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The persistence of high inflation—and the Fed’s bolder moves to curb it—have U.S. recession forecasts fading by the day, with more and more economists insisting that a significant An economic downturn is on the horizon.
Whether the US is on its way a “long and ugly” recession (according to “Dr. Doom” of Wall Street) or a soft landing (per Goldman Sachs) remains to be seen. On Friday, a top economist who predicted high inflation this year before a “whopper” of a recession doubled down on his call.
In an interview with CNBCSteve Hanke, a professor of applied economics at Johns Hopkins University, issued a dire prediction about the American economy.
“The probability of a recession, I think it’s much higher than 50% – I think it’s about 80%,” he said. “Probably higher than 80%. if [the Fed] continues the quantitative tightening and moves the growth rate and M2 [money supply] into negative territory, it’s extreme.”
Hanke, who served as a senior economist on former President Ronald Reagan’s Council of Economic Advisers in the 1980s, and in the 1990s advised several Eastern European countries on economic policy as a academic expert on hyperinflationEmphasizing that the supply of money has an important role in the near term for the US He argues that the Federal Reserve and its chair, Jerome Powell, bury their heads in the sand when it comes to recognizing in the weight of this particular economic indicator.
“Powell and his Fed … are really looking for the cause of inflation in all the wrong places,” Hanke said.
Hanke comes from the monetarist school of economics popularized by the legendary economist Milton Friedman, who subscribes to the “quantity theory of money”: an equation of how fast money enters the economy (the “money supply”) and the resulting inflation. Hanke has been sounding the alarm since a July 2021 op-ed in the Wall Street Journal that projected inflation roughly the same as we see in 2022.
He repeated his criticism of the Fed on CNBC: “They look at everything under the sun but the money supply, and they basically double down and triple down on the argument that money has no relationship to economic activity, or it doesn’t.” a reliable relationship with economic activity [and] inflation, and the reason for that is the Fed has exploded the money supply starting in early 2020 at an unprecedented rate.
“They don’t want this link to be seen between the money supply and inflation, because if it is, the noose is around their neck,” Hanke added. “Powell has no money supply on his dashboard.”
In the decades following his tenure as an adviser to the Reagan administration, Hanke took on similar positions working with lawmakers around the world, including Bulgaria, Venezuela and Indonesia.
In 1998, he successfully predicted the collapse of the Russian ruble, calling for a major devaluation of the currency which led to the economic crisis in Russia.
Hanke warned of that a “whopper” recession has been on the cards for some time, and it’s here taught M2 reading— a measure of the US money supply, which includes cash, checks and savings deposits—as a metric that shouldn’t be ignored.
He is one of many prominent voices saying that a US recession is likely in the near future, including top economist Mohamed El-Erian, Jamie Dimon by JP Morgan and the the richest man in the world, Elon Musk.
Even Powell himself appeared less confident in the Fed’s ability to engineer a soft landing for the US economy, speaking at a news conference this week that the chances of achieving that goal soon “are likely to diminish.”
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