PodcastAdam Taggart | Thoughtful Money®Lacy Hunt

Lacy Hunt & Brent Johnson: The US Has Entered A New Inflationary Era That Will Prove Bad For Bonds

Hunt argues that the end of globalization, reshoring, demographic pressures, and expanding government demands will reduce supply growth while increasing inflation and capital needs. He links low U.S. net national saving, larger deficits, and rising interest expense to higher real rates, Treasury yields, and borrowing costs, while warning that Federal Reserve and Treasury support could distort markets. AI-related investment may eventually lift productivity, but Hunt and Johnson expect its near-term competition for capital and greater bond issuance to pressure bond prices, with hard assets potentially performing relatively well if prolonged inflation materializes.

InflationFixed IncomeInterest RatesGovernment DebtFiscal PolicyMarket Structure

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Key Takeaways

Hunt argues that the shift away from globalization is removing the economies of scale and outward supply expansion that previously offset rapid debt and money-supply growth. He expects the resulting resilience measures—such as onshoring, friend-shoring, backup supply chains, and just-in-case inventories—to produce higher and more volatile inflation over an extended period.

Hunt says the projected U.S. federal deficit has increased from roughly $1.7–$1.8 trillion, or 5.8% of GDP, to $2.1 trillion, or 6.4% of GDP, with defense and social-spending pressures posing additional risk. He expects rising interest expense to increase the risk premium on Treasury debt and raise borrowing costs in mortgage and corporate markets.

Hunt contends that Treasury purchases under discussion are too small to address the deficit and could distort the market signals used by investors and the Federal Reserve. He also warns that official support could create a de facto Treasury-market put, encouraging investors to pressure policymakers to continue intervening.

Hunt describes significant Federal Reserve easing beginning in mid-December, including purchases of nearly 1,500 Treasury bills alongside faster deposit and money-supply growth. He argues that quantitative easing can lower credit spreads and stimulate stocks without broadly improving living standards, while support for asset prices may encourage corporations to favor financial assets over real investment.

Hunt argues that the U.S. has a severe saving shortfall: net national saving is below 1%, compared with a historical level near 7% or just under 7%. He says that limited saving cannot meet demand for physical investment, including AI, semiconductor, grid, and other capital projects, creating upward pressure on real interest rates and nominal Treasury yields.

Hunt expects financing demand from AI hyperscalers and other capital-intensive projects to compete with government borrowing for scarce capital. Johnson and Hunt link debt-financed investment and increased bond issuance to lower bond prices and higher yields, while Hunt says any cyclical rate declines would likely be less pronounced than in a more favorable global environment.

TECHNOLOGY

AI Inflation Sequence — AI could eventually deliver productivity benefits, but Hunt argues that infrastructure construction, capital requirements, and energy demand will come first. Any productivity gains would arrive later.

“Well it that's a possibility and many people are optimistic…”—

ECONOMY

Reshoring Inflation — The shift from globalization and cost efficiency toward resilience, just-in-case inventories, backup supply chains, onshoring, and friend-shoring is reducing economies of scale and raising production costs.

“Now the production function is turning adverbs. the emphasis on is on resiliency rather than on cost efficiency. We're moving from just in time inventory situation to just in case…”—

Global Supply Expansion — Globalization brought hundreds of millions of workers into production, creating manufacturing hubs, concentrated supply chains, and economies of scale. The resulting expansion in aggregate supply offset rapid growth in debt and the money supply.

“Massive. Hundreds of millions of people came into the into the labor market. And this facilitated the development of great manufacturing hubs and concentrated supply chains…”—

Federal Deficit Revision — Hunt says the expected U.S. federal deficit was revised from about $1.7–$1.8 trillion, or 5.8% of GDP, to $2.1 trillion, or 6.4% of GDP. Defense and social-spending pressures could worsen it further.

“Until July, virtually everyone in both official dom and outside of official dom said that the federal budget deficit would be about $1.8 trillion, 1.7 trillion, about 5.8% of GDP…”—

MARKETS

China’s Demographics — China’s average age is about 41 or 42 and rises by roughly one year every two years. Weak economic prospects and an imbalance between young men and women are discouraging marriage and childbearing.

“The Chinese the average age in China is about 41 or 42. But every two years the average age goes up a year.”—

Unequal Rate Burden — Higher interest expense disproportionately burdens modest- and moderate-income households because they rely more heavily on borrowing. The income benefit accrues more to higher-income households.

“So the rise in interest expense the burden of it falls on our modest and moderate income households whereas the benefit accrews to the left of our households and that…”—

QE’s Asymmetric Benefits — Hunt says quantitative easing lowered credit spreads, encouraged activity, and stimulated the stock market. Its benefits were asymmetric and did not necessarily raise living standards broadly.

“If you look at the work of Daryl Duffy at Stanford University or Ricardo Ree London School of Economics or Mark Gerbler, when the Fed comes in like they do…”—

FORECASTS

Higher Inflation Rates — Hunt expects the end of the roughly three-decade globalization period to bring higher and more volatile inflation, a higher trend in interest rates, and generally poor economic performance over an extended period.

“I think that the we're seeing a major secular shift that we're now moving into a period of capital shortage as well as we're witnessing the end of the of…”—

Capital Shortage — Hunt argues that net national saving near zero, versus a historical level just under 7%, is insufficient for the economy’s physical-investment demands. He says this should raise real interest rates and nominal Treasury yields.

“And historically has been just under 7% of net national income and now it's very close to zero…”—

AI And Bond Yields — Hunt argues that financing AI, semiconductor expansion, grid investment, space exploration, and a deteriorating federal deficit will compete for capital. Higher inflation would reinforce upward pressure on nominal interest rates.

“We're financing artificial intelligence. We're building an expansion of semiconductors. we need to expand the electrical grid. There's space exploration. we've got a massive federal budget deficit is deteriorating.”—

Inflationary Regime Shift

Adam introduces Lacy Hunt and Brent Johnson before asking why Hunt has shifted from a deflationary outlook toward concerns about persistent inflation and higher interest rates.

Capital Shortage Thesis

Hunt argues that abundant money cannot replace real saving, while major investment demands and historically low net national saving point toward higher real rates and inflation.

Deglobalization Costs

The speakers discuss how reshoring, supply-chain fragmentation, and the shift from efficiency to resilience reduce economies of scale and raise production costs.

AI’s Capital Drain

Hunt says AI may eventually improve productivity, but infrastructure, energy, semiconductor, and grid requirements will absorb capital before those benefits arrive.

Private Credit Demand

Growing hyperscaler borrowing and larger government deficits are adding competing claims on scarce capital, putting pressure on Treasury prices and yields.

Deficits In Recession

Hunt warns that recession would activate fiscal stabilizers and stimulus demands, worsening already excessive deficits, debt levels, and federal interest expense.

Treasury Market Meddling

Hunt criticizes Treasury purchases of longer-dated debt as a small but misleading intervention that could distort the market’s warning about inflation and fiscal imbalance.

Stealth Fed Easing

Hunt links recent Treasury-bill purchases, rising bank lending, faster money growth, and recovering velocity to renewed inflationary pressure and challenges for Fed credibility.

Financialization Versus Investment

Hunt argues that Fed support for financial assets encourages corporate financialization while diverting resources from real investment that determines productivity and living standards.

Debt’s Changing Effect

Hunt explains that debt once appeared disinflationary because globalization expanded supply, but capital scarcity and a deteriorating production function now dominate.

Net National Saving

Net national saving has fallen from a historical average near seven percent to below one percent, leaving insufficient resources for the economy’s expanding physical investment needs.

Fisher Equation Pressures

Hunt applies the Fisher equation, forecasting higher Treasury yields from rising real rates, inflation expectations, and a potentially increasing fiscal risk premium.

Demographics And Stagnation

Weak growth, aging populations, falling birth rates, and limited immigration could worsen demographics, reduce potential growth, and further pressure household living standards.

Socialism Risk

Hunt says deteriorating economic performance may increase support for greater government intervention, but expanding the public sector could accelerate inefficiency and demographic decline.

Hard Assets Outlook

Hunt agrees that prolonged inflation would be unfavorable for bonds and says precious metals and other assets with intrinsic value could perform relatively well.

Interest Income Distribution

Hunt explains that higher interest payments benefit wealthy savers while burdening lower-income borrowers, reinforcing inflation’s unequal effects and the K-shaped economy.

Dollar And Global Fallout

Hunt expects near-term dollar weakness but eventual rebounds amid global fiscal problems, while warning that U.S. economic trouble would affect a world still reliant on American growth.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

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