Irving Fisher Had It Right

Location Date: 
July 29, 2011

One of the pleasures of operating in the world of investments is the opportunity to hear and learn from professionals who have truly considered opinions on the state of economies and securities markets.  It also helps when they have an ability to explain the situation in an easily understood manner.

I always look forward to reading market commentaries from Van R. Hoisington and Dr. Lacy Hunt of Hoisington Investment Management Company in the U.S.  They publish a quarterly letter that is easily accessible at To paraphrase Don Cherry, their Q2-2011 letter is a “real beauty”.  In it, they argue very eloquently that it is economist Irving Fisher we should be studying to better understand today’s economic predicament. For a précis on Fisher, see Here.  Fisher lived and worked during the Great Depression, as did the highly celebrated John Maynard Keynes. It is Keynes, though, who is in the limelight today – how many times have you heard the adage “When the facts change, I change my mind; what do you do, sir?”  Well, if you are interested in the history of The Great Depression, you may have heard that in October 1929, some fellow said that stocks had found a “permanently high plateau.” That fellow was Irving Fisher.  Not exactly a forecast to enhance your reputation upon!

As Hoisington points out, Fisher postulated that it’s the excessive build-up of debt relative to GDP that results in economic slumps, as opposed to the cyclical fall in aggregate demand theory of Keynes (solved by deficit spending) or the printing of more money theory associated with Milton Friedman.  The “solutions” that these two latter economists advocated have simply not worked; both massive fiscal stimulus and a massive growth in the monetary base have had minimal financial impact on the average American family or on economic output.  In fact, the associated increased levels of debt and future interest payments on that debt inflict an even greater burden on the next generation.  While we have a short-term boost, we are likely worse-off – an effective “negative multiplier” effect.  Add to this a political process that virtually guarantees yearly deficits and we have the U.S. (and many other countries) facing a highly deflationary force for years to come.  There seems to be a growing understanding that Keynesian stimulus is not the solution.  The Globe and Mail’s Report on Business (Click Here to View) this week noted a recent economic study reinforcing the idea that higher government spending produces lower rates of growth over the longer term.

So the question is, “what to do?”  If monetary and fiscal policy tools are exhausted, then what?  Well, I read an interesting piece the other day that gave me cause for optimism.  Why?  Well, now we are forced to return to basics – i.e. forget the outrageous government spending, forget the money printing and QE experiments and let’s get to the real drivers of economic growth.  As Hoisington notes, “the economic well-being of a country is determined by the creativity, inventiveness and hard work of its households and individuals”. In my humble opinion, the best way for a government to maximize the economic potential of its citizens and its’ economy is to provide a framework and an environment where this human potential can flourish. 

It is economic freedom that is key. This is one of the key beliefs of the Fraser Institute in Canada (, for which I am proud to be a Trustee. The Institute measures, studies and communicates the impact of competitive markets and government interventions on the welfare of individuals. Every year, they publish an Economic Freedom of the World Index Report that you can download from their website.  I also strongly encourage you to become a member and support their research!

In the United States, among the many things that could be done to improve economic potential is to enact a broad reduction in government red tape and bureaucracy, while acknowledging that the financial system requires more effective regulation (rules and enforcement) so that depositors and savers are not subjected to excessive leverage or inappropriate risks.  Secondly, introduce a permanent and simplified individual and corporate tax structure that both mitigates special interest groups’ influence over government policy and creates a fair and transparent process.   Over the medium-term, the U.S. needs to reform social security policy so that it is affordable and takes into account the demographic shifts that are well under way.  Of course, this is an absolute minefield but it has to be dealt with in the next 3 years as these expenditures will swamp the tax base in the next 20 years.   As well, housing policy reform is required: eliminate mortgage interest deductibility, “strategic” mortgage debt defaults and other moral hazards.  I know that there is a lot of inventory (shadow or otherwise) but let the market clear it out sooner than later so that the market will have confidence that a true “bottom” in home prices is in.

We will look at the U.S. deficit and debt in a post shortly.  All of the “noise” associated with the “debt” ceiling debate is worrisome because time is needed to put forward a credible and sensible short- and long-term solution that will provide confidence to markets and the general public.  Without leadership and cooperation between politicians, everyone fears a full-blown crisis down the road.  It is better to deal with the issues now than kicking them down the road.

Jim McGovern