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, Hanke criticized the Federal Reserve for lacking direction and predicted an “ugly recession” in 2024.
Money Supply Contraction Signals Impending Crash
Hanke emphasized that while the Fed's interest rate decisions grab headlines, the money supply is the true indicator to watch. Since last April, the U.S. money supply has contracted by 4.6%, a level not seen since the late 1930s. He explained that such a contraction inevitably leads to a rapid drop in broad-based inflation within 12 to 24 months, followed by an economic contraction.
“Inflation is falling very rapidly because the money supply has been contracting very rapidly,” Hanke said. “Eventually, we’re going to have the economy contracting very rapidly.” He noted that the lag effects of monetary policy mean the recession could hit anywhere between six to eighteen months from now.
Hanke accused the Fed of “ignoring the evidence” by dismissing the money supply as an unreliable indicator. He pointed out that the central bank relies on post-Keynesian macroeconomic models that do not include money, which he called a fundamental flaw. “I think the Fed doesn’t know what it’s doing,” Hanke stated bluntly, adding that Chairman Jerome Powell has repeatedly said the Fed pays no attention to the money supply.
Bank Tightening and the Risk of a Credit Crunch
The economist also warned that banks are shrinking their assets to meet regulatory demands, which further tightens credit conditions. He believes the only factor that could force the Fed to pivot is a major credit or liquidity crisis on Wall Street. “The only thing that could make them pivot is if they have some kind of credit or liquidity crash, or squeeze on Wall Street,” Hanke said.
Gold Optimism and Argentina's Inflation Lessons
During the interview, Hanke expressed a positive outlook on gold, citing its historical performance during recessions and the recent surge in central bank gold purchases. He also discussed Argentina's chronic inflation, arguing that the country needs fundamental monetary reform rather than conventional measures.
Hanke concluded by reiterating that the money supply contraction has already “baked in” a recession. His warnings come as the Fed attempts a delicate balancing act between fighting inflation and avoiding a downturn—a balance he believes the central bank is failing to achieve.