Steve Hanke, a professor of Applied Economics at Johns Hopkins University and a former member of Ronald Reagan’s Council of Economic Advisors, has issued a stark warning about the U.S. economy. In a recent interview with Kitco News lead anchor Michelle Makori, Hanke accused the Federal Reserve of lacking a coherent policy direction and predicted a severe recession in 2024, which he described as an “ugly” downturn.
Money Supply Contraction: A ‘Baked-in’ Recession
Hanke emphasized that while interest rates dominate headlines, the true indicator to watch is the money supply. Since last April, the U.S. money supply has contracted by 4.6%, a level not seen since the Great Depression years of 1938-1939. “You have to go back to 1938 or 1939 to find that kind of shrinkage,” he said. The economist explained that changes in the money supply transmit to the economy with a lag of about six months for sensitive asset prices and 12 to 24 months for broad-based inflation. “Inflation is falling very rapidly because the money supply has been contracting very rapidly. Eventually, we’re going to have the economy contracting very rapidly,” Hanke warned.
He argued that a recession is “baked in the cake” given these contractions, with the impact likely to appear within six to eighteen months. The current contraction, driven by the Fed’s quantitative tightening, is already causing banks to tighten and reduce assets to meet regulatory demands. Hanke believes that the only thing that could force a Fed policy pivot is a “credit crunch or liquidity squeeze on Wall Street.”
Fed ‘Doesn’t Know What It’s Doing’
Hanke was highly critical of the Federal Reserve’s approach. He pointed out that while Chairman Jerome Powell paused rate hikes in June 2023, quantitative tightening continued. Powell has repeatedly stated that the Fed does not pay attention to the money supply, a stance Hanke calls “ignoring the evidence.” The economist insists that the central bank relies on flawed post-Keynesian macroeconomic models that exclude money. “I think the Fed doesn’t know what it’s doing,” he told Makori, adding that the Fed has “doubled down on this money supply business” without acknowledging its consequences.
Gold and Argentina’s Inflation Solution
Turning to safe-haven assets, Hanke expressed a positive outlook on gold, citing its strong performance during past recessions and the recent surge in central bank gold purchases. He also discussed how inflation should be handled in Argentina, drawing lessons from the country’s chronic monetary mismanagement. Hanke concluded by urging investors to pay close attention to money supply data rather than being distracted by interest rate decisions.
The warnings from the prominent economist have sparked debate in both traditional finance and cryptocurrency circles, with many analysts predicting increased volatility for risk assets and potential gains for hard assets like gold if the Fed’s tightening continues.