TL;DR Breakdown
- Economist Steve Hanke warns of a looming US recession due to monetary supply contraction.
- Despite the Fed’s focus on interest rates, Hanke argues the reduction in money supply is a critical concern.
- Predicted economic downturn is tied to monetary supply contractions, could happen within 6-18 months.
Description
The ominous shadow of a potential recession looms over the United States. Despite economic indicators demonstrating resilience, underlying factors suggest a forthcoming recession could be inevitable. The complexities surrounding the Federal Reserve’s decisions, the state of the monetary supply, and market trends point towards an impending economic contraction. Monetary supply and the Fed’s role Internationally … Read more
The ominous shadow of a potential recession looms over the United States. Despite economic indicators demonstrating resilience, underlying factors suggest a forthcoming recession could be inevitable.
The complexities surrounding the Federal Reserve’s decisions, the state of the monetary supply, and market trends point towards an impending economic contraction.
Monetary supply and the Fed’s role
Internationally recognized economist, Steve Hanke, recently shared his insights on this unfolding narrative. Amid the Fed’s decision to hold the federal funds rate steady, Hanke shifts focus to the critical matter of monetary supply.
He emphasizes that even though the Fed has pressed pause on rate increases, the institution persists with quantitative tightening.
From Hanke’s perspective, the money supply contraction since the previous year is a cause for concern. He highlights a 4.6% decrease, a phenomenon not witnessed since the late 1930s.
Hanke argues that changes in the money supply permeate the entire economy, affecting sensitive asset prices within a six-month timeframe.
Extrapolating these findings to a 12-24 months horizon, Hanke forecasts changes in broad-based inflation. Ultimately, he predicts a potential economic crash triggered by the swift contraction of the money supply and rapidly falling inflation.
The ‘baked in’ recession
In his perspective, the recession is not a remote possibility but a definite future, inherently linked to the monetary supply contractions. He suggests the inevitable economic downturn could take place within a six to eighteen months period due to economic lag.
Despite these findings, Hanke criticizes the Fed for not paying much attention to the monetary supply, considering it an unreliable indicator.
However, he stands firm in his conviction that disregarding this crucial aspect ignores empirical evidence and excludes money from macroeconomic models.
Hanke also touched on the regulatory changes causing banks to tighten and reduce assets. He speculates that a shift in the Fed’s approach could be on the horizon, likely triggered by a credit crunch on Wall Street.
The potential for a liquidity crash or squeeze on Wall Street might force a pivot in Fed policy.
Potential safe havens and recession predictions
The anticipation of the recession also casts a spotlight on potential safe havens, such as gold. Historically, gold has maintained a stable performance during economic downturns. Moreover, central banks’ recent gold purchasing trend supports the precious metal’s value.
Prominent financial institutions like Deutsche Bank echo Hanke’s predictions, anticipating a 100% probability of a U.S. recession. These projections come even as the labor market and consumer spending display tenacity in the face of some of the most aggressive interest rate hikes in history.
The U.S. economy is currently navigating its first genuine policy-induced boom-bust cycle in over four decades. Deutsche Bank’s chief economist, David Folkerts-Landau, warns that despite rate increases potentially bringing inflation down to the 2% target, the cost could be a recession.
The expansive fiscal and monetary policy-induced inflation, now being curtailed by aggressive rate hikes, is setting the stage for a hard landing. Steering clear of such an outcome would be, as Folkerts-Landau states, “historically unprecedented.”
As these economic dominoes align, a U.S. recession appears increasingly imminent. All eyes are now on the Federal Reserve and Wall Street as the world watches the saga unfold.
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