Steve Hanke, a economics professor at Johns Hopkins University, said on Monday that the Federal Reserve’s manipulation of the money supply will cause a “whopper” of a recession in the United States in 2023.
M2, a measure of the money supply that includes cash, checking accounts, savings, and other relatively liquid assets, increased in 2020 as a result of central bank operations before plateauing this year, according to statistics from the Federal Reserve, Hanke said in an interview with CNBC.
Hanke asserted that Federal Reserve Chair Jerome Powell does not understand that “inflation is always a result of excessive growth in the money supply, turning on the printing presses. The bottom line is we’re going to have economic stagnation — we’re going to have the inflation because of this overabundance that’s now starting to come into the system,” Hanke said.
After COVID and the lockdown-caused recession, the Federal Reserve set a target interest rate that was nearly zero and started buying $120 billion worth of assets every month to help the economy. These actions aimed to reduce borrowing costs while boosting the amount of liquidity in the market. Since then, officials have announced two straight 0.75% increases in interest rates, bringing the objective down to between 2.25% and 2.5%.
Hanke said that excessive expansion of the money supply had always caused “sustained inflation” throughout history. He said, “That is why we are currently experiencing inflation, and that is also likely the reason inflation will continue through 2023 and into 2024.”
Last month, the GDP of the United States declined at a 1.5% annualized rate in the first quarter and decreased at a 0.6% rate in the second, meeting the standard definition of a recession as two consecutive quarters of negative growth. According to statistics from the Bureau of Labor Statistics, year-over-year inflation inched down to 8.5% in July 2022 from a reading of 9.1% in June 2022 due to decreased energy prices, despite rising prices for food, new cars, healthcare, and housing.
Powell committed to keep implementing policies to ensure that inflation returns to the 2% goal that has been mostly sustained over the previous three decades during a speech last week at the Federal Reserve’s annual conference in Jackson Hole, Wyoming.
The Federal Reserve is in charge of maintaining price stability, which is the foundation of our economy, he said. “The economy does not function for anyone if there is not price stability. In particular, we won’t be able to sustain favorable labor market circumstances for an extended length of time without price stability. High inflation places a heavy burden on those who are least able to endure it.
