policy are often overlooked, leading to cyclical repetition.
Energy costs have become a key inflation factor, with U.S. electricity prices rising due to AI-driven demand. This may elevate energy as a real constraint on growth, similar to oil prices before the shale boom, potentially overshadowing Federal Reserve fund rates. A policy shift towards expanding nuclear and natural gas could alleviate this, but the risk of delays continues to exert price pressure. For instance, China's leading position in nuclear energy investment highlights the lag in the U.S., which could lose its competitive edge if it does not accelerate.
For asset allocation, Lepard advocates for sound monetary substitutes: gold, silver, and Bitcoin. Gold and silver have broken through key resistance levels (gold at $3500, silver above $40), signaling a breakthrough from suppression. Bitcoin, seen as digital scarcity with a fixed supply of 21 million, is expected to reach $140,000 by the end of the year and $1 million by 2030, performing excellently due to the adoption curve. Mining companies are still undervalued relative to the metals, trading at low cash flow multiples, with further profit potential.
In contrast, stocks seem overvalued, although commodity-related and international stocks offer opportunities. Lepard warns against a zero allocation to sound monetary assets, recommending 10-30% to protect against depreciation. This is especially important in volatile markets, as diversification can mitigate risks.
Expanding on this part, the concept of the Fourth Turning originates from the works of William Strauss and Neil Howe, describing social cycles occurring every 80-100 years, including the stages of heightened, awakening, unraveling, and crisis. The current crisis stage involves a debt crisis and social division, potentially ending with monetary reform. Lepard cites historical resets, such as Roosevelt's 1933 gold revaluation, to combat deflation. This may replay in modern times, enhanced by digital assets like Bitcoin.
In asset strategies, the uniqueness of Bitcoin lies in its fixed supply, contrasting with gold's annual growth of 1-2%. This supports its potential as a hedge, especially in the digital economy. The valuation dynamics of mining stocks reflect the leverage effect: rising metal prices amplify profits but also increase volatility. Investors should consider diversification to mitigate risks and monitor global trends such as central bank gold purchases.
Conclusion
The interview with Hunter and Hank elucidates the deflationary risks of debt, tariffs, and fiscal pressures, while Leppard's analysis highlights the counter-inflationary forces of policy intervention. This tension indicates a volatile path: potential short-term inflation slowdown or deflation during an economic slowdown, followed by aggressive printing in a "big money printing" scenario. Investors face a landscape where traditional assets may perform poorly, favoring diversified exposure to real assets such as precious metals and cryptocurrencies. Ultimately, addressing these dynamics may require structural reforms, such as a return to sound monetary principles, to stabilize the system amid ongoing monetary challenges.
To explore more deeply, we can consider potential scenarios. If deflation dominates, bonds may benefit from a flight to safety, but policy responses may lead to yield curve control, similar to the 1940s. This could trigger asset repricing, favoring liquid assets. Conversely, if inflation accelerates, commodities and hard assets will become the preferred choice. Policymakers face a dilemma: balancing growth and stability. The Federal Reserve's dovish shift may exacerbate inflationary pressures in the future. Investors should remain vigilant; education and diversification are key to navigating this era.
This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.
Inflation or deflation?
Recent discussions in the macroeconomic field have highlighted contrasting views on inflation trends, particularly considering interviews featuring economists Lacy Hunt and Steve Hanke. Hunt is known for his deflationary outlook, while Hanke advocates for a slowing of inflation, and their analyses challenge the mainstream narrative of persistent inflation. In a detailed conversation on the Thoughtful Money platform between investor Lawrence Lepard and host Adam Taggart, Lepard criticized these perspectives while outlining his own expectations regarding monetary policy, asset prices, and economic cycles.
To gain a more comprehensive understanding of these viewpoints, we need to review the current macroeconomic environment. The U.S. economy is facing challenges of high debt levels, trade tensions, and shifts in monetary policy. The Federal Reserve's interest rate path, fiscal deficits, and global geopolitical factors are all shaping inflation expectations. The views of Hunter and Hank represent a cautious stance, while Lepard emphasizes potential inflation risks. By examining these debates, we can better grasp the uncertainties of the economy and provide guidance for future decision-making.
Criticism of the Outlook for Hank's Inflation Slowdown
Hank's perspective emphasizes the slowdown in inflation, attributing it to factors such as debt burden and reduced consumption after excessive borrowing. He points to historical examples, such as the 1929 stock market crash, where debt deconstruction led to deflation. However, Lepard questions the applicability of this framework in the current environment, arguing that central bank and government policy responses often counteract deflationary pressures through aggressive monetary expansion. This reflects the role of interventionism in the modern economy, contrasting with the laissez-faire policies of the past.
The core of the disagreement lies in the measurement of inflation. Hanke relies on official Consumer Price Index (CPI) data and suggests that a money supply growth (M2) of about 4.5% is insufficient to meet the Federal Reserve's 2% inflation target, and that M2 needs to expand at a rate of 6% to achieve sustained inflation. Lepard counters that the CPI underestimates the true inflation rate, citing examples such as electricity prices rising more than 3% annually. He believes that M2 growth itself is the core driving factor of inflation, showing uneven performance across different sectors, including the expansion of asset prices during the low interest rate period following the 2008 Global Financial Crisis (GFC).
This divergence highlights a broader debate on monetary indicators. Historical data shows that M2 has averaged a growth of 7% over 50 years, consistent with long-term inflation trends, but short-term fluctuations—such as a peak of 9% during COVID-19 followed by a contraction of 4.7%—complicate predictions. Lepard's analysis indicates that the face value acceptance of official indicators overlooks structural biases, which may lead to an underestimation of inflation risks. For example, asset inflation, such as stock market and real estate bubbles, is not adequately reflected in standard CPI, yet significantly affects wealth distribution and economic stability.
To further expand this view, we can examine the historical evolution of monetary theory. From Milton Friedman's monetarist perspective, the money supply is the primary determinant of inflation. Hank, as a monetarist, seems to partially agree, but his focus is more on short-term adjustments. In contrast, Lepard adopts a stricter monetarist approach, emphasizing the asset inflation channel. These channels were evident in the quantitative easing of the 2010s, leading to a booming stock market while consumer goods inflation remained moderate. This suggests that inflation may shift from goods to assets, challenging the effectiveness of traditional indicators.
In addition, the current global environment has increased complexity. Supply chain disruptions, geopolitical tensions (such as the Russia-Ukraine conflict), and energy transitions are all driving up costs. These factors may amplify Leipad's concerns that official data fails to capture the real economic pressures, thereby misleading policymakers.
Discrepancies and Agreements with Hunter's Deflation Argument
Hunter's deflation forecast is more pronounced, predicting a price decline due to fiscal dynamics and external shocks. He believes that the U.S. fiscal situation is more balanced than generally thought and criticizes the Congressional Budget Office for accounting errors in its forecasts of recent legislation such as the "Great Beautiful Act." Hunter estimates that tariff revenues exceed $300 billion, which could offset the deficit, reflecting an optimistic assessment of trade policy.
Leopard challenges this optimism, pointing out that recent tariffs have been imposed at about $20 billion per month, annualized to $240 billion – lower than Hunter's predictions. He emphasizes the potential additional spending under the bill, estimated at $200 billion to $600 billion, and warns that an economic slowdown could worsen the deficit by reducing revenue and increasing safety net costs, as seen with the rise of deficits to 6-8% of GDP in 2008 and 2000. This fiscal deterioration could amplify cyclical risks, leading to a more severe recession.
However, Lepard agrees with Hunter's reference to the Kindlerberg spiral, citing historical tariffs from the 1930s such as the Smoot-Hawley Tariff, which averaged 19.7%—similar to the current U.S. level of 18%. Tariffs, as a form of taxation, reduce demand, trade deficits, and foreign investment in the U.S. market, potentially leading to deflationary pressures. A weaker dollar may further deter foreign capital, as currency losses offset asset gains. This is already evident in the current market, with a slowdown in foreign capital inflows.
This section consistently reveals subtle points: while tariffs may induce short-term deflation, Lepard emphasizes the possible policy response—aggressive monetary easing—to prevent system collapse. Hunter calls for a rate cut of 100 basis points in line with this, although Lepard points out that the Federal Reserve faces "fiscal emergency" in its restrictive stance amid rising rate costs. This highlights the policy dilemma: short-term stability vs. long-term sustainability.
To deepen the analysis, the Kindleberger spiral originates from the works of Charles Kindleberger and describes how financial crises are amplified through feedback loops. Applied to the current situation, tariffs may trigger a contraction in demand, leading to a reduction in global trade and capital outflows. This is reminiscent of the Great Depression, when protectionism exacerbated the economic downturn. Leperd added that a devaluation of the dollar could amplify these effects, as foreign investors face exchange rate risks, further weakening market liquidity.
The common ground lies in the recognition of structural risks, but the divergence is in policy flexibility. History shows that central bank interventions, such as the Federal Reserve's quantitative easing in 2008, often reverse deflationary trends and shift towards re-inflation. This may repeat in the current cycle, especially in an era of fiscal dominance.
Broader Impacts: Inflation, the Fourth Turning, and Asset Strategies
The discussion expands to the long-term cycle, framing the current era as the "Fourth Turning" (2008-2038), characterized by institutional turmoil and potential monetary reset. Lepard anticipates a significant inflation event within three years, driven by fiscal dominance, where money printing covers interest payments. Historical parallels, such as the post-World War II yield curve control leading to inflation peaks of 17-21%, support this outlook. This reminds us that historical lessons of monetary policy are often overlooked, leading to cyclical repetition.
Energy costs have become a key inflation factor, with U.S. electricity prices rising due to AI-driven demand. This may elevate energy as a real constraint on growth, similar to oil prices before the shale boom, potentially overshadowing Federal Reserve fund rates. A policy shift towards expanding nuclear and natural gas could alleviate this, but the risk of delays continues to exert price pressure. For instance, China's leading position in nuclear energy investment highlights the lag in the U.S., which could lose its competitive edge if it does not accelerate.
For asset allocation, Lepard advocates for sound monetary substitutes: gold, silver, and Bitcoin. Gold and silver have broken through key resistance levels (gold at $3500, silver above $40), signaling a breakthrough from suppression. Bitcoin, seen as digital scarcity with a fixed supply of 21 million, is expected to reach $140,000 by the end of the year and $1 million by 2030, performing excellently due to the adoption curve. Mining companies are still undervalued relative to the metals, trading at low cash flow multiples, with further profit potential.
In contrast, stocks seem overvalued, although commodity-related and international stocks offer opportunities. Lepard warns against a zero allocation to sound monetary assets, recommending 10-30% to protect against depreciation. This is especially important in volatile markets, as diversification can mitigate risks.
Expanding on this part, the concept of the Fourth Turning originates from the works of William Strauss and Neil Howe, describing social cycles occurring every 80-100 years, including the stages of heightened, awakening, unraveling, and crisis. The current crisis stage involves a debt crisis and social division, potentially ending with monetary reform. Lepard cites historical resets, such as Roosevelt's 1933 gold revaluation, to combat deflation. This may replay in modern times, enhanced by digital assets like Bitcoin.
In asset strategies, the uniqueness of Bitcoin lies in its fixed supply, contrasting with gold's annual growth of 1-2%. This supports its potential as a hedge, especially in the digital economy. The valuation dynamics of mining stocks reflect the leverage effect: rising metal prices amplify profits but also increase volatility. Investors should consider diversification to mitigate risks and monitor global trends such as central bank gold purchases.
Conclusion
The interview with Hunter and Hank elucidates the deflationary risks of debt, tariffs, and fiscal pressures, while Leppard's analysis highlights the counter-inflationary forces of policy intervention. This tension indicates a volatile path: potential short-term inflation slowdown or deflation during an economic slowdown, followed by aggressive printing in a "big money printing" scenario. Investors face a landscape where traditional assets may perform poorly, favoring diversified exposure to real assets such as precious metals and cryptocurrencies. Ultimately, addressing these dynamics may require structural reforms, such as a return to sound monetary principles, to stabilize the system amid ongoing monetary challenges.
To explore more deeply, we can consider potential scenarios. If deflation dominates, bonds may benefit from a flight to safety, but policy responses may lead to yield curve control, similar to the 1940s. This could trigger asset repricing, favoring liquid assets. Conversely, if inflation accelerates, commodities and hard assets will become the preferred choice. Policymakers face a dilemma: balancing growth and stability. The Federal Reserve's dovish shift may exacerbate inflationary pressures in the future. Investors should remain vigilant; education and diversification are key to navigating this era.