VAN R. HOISINGTON AND LACY H. HUNT: Broad money is growing about 6.5% a year, roughly double the benchmark, an excess similar in scale to 1979 that risks keeping inflation above target

The Gist

Money is growing about twice as fast as the economy can absorb. The last time the gap was this large, in 1979, inflation was near 9 percent. Too much money chasing limited output keeps prices rising faster than the Fed wants. This is a steelman: Van R. Hoisington and Lacy H. Hunt's arguments are reconstructed in their strongest fair form, not endorsed.

Conclusion

Broad money growing at about 6.5 percent a year, roughly double the 3 percent benchmark, is a monetary excess similar in scale to 1979 and risks nominal spending outrunning productive capacity, keeping inflation and inflation expectations above target.

Premises

1. The non-inflationary benchmark for broad money growth is about 3 percent a year.
2. Broad money grew at a 6.5 percent annualized rate from December 2025 to September 2026.
3. When Volcker became Fed chair in 1979, 12-month PCE inflation was about 9.3 percent, the federal funds rate averaged 10.9 percent and broad money grew 8.5 percent, about 3 points above that era's 5.5 percent benchmark.
4. Though the labor-force and productivity mix differs, the scale of monetary excess then and now (about 3 points or more above the benchmark) is similar.
5. Money growth persistently above the benchmark lets nominal spending outrun productive capacity, and rapid money growth risks a money-price-wage spiral and higher expected inflation.

Assumptions

• Broad money means the Federal Reserve's broad monetary aggregate (written M-2 here), the measure the letter uses throughout.
• The money-to-spending link holds over the coming year or two, not only in the long run.
• Financial interest: Hoisington Investment Management manages U.S. Treasury portfolios and for decades was known for holding very long-duration Treasuries on a falling-inflation, falling-rates view. Press reports on its 2026 letters say the firm cut effective duration from about 20.9 years at the end of September 2025 to under one year by June 30, 2026, so this letter's forecast of higher long-term yields is consistent with the firm's current short-duration positioning rather than with its earlier long-duration stance. Sources: "Decades long bull turns bearish. Cites structural deficits…
• Differs: Dallas Fed tests found money-growth inflation forecasts generally underperformed simple benchmarks from 2002 to 2023 despite catching 2021, and IMF work finds the money-inflation link weak at low inflation; a Fed P* model with changing equilibrium velocity forecasts reasonably, which partly supports the letter's velocity-adjusted approach.

Analysis

Argument type: Inductive.

Potential Fallacies

• Weak or false analogy (P3–P4 and the title's 'similar in scale to 1979') — The 1979 comparison matches one variable, the size of the gap above benchmark, while setting aside differences in starting inflation (about 9.3% then), policy rates (10.9%), expectations anchoring, wage indexation, energy shocks, and central bank credibility. A similar gap does not imply a similar outcome unless these other conditions are also similar.
• Inconsistent metric (ratio versus difference) (Conclusion and P4) — The present excess is described as 'roughly double' the benchmark, a ratio. The 1979 excess is described as 'about 3 points', a difference. In ratio terms, 8.5% against 5.5% is only about 1.5 times. Whether the two episodes are 'similar' depends on which measure is chosen, and the premises do not say why the point gap is the relevant one.
• Partial circularity / assumed benchmark (P1, P3 and P4) — P4 asserts the similarity that the conclusion needs, so P3 supplies the data but not the equivalence. The 'excess' is also measured against the authors' own era-specific benchmark (5.5% then, 3% now), whose derivation is not shown. A flexible benchmark makes the size of the 'excess' partly a product of how the line is drawn.
• Scope gap between 'persistent' and the evidence (P2 and P5) — P5 applies to money growth that is persistently above the benchmark, but P2 documents only about nine months of annualized growth. A short window is sensitive to endpoints and temporary flows, so the antecedent of the causal principle is not yet shown to hold.
• Selective use of supporting episodes (P4, P5 and A4) — The argument leans on 1979 and the 2021 success of money-based forecasting. Periods in which large money-growth gaps were not followed by inflation, such as the post-2008 expansion, are not weighed. A4's finding of poor forecasts from 2002 to 2023 is acknowledged but does not temper the conclusion.
• Appeal to fear by association (Title and P3–P4) — Invoking Volcker and 1979 carries the emotional weight of double-digit inflation and painful disinflation. This can persuade through dread rather than evidence, especially since only the money-growth gap is claimed to match.

Counterarguments

These challenges are not ranked.

• Premise 4 (High impact) — The 1979 inflation process depended on conditions absent today: inflation already near 9%, unanchored expectations, deeply negative real rates, oil shocks, and widespread wage indexation. Today's Fed has far greater credibility, real policy rates are positive, and wage-setting is less indexed. A matching money-growth gap therefore tells us little about whether a similar outcome will follow.
• Premise 5 (High impact) — The money-inflation link is strongest at high inflation and over long horizons, and has been unreliable at low inflation. Dallas Fed tests show money-growth forecasts underperformed simple benchmarks from 2002 to 2023, and the IMF finds a weak link at low inflation. The same logic would have flagged the post-2008 expansion as inflationary, when no inflation followed.
• Premise 1 (High impact) — The 3% benchmark depends on assumed trend growth and velocity. If velocity is changing for structural reasons, such as money-market fund shifts, higher deposit yields, or digital payments, or if potential growth is higher because of productivity gains, the true benchmark could be 4–5% and the 'excess' much smaller. The benchmark moved 2.5 points between 1979 and now, which shows how assumption-dependent it is.
• Premise 2 (Medium impact) — A nine-month annualized rate is a short, noisy window. Growth may partly reflect rebuilding of deposits after earlier contraction, rate-driven shifts into liquid assets, or temporary Treasury and banking flows. Such money may be held as savings and not spent, so velocity falls and nominal spending does not accelerate.
• Conclusion (Medium impact) — Inflation is driven more by supply conditions, tariffs, fiscal impulses, expectations, and labor-market slack than by M2 alone. Productivity gains, including AI-related capacity, could also absorb nominal demand. The Fed may tighten in response to inflation, which would offset the effect of money growth.
• Conclusion (Low impact) — The authors' firm has repositioned sharply toward short duration after decades of the opposite view, so the forecast is consistent with its commercial interest. This does not refute the argument, but it calls for independent corroboration. The same velocity-adjusted framework supported a deflationary conclusion a year earlier, which suggests it is flexible enough to fit different narratives.

Suggested Improvements

• Benchmark derivation and sensitivity — Show how the 3% (and 5.5%) benchmark is built from trend real growth, the inflation target and the velocity trend, and report how the 'excess' changes under alternative assumptions (for example 2–5%). The headline 'double the benchmark' rests entirely on this construct, so transparency and a sensitivity range would make the central claim far more robust.
• Analogy conditions — Replace the single-variable comparison with a table comparing 1979 and 2026 on starting inflation, inflation expectations, real policy rates, wage indexation, energy shocks, and central bank credibility, and state which differences matter and why. This would turn a rhetorical analogy into an evidence-based comparison and address the main disanalogies directly.
• Broader historical sample — Test the rule across many episodes and countries, including cases such as 2009–2015 and 2020, and report how often a 3-point gap preceded persistent above-target inflation (hits, misses, and lags). A base rate would replace reliance on one vivid case and address the poor 2002–2023 record acknowledged in A4.
• Persistence and composition of money growth — Present 12- and 24-month growth rates and break M2 into components (deposits, money-market funds, and the sources of growth) to show whether the money is likely to be spent. This would address the 'nine months is not persistent' concern and the question of whether the money will become spending.
• Falsifiable forecast — State a quantitative prediction with a horizon, for example PCE inflation above a given level over the next four to eight quarters, along with the evidence that would change the authors' view. A hedged 'risks' claim is hard to test. A pre-specified forecast would make the argument accountable and more useful to readers.
• Engagement with rival frameworks — Explain why velocity should not fall enough to absorb the money, and set the money-based view against expectations, output-gap, fiscal, and supply-side accounts of current inflation. Working through the counter-evidence, instead of noting it, would show when the money-inflation link should be expected to hold.

Scenario Tests

• Velocity falls over the next two years as households and firms hold the extra balances as savings or in money-market funds, and nominal GDP growth does not accelerate. (Challenges) — The central causal chain from money to spending breaks and inflation drifts toward target despite high M2 growth. This is the most important failure mode and is consistent with A4's evidence.
• Over the next four to six quarters, nominal spending, wage growth, and survey- and market-based inflation expectations all rise while M2 growth stays near 6–7%. (Supports) — The money-to-spending link is operating over the horizon granted in A2, and the 'excess' becomes an early signal. The argument would still need to rule out supply shocks and fiscal impulses as alternative causes.
• The benchmark is re-estimated at 4–5% using a different velocity and productivity trend. (Challenges) — The 'roughly double' excess shrinks to a modest overshoot and the comparison with 1979 loses most of its force, showing how much the conclusion depends on the choice of benchmark.
• Money growth reverts to roughly 3–4% within a couple of quarters without Fed action. (Challenges) — The 'persistent' condition in P5 fails and the risk lapses. The nine-month window would then be seen as a temporary swing, not a regime.
• Productivity gains, including AI-related investment, expand productive capacity faster than expected while money growth stays elevated. (Challenges) — Nominal spending does not outrun capacity, so inflation need not exceed target. This shows that the 'capacity' side of the argument is as important as the money side.
• The 2021 episode, when money-growth signals preceded inflation, is used as the reference case. (Supports) — This shows the framework can work in some conditions, but a single success does not offset the weak 2002–2023 forecasting record, so it supports the claim only partially.

Coherence & Relevance

The argument has a clear three-stage structure: measure the gap (P1–P2), analogize to 1979 (P3–P4), and apply a causal principle (P5). The first stage is arithmetically secure and the third is plausible and suitably hedged. The second stage is the weakest, since the analogy is asserted, uses an inconsistent metric, and omits large differences in initial conditions. Overall the argument holds together as a cautionary inductive case that inflation risk may be higher than commonly assumed. It does not establish a 1979-scale problem or a forecast of persistent above-target inflation, a limitation the stated assumptions (A3, A4) partly acknowledge.

• The non-inflationary benchmark for broad money growth is about 3 percent a year. (Strong) — Essential to the 'double the benchmark' claim, but the derivation, stability, and sensitivity of the benchmark are not shown, and its era-by-era variation (5.5% in 1979) is not explained.
• Broad money grew at a 6.5 percent annualized rate from December 2025 to September 2026. (Strong) — Together with P1, it directly supports the arithmetic that growth is about twice the benchmark. It does not establish persistence or show that the money will be spent.
• When Volcker became Fed chair in 1979, 12-month PCE inflation was about 9.3 percent, the federal funds rate averaged 10.9 percent and broad money grew 8.5 percent, about 3 points above that era's 5.5 percent benchmark. (Moderate) — It supplies the reference data for the analogy, but it shows only co-occurrence of an excess and high inflation. It does not show causation or that a similar excess leads to a similar outcome from a much lower inflation base.
• Though the labor-force and productivity mix differs, the scale of monetary excess then and now (about 3 points or more above the benchmark) is similar. (Moderate) — This is the bridge from the historical data to the 'similar to 1979' claim, but it is asserted and mixes a point-gap metric with a ratio headline. It does not address the other differences between the two eras or show that they are immaterial.
• Money growth persistently above the benchmark lets nominal spending outrun productive capacity, and rapid money growth risks a money-price-wage spiral and higher expected inflation. (Strong) — It supplies the causal mechanism for the risk claim. It requires 'persistent' excess, which nine months of data does not show, and it relies on a stable short-run transmission that A4 casts doubt on, partly offset by A2.

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