Third-quarter real gross domestic product (GDP) rose 2.6%, according to data released Thursday by the U.S. Bureau of Economic Analysis. The figure was above the consensus estimate of 2.4% 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 updated his probability of a coming recession to 90%.
The shrinking money supply is primarily responsible for the deterioration in economic conditions ahead, Hanke said.
“Where we go is determined by where the money supply goes,” he said. “The quantity theory of money is a means of determining the determination of national income. The money supply was inflated at the start of 2020, when COVID hit, the money supply grew, on average, about three times faster than it would have had to grow to reach a 2% inflation target. As a result, we had a lot of inflation.
The Federal Reserve’s quantitative tightening has reversed the rate of money supply growth to an “unprecedented” rate, Hanke said.
“Over the past seven months, the money supply has actually contracted by 1.1%. It’s almost unprecedented. This means, of course, that you have a large change in the money supply and then there is a transmission mechanism. There are lags between surges in the money supply, whether it is rising or falling, and what happens to the real economy. At some point in 2023 we have a pretty big recession baked into the cake. So these [GDP] the numbers its a good thing and you can celebrate it today its not negative anymore we got a positive number…the big picture gives the impression that the economy is pretty stable since last year, but she’s going to head south,” he said.
Fed pivot
As for the possibility of a “pivot,” the Federal Reserve would likely only reverse rate hikes once a liquidity crisis hits.
“The most likely thing that would cause a true pivot would be a crisis in financial markets because of the illiquidity problem that could result from this zero or negative money supply growth,” he said.
There have been historic precedents for the Fed to pivot as soon as markets have experienced liquidity crises.
“It happened, by the way. [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 and that was due to the upcoming quantitative tightening, and the Fed had to pivot immediately because there really was a crisis in the financial engineering aspect of the financial markets.
For Hanke’s year-end inflation rate forecast, watch the video above.
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