According to Steve Hanke, professor of applied economics at Johns Hopkins University, there is an 80% chance that the United States will fall into a recession – much higher than previously expected.
According to CNBC’s September survey of economists, fund managers and strategists, those surveyed said there is a 52% chance that the United States will enter a recession over the next 12 months.
“The probability of a recession, I think, is much higher than 50% – I think it’s about 80%. And probably higher than 80%,” Hanke told CNBC’s “Street Signs Asia” on Friday.
“If they continue quantitative tightening and move the growth rate and M2 (money supply) into negative territory, it will be sharp.”
Hanke was critical, and was in the past, to the Federal Reserve’s failure to manage inflation by monitoring the large supply of money flowing into the US economy.
“They’ve been really looking at inflation and its causes in all the wrong places,” Hanke said. “They’re looking at everything under the sun, but the money supply.”
“And in fact, they doubled and tripled because of the argument that money has nothing to do with economic activity or has no reliable relationship to economic activity and inflation.”
A customer is shopping at a supermarket in Oregon. According to Steve Hanke, professor of applied economics at Johns Hopkins University, there is an 80% chance that the United States will fall into a recession – much higher than previously expected.
Wang Ying | Xinhua News Agency | Getty Images
He blamed the US central bank for rising inflation.
“The reason for this is that the Fed blew up the money supply, starting in early 2020 at an unprecedented rate and they don’t want that length to be visible between the money supply and inflation.”
“Because if that’s the case, the gallows are around their necks, and that’s the real problem.”
An increase in the money supply causes prices to rise as consumers are willing to pay more for goods.
Classical economics, as put forward by Milton Friedman and others, they refer to Hanke added that the money supply is the reason behind out-of-control inflation.
The professor said the Fed has flooded the US economy with loads of stimulus and liquidity to keep it afloat during the pandemic, but it has not focused carefully on reducing the money supply over time.
M2 money supply, a broad measure of money supply that includes cash and deposits, has grown by double digits in the past three years.
Hanke warned that growth in the M2 money supply is now slowing down too quickly and this could push the economy into a recession.
“They don’t handle it properly,” he said. “In the five months, we’ve seen big, big money in fixed lines in the US. It’s not growing at all.
“Now they are going to introduce quantitative tightening and what that will do will lead to a decrease in the money supply, which will push it into negative territory if they continue to do so.”
Hanke said the correct economic move would be to keep money supply growth at a “golden growth rate” of 5% to 6% to bring inflation to around 2%.
“Now it’s zero,” the professor said. “It’s likely to become negative.” That is why we will experience a recession in 2023.”