Steve Hanke, an applied economics professor at Johns Hopkins University, predicts that the U.S. economy will enter a recession in the coming year, but not necessarily as a result of higher interest rates.
“We will have a recession because we’ve had five months of zero M2 growth, money supply growth, and the Fed isn’t even looking at it,” on Monday, he said on “Street Signs Asia” on CNBC.
The broad M2 metric is used by market observers as a predictor of future inflation and the overall money supply. Cash, checking and savings deposits, and money market securities are all included in M2.
Hanke cautioned that the stagnant money supply of recent months is likely to cause an economic slowdown.
“We’re going to have one whopper of a recession in 2023,” he said.
Hanke predicted that due to the “unprecedented growth” in the US money supply, inflation will continue to be high.
He noted that the money supply in the United States had “unprecedented growth” when Covid started two years ago and noted that historically, “sustained inflation” has never occurred that isn’t the result of excess growth in the money supply.
“That is why we are having inflation now, and that’s why, by the way, we will continue to have inflation through 2023 going into probably 2024,” he added.
“The bottom line is we’re going to have stagflation — we’re going to have the inflation because of this excess that’s now coming into the system,” he added.
“The problem we have is that the [Fed Chair Jerome Powell] does not understand, even at this point, what the causes of inflation are and were,” Hanke said.
“He’s still going on about supply-side glitches,” he said and keep on continuing that “he has failed to tell us that inflation is always caused by excess growth in the money supply, turning the printing presses on.”
The high inflation in the United States, according to Powell, is a “product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand,” he said in his policy speech at the annual Jackson Hole economic symposium on Friday.
The Fed’s strategy has drawn some criticism from David Rosenberg, president of Rosenberg Research, but in different ways. He claimed that the Fed is now “more than happy” to tighten policy excessively in order to reduce inflation swiftly.
“Overtighten means that if the economy slips into a recession, you know — so be it,” Powell stated that this is short-term pain for long-term gain, the speaker remarked on Monday’s episode of “Squawk Box Asia” on CNBC.
He said he is “a little disappointed” that the Fed is “not going to take any chances” after being “thoroughly embarrassed” for calling inflation transitory, but that the Fed is “not going to take any chances” since it is chasing lagging indicators like the unemployment rate and inflation.
″[Powell] basically said the economy will be, near term, a sacrificial lamb,” Rosenberg said.
“I think this Fed, after being on the wrong side of the call for the past say 12 to 15 months, are going to need to see probably at least six months of intense disinflation in the price data before they call it quits,” he added.