Austin, Texas. On Highway 360, a main highway between the hill country and the Texas capital, the office buildings are pristine, the shopping upscale, the cars new, and the cell phones at hand. I've come down here to listen to economist Lacy Hunt explain the economic view he shares with Van Hoisington. Mr. Hoisington is the founder and prime mover at Hoisington Investment Management, a fixed income advisory firm that manages about $3.3 billion for institutional clients.

I've come hoping they can answer a vexing question: Faith in lower interest rates notwithstanding, exactly what is going to be the driver that leads us out of recession?

Their answer is worrisome.

There is no driver.

We're not looking at a spring recovery; we're looking at a long and dismal period as debt is reduced. Poised like members of an intellectual tag team, the two men point, shift, and move from chart to chart. They reveal an increasingly constrained and limited economy. Listen:

Hunt: "One of the things making the economy look slightly better right now is that much of the activity that was cancelled immediately after 9/11 has been rebounding. We've also had an unprecedented liquidation of inventories, an incredibly mild winter, and a wave of patriotism that made people feel good about buying things."

Hoisington: "There's a benefit from all that. Just consider lower gas prices and the billions they add to (consumer) disposable income."

As a consequence, they feel that we may now be in a kind of false spring where incomes seem higher, inventories are replenished, and demand seems to be coming back.

"Arrayed against this," Mr. Hoisington continued, "are some very deep structural problems, perhaps even systemic risks."

I asked why.

Hunt: "Start with GDP (Gross Domestic Product). In real terms it has declined. But the nominal GDP figure may be more upsetting. It is top line growth--- growth in the number of dollars that change hands--- that generates the employment opportunities. But in the fourth quarter there was an actual decline. It was only one-tenth of a percent but it was the first time we've had a nominal GDP decline since 81-82."

Hoisington: "Think about it. We've got an $11 trillion economy that actually spent fewer dollars in the fourth quarter than in the third…"

They explained that a shrinking GDP in nominal dollars meant fewer dollars were available to service a fixed amount of debt. Pointing to Japan, where GDP is declining at a 5 percent rate, they observed the rising danger of real deflation.

Hunt: "There are two types of economic cycles. Those led by investment and those led by consumer spending. Most of the cycles we've experienced have been consumer spending cycles. We've only had a few investment led cycles. Those cycles--- like this one--- end with excess goods, high debt levels, excess capacity, and low inflation. If you look at industrial capacity, we're operating at the lowest level in the entire Post War period. In the last 50 years it has averaged 81 percent--- but for the last five years we've been far below that.

"The risk we face is that consumer spending will give way late in 2002."

I asked why that might happen.

Hunt: "The economy is over-leveraged to an unprecedented degree for both business and households. We're at 155 percent of GDP, a record. Consumer debt is 100 percent of disposable income. That figure doesn't include credit card debt that is paid monthly. Nor does it include auto leases. They are another form of debt. Corporate debt is the same--- it doesn't include leases. We're very, very leveraged. We're the most leveraged we've been since the 1930's.

Hoisington: "Another problem is that there really is no pent up (consumer) demand. Home ownership is at 68 percent. The delinquency rate on mortgages is at a 9 year high."

Hunt: "Now consider the savings rate. If it goes back to the post war average it would take about $500 billion out of spending. That's a severe head wind. Something like that doesn't happen all at once but it could take five years."

Mr. Hunt explained that savings were likely to rise because consumer net worth has been declining. While the rise in home values was a positive, it was largely offset by rising mortgage debt, leaving consumer net worth exposed to declining stock values. Consumer installment debt, now absorbing a record 22 percent of disposable income, is another measure of "headwind."

Hoisington: "The dollar has been on a tear. This is a deflationary event around the world. People who borrow in dollars now have to pay it back in more expensive dollars. Our demand leads the world. There can be no global recovery without U.S. demand."

Hunt: "We've only had two investment led recessions in the past. Railroads brought deflation in 1890 by revolutionizing distribution. In the 1920's the same thing happened with the development of assembly lines and electric power. We had a glut of goods that brought deflation."

For Hoisington and Hunt, who lay all this out in graphs for their clients, the message is very clear.   The long decline in interest rates isn't over yet. We may be approaching a period where a secure 5 percent return on a U.S. Treasury bond has majestic beauty.

Readers who would like to learn more can visit the Hoisington Management website, where their quarterly reviews can be downloaded as PDF files.