The U.S. economy is going to fall into a recession next year, according to Steve Hanke, a professor of applied economics at Johns Hopkins University, and that’s not necessarily because 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,” he told CNBC’s “Street Signs Asia” on Monday.
Market watchers use the broad M2 measure as an indicator of total money supply and future inflation. M2 includes cash, checking and savings deposits and money market securities.
In recent months, money supply has stagnated and that’s likely to lead to an economic slowdown, Hanke warned.
“We’re going to have one whopper of a recession in 2023,” he said.
Meanwhile, inflation is going to remain high because of “unprecedented growth” in money supply in the United States, Hanke said.
Historically, there has never been “sustained inflation” that isn’t the result of excess growth in money supply, and pointed out that money supply in the U.S. saw “unprecedented growth” when Covid began two years ago, he said.
“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.
In 2020, CNBC reported that the growth in money supply could lead to high inflation.
“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, adding that “he has failed to tell us that inflation is always caused by excess growth in the money supply, turning the printing presses on.”
Powell, in his policy speech at the annual Jackson Hole economic symposium on Friday, said he views the high inflation in the U.S. as a “product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand.”
CNBC has reached out to the Federal Reserve for comment.
‘Sacrificial lamb’
David Rosenberg, president of Rosenberg Research, also expressed skepticism over the Fed’s direction, but in other respects. He said the Fed is now “more than happy” to overtighten to get inflation down quickly.
“Overtighten means that if the economy slips into a recession, you know — so be it,” he told CNBC’s “Squawk Box Asia” on Monday, adding that Powell said this is short-term pain for long-term gain.
He said he’s “a little disappointed” that the central bank is chasing lagging indicators like the unemployment rate and inflation, but that the Fed is “not going to take any chances” after being “thoroughly embarrassed” for calling inflation transitory.
“[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.