March 27, 2023

90% chance of ‘pretty big recession’ hitting by 2023 as money supply shrinks ‘unprecedented’ – Steve Hanke

Third-quarter real gross domestic product (GDP) rose 2.6%, according to data released Thursday by the U.S. Bureau of Economic Analysis. This was higher than the consensus estimate of 2.4 percent and follows two consecutive quarters of GDP contraction.

Steve Hanke, a professor of applied economics at Johns Hopkins University, believes a recession is still likely. In fact, Hanke told Kitco News anchor David Lin that he recently upgraded his odds of a future recession to 90 percent.

Hanke said that the shrinking of the money supply is mainly the reason for the deterioration of the future economic situation.

“Where we’re going is determined by where the money supply goes,” he said. “The quantity theory of money is a way of determining the determination of national income. We had a loss of money supply at the beginning of 2020, when COVID hit, the money supply grew on average about three times faster than it should have grown to reach the 2 percent inflation target. As a result, we had a lot of inflation.”

The Federal Reserve’s quantitative tightening has reversed the growth rate of the money supply at an “unprecedented” rate, Hanke said.

“Over the past seven months, the money supply has actually contracted by 1.1%. That’s almost unheard of. This means, of course, that you have a large change in the money supply and then there is an intermediary mechanism. There are lags between the focus of the money supply, whether it rises or falls, and what happens to the real economy. At some point, in 2023, we’ll have quite a recession baked into the cake. So these [GDP] the numbers, they’re a great thing and you can celebrate that today, it’s no longer negative, we had a positive number…the overall picture looks like the economy has been flat for the last year, but it’s going to hit south,” he said .

Fed Pivot

Regarding the “pivot” option, the Federal Reserve would likely reverse the interest rate hike only when a liquidity crisis hits.

“The most likely thing that would cause a real reversal would be a crisis in the financial markets due to an illiquidity problem that might be caused by non-growth or negative growth in the money supply,” he said.

There have been historical precedents for the Fed to reverse as soon as markets experienced liquidity crises.

“That’s what happened anyway. [The Fed] started doing quantitative tightening several years ago,” he said. “Remember the big problem we had in the repo market? There were a lot of failed trades in the repo market because of the incoming quantitative tightening, and basically the Fed had to turn around immediately because there was really a crisis in financial market funding.”

See Hanke’s year-end inflation forecast in the video above.

Follow David Lin on Twitter: @davidlin_TV (

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