As we have noted in this space in the past, “these dudes” have been more than mostly right for a really long time on what has arguably been the most important economic story for decades – the emergence and prevalence of disinflation. They aren’t budging.

But this paragraph was a new twist and worth eyeballing – because there are three weeks until the election.

“The second risk would bring a rising inflationary dynamic into the picture, potentially becoming much more consequential. General disappointment with trying to solve economic underperformance by more indebtedness may crystalize along with the realization that debt will not work any better in the U.S. than in Japan, the Euro Area and many other countries. As this dissatisfaction intensifies, either de jure or de facto, the Federal Reserve’s liabilities could be made legal tender, or a medium of exchange.

Already, the Fed has taken actions that appear to exceed the limits of the Federal Reserve Act under the exigent circumstances clause, but so far, they are still lending and not directly funding the expenditures of the government in any meaningful way. But some advocate making the Fed’s liabilities spendable and a few central banks have already moved in this direction.

If the Fed’s liabilities were made a medium of exchange, the inflation rate would rise and inflationary expectations would move ahead of actual inflation. In due course, Gresham’s law could be triggered as individuals move to hold commodities that can be consumed or traded for consumable items. This would result in a massive decline in productivity, thus real growth and the standard of living would fall as inflation escalates.

Lower and moderate income households would be the most adversely effected. Velocity would rise dramatically. This would make Treasury bills and inflation adjusted Treasury securities far more preferable compared to longer dated Treasury bonds.”

– Hoisington’s Quarterly Review and Outlook, 3rd Quarter 2020