Longtime Deflationist Now Fears Inflation More | Lacy Hunt

Adam Taggart | Thoughtful Money® Jul 28, 2026

Summary

Lacy Hunt argues the globalization-era production function has reversed, shifting the economy from disinflation toward structurally higher inflation.

Reshoring raises input costs while AI, grid repair, and defense needs compete for scarce capital, lifting the cost of capital.

Net national saving near record lows means the Fed can add liquidity but cannot create the saving real investment needs.

Hunt expects inflation settling into a 3.5% to 4.5% range, with all three Fisher equation components pointing toward higher long-term rates.

Hunt's firm manages bills with duration under one year, and he expects the coming regime to favor commodities and precious metals.

Top takeaway The host argues hard assets, including precious metals, should outperform financial assets on a relative basis in the scenario Hunt describes, since commodities historically do better in rising inflation and financial assets are coming off an unusually favorable 1990-2020 run.
He summarizes Hunt's thesis as rising input costs and a rising cost of capital pushing GDP lower while the existing debt stock becomes more expensive to service, reducing overall prosperity.
He notes the new Fed chairman has been talking hawkish and wants to shrink the balance sheet, the opposite of the liquidity injection the prior regime began in mid-December.
He presses on whether AI can restore the old production-function boom, drawing out Hunt's reply that AI should help productivity but requires heavy capital up front, with benefits arriving later and uncertain.
He asks directly whether the outlook amounts to stagflation, prompting Hunt's description of an inward-shifting aggregate supply curve delivering higher prices and lower real growth.

Top takeaway The longtime deflationist now argues the greater risk is inflation: de-globalization has reversed the favorable production function, shifting the aggregate supply curve inward so higher prices come with weaker real GDP growth.
He expects inflation to move over time from its long-running 1.5-2.5% range into a 3.5-4.5% range, with all three components of the Fisher equation - real rate, inflation expectations, and term/risk premium - pointing to higher Treasury yields.
He sees capital scarcity as central: net national saving sits near all-time lows close to zero versus roughly 7% of national income since 1929, while AI, grid rebuilding, and defense compete for capital, and he stresses the Fed can create liquidity but not saving.
He calls the Fed's bill purchases since mid-December a stealth quantitative easing: instead of idle reserves, bank deposits and credit surged - loans and leases up an 8.3% annual rate since June, about 330 basis points above their 10-year average - helping inflation accelerate before Middle East hostilities began.
He warns interest expense now exceeds defense spending in the U.S. federal budget - a threshold that, citing Niall Ferguson's research, has historically marked the start of an economic power's decline - eroding the government's ability to control the deficit.

Top takeaway Hunt says the new Fed chairman has taken a hawkish line and wants to shrink the balance sheet, but unlike Volcker it is unclear he has the support of the board or the FOMC to end the bill purchases.
The discussion notes Warsh co-authored a paper with Michael Spence on quantitative easing and forward guidance, the toolkit Hunt blames for creating the Fed put and steering investment toward financial assets.

Top takeaway Hunt traces quantitative easing and forward guidance to Chairman Bernanke, arguing they created a widely accepted belief that the Fed would always supply liquidity and price support for financial assets - something it cannot promise for real assets.