'GDP measures new output, but it has no capability of subtracting from the output measure the destruction of wealth caused by the pandemic and the economic shutdown response. Achieving the level of precrisis activity will in fact require years, owing to the wealth destruction. This economic point was clearly made more than a century ago by French economist Frederic Bastiat (1801-1850) in his essay “Ce qu'on voit et ce qu'on ne voit pas” (English: "That Which is Seen and That Which is Not Seen"). Economics in One Lesson (1946), written by Henry Hazlitt (1894-1993), did much to publicize the work of this French economist.
For Hazlitt and Bastiat, the essence of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups. One component of this argument was the fallacy of the broken window. If a brick is thrown through the window of the bakery and breaks it, the baker will have to replace the window and, in the process, GDP will be boosted. However, the wealth of the baker is reduced because the baker had to reduce other assets or components of their wealth to replace the window thus the economy is worse off than if no damage was incurred. Therefore, if this were not true then economic prosperity could be achieved by breaking each other's window. The GDP measure fails to register this loss of wealth.
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..When debt capital, like any other factor of production, is overused its marginal revenue product declines. This serves as a persistent drag on economic activity that restrains growth despite the best efforts of monetary and fiscal policy..''
Still BullishInvesting in a 30-year U.S. Treasury bond at a paltry yield of 2.4% on December 31, 2019 appeared to be a poor investment choice, particularly since it was the lowest year-end yield since the inception of the 30-year bond in 1977. However, in a short 12 months the 30-year U.S. Treasury realized a 20% return compared with a 18.4% return in the S&P 500 and a 7.5% return for the Bloomberg Barclays Aggregate Bond Index. A similar context existed at the end of 2020 as the yield stood 75 basis points lower at 1.65%, another record year end low. Presently, the overwhelming judgment of market forecasters is that interest rates will rise throughout 2021 owing to the expectation that additional fiscal stimulus coupled with an easy monetary policy will create an inflationary cocktail as pandemic related shutdowns lessen. The essence of the decision at Hoisington Management to maintain a bullish stance on long U.S. Treasury yields is not whether rates can rise, since it happens transitorily every year, but whether they can stay elevated. Provided there are no major changes by Congress to the Federal Reserve Act, we believe it is prudent to expect that long dated U.S. Treasury rates will eventually gravitate to lower levels as inflation continues to recede.
The rationale for this apparent contrary stance is as follows. First, the massive void in economic activity and destruction of wealth created by the virus and related shutdowns of businesses in the U.S. and abroad will take years to fill. Second, U.S. fiscal multipliers are generally negative, rendering much government spending counterproductive in terms of stimulating economic growth. Third, monetary policy becomes much less impactful since the debt overhang was massive before the pandemic and is now even worse, not just in the United States but in virtually all parts of the world.
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GDP measures new output, but it has no capability of subtracting from the output measure the destruction of wealth caused by the pandemic and the economic shutdown response. Achieving the level of precrisis activity will in fact require years, owing to the wealth destruction. This economic point was clearly made more than a century ago by French economist Frederic Bastiat (1801-1850) in his essay “Ce qu'on voit et ce qu'on ne voit pas” (English: "That Which is Seen and That Which is Not Seen"). Economics in One Lesson (1946), written by Henry Hazlitt (1894-1993), did much to publicize the work of this French economist.
For Hazlitt and Bastiat, the essence of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups. One component of this argument was the fallacy of the broken window. If a brick is thrown through the window of the bakery and breaks it, the baker will have to replace the window and, in the process, GDP will be boosted. However, the wealth of the baker is reduced because the baker had to reduce other assets or components of their wealth to replace the window thus the economy is worse off than if no damage was incurred. Therefore, if this were not true then economic prosperity could be achieved by breaking each other's window. The GDP measure fails to register this loss of wealth.
..
..When debt capital, like any other factor of production, is overused its marginal revenue product declines. This serves as a persistent drag on economic activity that restrains growth despite the best efforts of monetary and fiscal policy..
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In sum, considering economic destruction placed on individuals and small businesses by the virus and its resultant shutdowns, the fact that fiscal expenditures have a negative multiplier on macroeconomic conditions, the debilitating impact on growth of excessive debt and the restriction of the zero bound on monetary stimulus, a secular inflation cycle is not at hand. Since inflation is the primary determinate of the yield on long dated U.S. government debt, it remains our judgement that the bull run in 30-year U.S. Treasurys is continuing.'
- Hoisington,
Fourth Quarter 2020Context'..The crazier things get the more unsustainable Bubble prices become.'(Banking Reform) - 'The second-half of 2020 marked the emergence of a full-fledged market mania..'2021: The Year of Acute Monetary Disorder and Fragility