WASHINGTON – Recession is imminent. That's the clear consensus among U.S. economists. Although the Federal Reserve's work to bring down inflation has led to a slight drop, prices are expected to keep climbing. There's a growing belief the Fed missed the mark, over-reacting to put the country right into a recession.
One key factor in all of this is the money supply. In 2020, fear over a pandemic shutdown prompted the Federal Reserve to begin pumping more than $6 trillion into the U.S. economy to combat unemployment and promote economic growth.
Congress injected close to another $6 trillion in stimulus-related spending. The result was an over-stimulated economy.
Johns Hopkins Economics Professor Steve Hanke, a former advisor to President Ronald Reagan, says the reason for today's high inflation is that the money supply grew so quickly during the COVID economy of 2020 and into 2021. "Well, that's still in the system, that's still driving things," he said.
Hanke believes the Federal Reserve got this one wrong.
"They're overdoing things, you see, they created this huge growth in the money supply in 2020 and 2021. That, with a lag of 12 to 24 months, gave us a lot of inflation that's still in the system. And now they, they hit the panic button early last year, and they're overdoing it. They're squeezing the money supply too rapidly, and it's actually contracting in an unprecedented way," Hanke explained.
As the Fed rapidly raises interest rates, many businesses are hurting, and much less money is going into the economy.
Hanke says it's now just a matter of watching the recession play out. "The money supply starts changing – in this case actually going negative on us – is that with a lag of about one to nine months, asset prices react. They go down," he said. "That's why the stock market has been kind of stagnant, nothing going on the stock market. Then, with a lag of about six to 18 months, the economy reacts, real economic activity starts changing. And that's the recession, that is the recession."
Hanke anticipates recession to begin around the end of this year and predicts inflation will continue throughout 2023.
In the meantime, he's largely ignoring economic headlines such as job reports, the dollar's status, the stock market, and unemployment numbers. Hanke is simply watching the money supply.
"Money dominates, that's the signal. the rest of the data are important, not irrelevant, but they can be – and they usually are – noise, because people can't package them into any meaningful model that leads to an accurate prediction," Hanke explained.
While he can't predict the length of a recession, Hanke believes it will be significantly worse if the Fed keeps raising interest rates. He recommends a pivot that would allow smaller economic growth, rather than continuing to seek contraction.