Steve Hanke Says With Money Supply Contracting At 'Unprecedented' Rate, Recession Is 'Around The Corner'

Steve Hanke, the professor of Applied Economics at Johns Hopkins University, reportedly said with the U.S. money supply contracting at an unprecedented rate, a recession will be right around the corner.

What Happened: "The money supply changes eventually get transmitted first with a lag of about one to nine months into changes in asset prices and changes in real estate prices and changes obviously in the stock market,” Hanke told

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He added, “And then, with another lag of a little longer about six to 18 months after those signal changes, after the money supply substantively changes, we get changes in real economic activity. So, that gets into the recession issue.”

The fight against inflation that led to aggressive rate hikes by the Federal Reserve has led to a decline in the M2 money supply, which is the central bank's main measure of the country's money stock. It fell for a fifth straight month in December, declining by a record $147.4 billion to a seasonally adjusted $21.2 trillion from the month before.

Hanke also highlighted how the decline in money supply over the last nine months is unprecedented. "It’s shrunk by about 2.5%. This is unprecedented too. You have to go back to 1929 and 1937 to find shrinkages like this," he explained.

Pivot Possibility: The professor believes that what could throw the market prediction off is the fact that if there would be a liquidity crisis and the U.S. starts going into sharp recession, the Federal Reserve might pivot and start reducing rates more rapidly than the market anticipates.

‘But that’s kind of an outlier. We could have a liquidity crisis actually. With the money supply shrinking like this, that is a possibility. But again, they’re focused on interest rates, not the money supply and that’s a very dangerous way to be flying an airplane," he said.

Photo: Courtesy of Wikimedia Commons

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Posted In: NewsEconomicsFederal ReserveInflationJohns Hopkins UniversityRecessionSteve Hanke
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