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funny you should mention that. It was a 16 page article / interview (titled " Hard Times Hiding in Plain Sight " ) and the meat is from about p7

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Ed D'Agostino:

I'm just a simple guy trying to keep up with one of the greatest economists of my lifetime. So, bear with me. So, how much of this boils down to government debt and deficits? Because in your last note in the second-quarter Hoisington note, you had a chart where you highlighted debt-to-GDP at 90%, and we are well above 90%. But that 90% mark seemed to be an important threshold for you. How much does government debt play into it?

Lacy Hunt:

That's the critical question and that's the one that no one's willing to answer. That's really the tragedy of the presidential election. By the way, that 90% level is based on gross government debt, and it's not my figure as being a critical level. It came from an outstanding econometric study published in one of the American Economic Association's peer review journals written by the Reinharts and Ken Rogoff. It's called Growth in a Time of Debt. What they showed is that when gross government debt goes above 90% of GDP, you lose one-third of your growth rate against trend. Now, we're at 120%.

So, basically, historically, from 1870 to 1970, we grew at about 2.3% per annum. We're now growing at about 1.4% per annum. So, we've lost nine-tenths of 1% on a 2.3% base. That's about 40% of our growth trend. Reinhart and Rogoff said that we would lose a third of our growth rate against trend, and that's going to happen. Here we are in a presidential campaign and there's no attention being paid to the government debt. In fact, all I'm seeing are more and more promises.

Ed D'Agostino:

From both sides. Yeah.

Lacy Hunt:

Your debt levels are going to continue to rise. There's a corroborating study that proved equally as prescient as Reinhart, Reinhart, and Rogoff. A book published in 2000 by two outstanding Swedish economists, Bergh and Henrekson, they teach at Scandinavian University today, but part of their career was at Harvard. Their work is first-rate, and they did it a little differently.

What they looked at was the impact on the real per capita growth rate of what happens when the share of government economic activity increases. What they found is that for each one percentage point increase in the government share of economic activity, you lose 0.09% of growth per annum. So, in 1970, the government share of economic activity was 25% of GDP. Today, it's 36% of GDP. So, we've lost about 1%, as I said, the same number that Reinhart amd Rogoff would've projected. You go deeper and deeper into the government sector and you get less economic performance.

There's a third way of confirming that because what happened is that when the Fed reversed monetary policy after the inflation rate surged dramatically, the federal budget deficit was funded entirely by the domestic non-bank financial sector. That meant that the funds were not available for the private sector. A lot of people are talking about the revisions to the national accounts. I gave you my analysis of it, but all the news wasn't good. There was some very disturbing news.

Now because of the fact that home sales have been lackluster and motor vehicle sales have been lackluster, we're seeing a big buildup in inventories. We have automobile inventories and units back at where they were in 2019, even though the selling rate is down 12 to 14%. The home sales are down 35 to 40% from their peak levels, yet we've seen a substantial increase in recent months to 9 or 10 months high in unsold home inventories. If you look at the GDP accounts for the first half of the year, what you see is that the inventory buildup was not just confined to automobiles and houses. It was far broader.

If you do this little exercise, if you take the real GDP and you include the inventories, the growth rate in the economy was under 2% in the first half of the year. So, there was actually a slowdown, but it was masked by this buildup in inventories, which is not sustainable....  "