Fed's Blind Flight To Trigger A Recession

EDITOR'S NOTE: Economist Steve Hanke, Professor of Applied Economics at Johns Hopkins University and former advisor to Ronald Reagan, issues a stark warning about the Federal Reserve's direction, stating that it is flying blind into an impending recession in the first quarter of 2024. Hanke, a proponent of the monetarist approach, emphasizes the importance of monitoring changes in the M2 money supply as a leading indicator for inflation and GDP, a factor that the Fed dismisses. Hanke's concerns come in the wake of the recent rate pause by the Federal Open Market Committee (FOMC), which had previously raised rates consistently for over a year.

As Hanke highlights the contraction of the money supply since last April and the subsequent rapid decline in inflation, he predicts a significant economic contraction on the horizon. Against this backdrop, gold gains prominence as Hanke remains bullish on the precious metal, noting its historical performance as a safe haven during times of recession.

Source: Youtube

The Federal Reserve “doesn’t know what it is doing” and is “flying blind” into an “ugly recession” in the first quarter of 2024, according to Steve Hanke, Professor of Applied Economics at Johns Hopkins University.

Hanke, who served on Ronald Reagan’s Council of Economic Advisors, is a monetarist, and claims that changes in the M2 money supply directly cause changes in inflation and GDP.

“The Fed doesn’t pay any attention to the money supply, because [it claims] the money supply is not a reliable indicator,” he told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News. “They’re ignoring the evidence… The models that they have are post-Keynesian macroeconomic models that don’t include money.”

Hanke’s comments come after the Federal Open Market Committee’s (FOMC) latest meeting, which saw a rate pause. The Fed previously hiked rates ten consecutive times from March 2022 to May 2023, raising the Fed Funds Rate by 500 basis points over that time.

Hanke suggested that it is the money supply, and not changes in interest rates, which drive the “tenor and tone of monetary policy.”

“Since last April, the money supply has actually shrunk by 4.6 percent,” he observed. “Inflation is falling very rapidly because the money supply has been contracting very rapidly, and eventually we’re going to have the economy contracting very rapidly.”

To find out how bad Hanke expects the forthcoming recession could be, watch the video above

Bank Credit

In his FOMC Press Conference, Fed Chair Jerome Powell said that he is watching to see the “full extent” of the unfolding banking turmoil, which saw four banks collapse this year. This marks a departure from his prior comment that the U.S. banking system is “sound and resilient.”

“The banks are tightening up,” said Hanke. “They’re shrinking the assets that they have so they can increase the capital-asset ratios to meet the demands of the regulators.”

In March, three banks – Silvergate, Silicion Valley Bank, and Signature – closed amid liquidity concerns. In May, First Republic Bank collapsed, and its assets were sold to JP Morgan.

Hanke said that a “credit crunch on Wall Street” would force the Fed to pivot on rate hikes and reverse its quantitative tightening program.

“The only thing that could make them pivot is if they have some kind of credit or liquidity crash, or squeeze on Wall Street,” forecast Hanke.

To find out whether Hanke thinks more bank collapses are on the horizon, watch the video above

Gold

Hanke and his colleague, Abe Cofnas, developed The Gold Sentiment Score, which relies on a computer to mine the internet for articles about gold, and uses artificial intelligence to develop a sentiment score from -10 to 10. The higher the score, the more bullish the gold outlook.

“We don’t really care if the [gold] market is flat,” Hanke said. “From that sentiment score, we’ve got algorithms that trade off from it.”

Fundamentally, Hanke remains bullish on gold.

“I’m bullish on gold and the reason for that is that gold does very well going into a recession,” he stated.

To find out how Hanke uses The Gold Sentiment Index to earn a 30 to 50 percent per annum return, watch the video above

Originally published by: Cornelius Christian and Michelle Makori on Kitco News