Is The Fed Destroying The Economy? Professor Steve Hanke Explains Why It Will Collapse

fiscal policies simply way out of equilibrium shall we say it's not sustainable so I would start doing something with it right now and and as I say what I would do is be pushing for a constitutional convention and a constit change in the Constitution that impos something like the Swiss debt break into the US Constitution that that that would fix the fiscal thing right away the next thing I would do is is get a a chairman of the Federal Reserve that was in there paying attention to what was going on with the money supply somebody like Paul vuler who paid attention to the money supply it's all about the money supply the current chairman Paul is not even looking at the money supply they they don't even look at it they they've poo pooed the [Music] [Applause] thing hello and welcome to speak up here on the wealth on network I am your host Anthony scaramucci uh today joining us is Steve henky uh Steve is a professor of Applied economics and he's the founder and co-director of The Institute of Applied economics uh Global health and the study of business Enterprise at the Johns Hopkins University uh Steve thank you so much for joining us I'm going to get right into it with you if you don't mind I love your bookshelf by the way I'd like to I'm a big book reader so I I'm I'm sure you got some really smart stuff on that bookshelf what's happening in the economy sir where is inflation we at skybridge think the inflation numbers are lower than the FED is suggesting do we have that wrong are we in a period of long-term inflation no I I think generally broadly speaking Anthony you're you're correct uh and and the the reason for that is that the the money supply broadly measured by M2 the broadest measure that the FED has has been falling and Contracting since July of 2022 and and it's actually contracted by almost 4% since July of 2022 that's that's only occurred four times in US history uh you got to have to go way way back to 1948 49 to find the the the the last contraction and then you you go you go back you got another one in 3738 and then of course the Big Kahuna 2933 that was a great depression and then 1920 1922 you had another contraction so they're they're very very unusual we haven't had any in Modern Times And they're always followed by economic slowdown and recession of course the Great Depression was 2933 contraction so so the economy is is is going to slow down because money is the fuel that drives the economy and and with long leads and and and variable leads after you get these changes in the money supply then you get changes in asset prices changes in economic activity and changes in inflation so what did we have on the upside we had the money supply skyrocketing in in February of 20 21 it was growing at 21 27% sorry 27% per anom that's a record it's never grown that fast and we we got inflation B exactly what we thought now it's Contracting and what back to your point the inflation H has been kind of plateaued a little bit in here for four months but it's it's coming down it's baked in the cake John Greenwood and I think by the end of this year it'll be down to 2 and a half to 3% so that's that's a a kind of a long answer but you got to get the money supply it's it's all about the money supply okay and I and I and I appreciate all that having been a long-term monitor I understand exactly where you're coming from I guess I guess the the question I have is if you were the Fed chair let's say you were the whole board I empowered you I made you the FED Zar you'd be cutting rates you'd be waiting to cut rates are you worried about the economy slipping into a recession an unnecessary recession if they don't start to move on the rate table I I I I would be reducing rates and uh a stopping quantitative tightening the main thing to stop quantitative tightening stop the shrinkage in the balance sheet because when your quantitative tightening occurs what happens is that the uh the the Fed is is no longer buying bonds and and refreshing the bonds that that are that are going off the off maturing they're having to sell as bonds to and when that happens the general public pays with a check out of their checking account for the bond and and the reduction in their checking account reduces the money supply so it's a drag on the money supply so so we don't want that the money supply should be growing hanky's golden growth rate Anthony is about 6% now that's consistent with hitting an inflation Target of 2% if you want to hit two you got to grow the money supply about five or six percent right right now the the money supply is just growing a little over two% so my my my next question is like sort of related to the same thing it's it's the uh the fiscal policy so you've got the Fed probably doing the right thing they've taken some money out of the system they're trying to reduce inflation but we are spending like drunken Sailors I mean it's six and a half to s% of the GDP of the country in deficit spending at a time when the country is more or less at full employment the participation rate seems to be pretty good sir what what do is that the right thing to do to uh where the CBO is now saying we're going to have a $50 trillion deficit over the next 10 years in terms of the cumulative deficit is is that the right thing to do for the United States no no the right the right thing to do is is get get that deficit on on the on a shrinking basis not an expanding basis and get our fiscal house in order so it's sustainable e even the nonpartisan Congressional budget office says this can't go on this is not sustainable so how how do you how do you correct it there there are only three ways to do it one is to reduce government spending that would that would be the best thing by the way for the economy to Goose the economy reducing government spending and letting the private sector have have more of the change would be the best policy but you also can shrink a deficit by increasing taxes now that that slows the economy down so that's not that's not so great you and this I'm talking about direct taxes what what you pay on April 15th you can also have another kind of tax to shrink the the burden of the of fiscal deficit and the debt to GDP and that's what's called an inflation tax and that's bad so all all the two taxes are bad and shrinking government expenditures are good so I'm on the shrinking government expenditures are slowing those down to close that deficit the deficit is is definitely bad do we have anybody that is willing to do that though I I I don't see anyone on the political scene that's willing to do that and if you look at the history of fiscal control if you have statutory changes that uh that that are put in place new fiscal rules that that try to slow things down those tend to work for a little little while and and then they break them so the only way you really can do what I think is to have a a constitutional convention under Article Five of the Constitution and look specifically at how to change the Constitution that would require something like a Swiss debt break like like the Swiss do they they changed their constitution and now they must balance their budget and the government expenditures can't grow any more any more rapidly than the rate of growth in the economy so so that's that I think that's the only long-term solution uh really if I talk to Business Leaders no one cares if I talk to the campaigns I have friends on both campaigns the Biden campaign and the drum campaign don't care not gonna stop it not going to do anything about it uh don't care uh so why such apathy you're concerned about it I'm concerned about it if I was in the government I'd be pulling a five alarm fire I'd be working on a 15-year deficit reduction ction plan I'd be telling the American citizens how dangerous this is and how we're going to lose our dollar Supremacy we could I mean you're you're now spending more in interest rate payments than we are in National Defense and that's only going to accelerate sir so so what am I missing or or is you know that because there is also wisdom in crowds maybe I'm completely wrong listen I've been humbled by life and markets Professor so I'm not here even pretending for a moment that I'm right I'm just am I missing something is the marketplace right that the indifference is the right approach or should there be some some less indifference and you you and I are on the same camp obviously on this on this score the these kinds of things aren't a problem and until they sneak up and and and bite you in the rear end it's that it's that kind of problem and and as herb Stein who was the chairman of the president's Council economic advisor under Nixon once said I if if something can't go on it will stop and and and this can't go on and it will stop and what people have to think about are those three options that I just mentioned to you are we gonna are we going to squeeze government spending are we going to increase taxes or direct taxes or are we going to have more inflation tax that's that's the only thing that can happen and and it will happen by the way because as Stein says if something can't go on it will stop yeah well I mean you know that's the thing I'm worried about sir I mean you know this is the um I mean and and it it ties into my next question which I want to ask you about the stimulus when I look back at the stimulus and the amount of money that was over inducted into the economy uh uh did we mishandle that and and so the question is you had a crisis and so what ends up happening is the we overreact to the crisis or sometimes we underreact but mostly overreact when it comes to monetary Supply and fiscal uh policy and so you know are we setting ourselves up for that type of collision again and so first question though is do you think we put too much money into the economy during Co well the the way we put it in was the problem because we we had the a massive increase in government spending a massive increase in the deficit and and the bonds that were being issued to finance that deficit were being bought by the Federal Reserve about 90% of the deficit was was being what they call monetized Anthony and and that's why the money supply shot up we we would not have the inflation we had if that monetization of the fiscal deficit hadn't occurred if those bonds had just been sold to the general public that we we would not have had the kind of inflation that we experienc so it it was the FED that was kind of basically in in bed with with the fiscal authorities and and that's where the nub of the problem is it comes back to what I originally said It Money Matters money dominates it's all about the money supply okay so let me set the stage for you it's 2030 uh we're spending $2 trillion dollar in interest rate payments one and a quarter trillion dollars in National Defense and uh we're upside down in our budget deficit by $2 and a half trillion dollars and we're having a dollar crisis uh people are shedding dollars internationally because they're worried about this upside down Apple Court what would the United States do in the event of a crisis like that sir with those who occupy Washington DC and got us into the C into the into the hypothetical crisis that you just put forward it's very hard to predict what they would do my my guess is they would probably panic and and and make a move that maybe would make the crisis even worse so so so it's this is one thing in the in the markets I mean you're you're in the market every day and the thing that amazes me is that the markets aren't aren't pricing any of these kinds of things in at all you you and I are talking about the debt and the deficit and and the CBO says this isn't sustainable we we know the arithmetic just can't keep going like this the markets just don't have anything priced in for that the markets are not pricing any any of these broad things in for example the the proxy war the US is engaged in with Russia right now and Ukraine none of that's priced in what's going on in the middle least none of that's priced in they're just all these larger things that are kind of off Beyond the Horizon that that bite you when they bite but before biting nothing is happening not none of that's priced in no no no one's pricing in a bite okay um what would you do sir is there anything actionable given everything that we're discussing I always like asking our guests this is there something actionable that you would do today that would uh improve your portfolio act the actionable uh in terms of fiscal policy fiscal policies simply way out of equilibrium shall we say it's not sustainable so I would start doing something with it right now and and as I say what I would do is be pushing for a constitutional convention and a constit change in the con stitution that imposed something like the Swiss debt break into the US Constitution that that that would fix the fiscal thing right away the next thing I would do is is get a a chairman of the Federal Reserve that was in there paying attention to what was going on with the money supply somebody like Paul vuler who paid attention to the money supply it's all about the money supply the current chairman Paul is not even looking at the money supply they they they they don't even look at it they they' poo pooed the thing they they said it it doesn't matter it doesn't count so it's not in their it's not in their models it's not in any of their templates they they hardly even report on it how many how many times do you see in the newspaper a a headline of what just happened to the to the change in the money supply during the last month you you've got to look in some footnote even in the Wall Street Journal to find the number what about for my portfolio what would I do for my portfolio actionable right now Steve let's talk about the stock market for just a second to get my kind of perspective we the stock market the S&P 500 it's up about 15% this year and we've had over 30 record closes this year uh and and there's very little volatility in the market this days the the trading range plus 1% uh minus 1% uh the fear gauge the Choy index is below 12 that's the lowest it's been in in five years now that's the price for options to hedge against a a downturn in in the stock market uh the the breadth of the market is actually very narrow 10 stocks make up 37% of the market cap uh and if you take those if if you just don't wait given market cap size of the stocks trade on the S&P 500 just a simple sum of those the market actually would be down the S&P 500 be down the last 30 days so and and the volume's low and as I say no factoring in of any of these geopolitical things no factoring in of what I think we will see a continued slowdown and a recession starting probably late this year early next year here due to the fact that we've had this monetary contraction we've got an inverted yield curve we've got gross output that's if you take all the sales we've got gross output is all the sales between all intermediate everything in the supply chain and that is growing actually less than at a slower rate than GDP which is Major for final goods and services in the economy now that's all all of these things are very negative the price the the Market's very pricey if you look at Robert Schiller's uh inflation adjusted PE uh and look at the data since 1881 we we have 95% of the time uh the PE that inflation adjusted Schiller PE is has been less than the PE is right now so the PE is the P prices are strong so what would I do well I I I'm a I'm above Buffett kind of guy and and Buffett's rule when Buffett really piled into apple he he said I I want to look for a stock that's trading that's cheap Le less than 15 as a PE well a current PE is about a little a little north of 20 21 in the stock market so so so the market wouldn't qualify for the buffer rule then then Buffett said I want a company that there's a 90% chance that the earnings will grow over the next five years and the third element of Buffett's rule he says I want a 50% chance that the earnings would grow at least 7% year-over year well now how many companies qualify for the B Buffet rule investment plus this overall picture I have of caution in there the Market's pretty toppy so I I would say hang on to your good stocks that are doing well uh and and and and and and but pay attention to things and and and you're not going to find any stocks to buy the the Merit buying given the buffet rule there's there's essentially nothing to buy and and then also in your portfolio since inflation's coming down you want to be long the 10year the 10 the 10year bond remember the the the interest rate on the 10year when I when I when I when I was recommending going along the tenure the yield was about 5% and I said you know inflation's going to be coming down because the money supply is Contracting and and with that interest rates always follow inflation Anthony so if inflation's coming down interest rates are going to be coming down on these long Bond so enter the 10year I think I think it's a pretty safe bet keep your keep your good stocks that are doing well and and I I and follow the Buffett rule about adding any new ones and I don't think you're going to find many so he just added uh accidental what do you think of that he usually knows what he's doing that's what I think of that right so so so but I mean maybe the strategy is just to buy Burkshire Hathaway right I mean I I often think about that when I first met him uh I've T you know if I had just bought if I didn't buy any private Equity Professor if I didn't buy the I just bought him I would have been fine you know I mean you know you know he's he's over 90 and he's clearly still hitting the long ball yeah yeah there's no question right so so the the by by the way another he he did just buy ocidental but he he also has been accumulating a huge pile of cash um yes I mean and he mentioned that during his uh annual meeting in May that he's he's got this ton of cash that he's built up um I guess you know people a lot of disinformation out there clear some things up for all of us the uh the Petro dollar agreement with the Saudis it looks like that they haven't reup that agreement uh some people say that that's a big deal other people say it's not that big of a deal uh but you know the brick countries many of these countries are thinking about figuring out ways to trade in Commodities away from the US dollar um our sanctions on our enemies have certainly created incentives for these people to do that um are we at risk of losing our mantle of monetary leadership well for for one thing that the that Petra dollar agreement uh uh from what I can figure out never existed so this this has been something that's been floating around on the social media but uh as someone who's you know been studying currencies more or less for over 50 years I I I'm not aware of that agreement from what I can figure out it never really existed but but be that as it may what what are the risk well the risk if you go back 2500 years and look at all the currencies there's there or the the world economy for 2500 years there's always one dominant International currency the US dollar happens to be the dominant International currency there have only been 14 Anthony in 2500 years so it's it's hard to knock the king off off his throne but how do you do that when when do Challengers come in and knock a king off the throne they they come in with basically bad monetary management uh and and and bad economic policy of one sort or another so let's look at the US and the US dollar right right now of course it's unbelievably strong it's been unbelievably strong for a couple of years you know it's the old line as a Trader you'll you'll know this and appreciate it buy dollars we diamonds and and so that's where we're at right now so but but if you look at the social media you've got basically the enemies of the United States who want to dollarize so they they're they're Fanning the Flames saying all these weaponization of the dollar sanctions and so forth are going to cause the dollar to to to tank and somebody else will take over well I agree sanctions are a bad thing and and weaponization of the dollar is something that makes it more vulnerable but but and something to keep your eye on but at this point we we're certainly not in any Tipping Point zone so so you have you know China and Russia they they talk a lot about dollarization and and the fact that the dollar is history and of course all the crypto crowds they they put out basically the same propaganda so you get a lot of chatter about dollarization but the fact is if you look even for central bank reserve buying central banks are piling into the dollar now they're they're actually increasing their dollar reserves they they the percentage of their total portfolios that has been in dollars it has gone down a little bit in the last 10 years but one of the main reasons for that is that the Swiss were intervening tremendously to try to hold down the value of the Swiss frank which kept ever appreciating and and they were doing that by by doing what they were buying Euros they were selling swissy and and buying eura so that's what that's probably the main factor in if you look in the aggregate reserves of all the central banks that's the reason the Dollar's role looks like it was sliding a little bit it was mainly that Swiss intervention now they're actually coming back into the market and buying dollars I mean it's brilliant Exposition which is why I'm not interrupting you um I want to talk about this tweet you put out last week okay even though sanctions have a history of failure US Treasury has announced more of them on the Iranian Bak houthis in Yemen stupidity is doing the same thing over and over again and expecting a different result so so when we agree I mean I I loved your tweet I guess the question is if you were the Secretary of the Treasury what would you do in anything would you have no sanctions on any of our adversaries or or what would what would you do as as a principle I I would I would deep of sanctions they counter productive they they hurt the United States more than they hurt the enemy what do they do they strengthen the enemy you get a rally around the flag effect right if you sanction somebody in a country or a country everybody says oh th those who are imposing sanctions on us they're at war with us they're our enemy so they they want to circle of wagons rally around the flag and and that's why the history of sanctions since World War I have have been a complete failure there almost no sanctions have ever accomplished their state of objectives and I by the way I was involved in this once with uh president Trump's Administration was considering putting Financial sanctions on Hong Kong as you remember and uh secret secretary Pompeo called me one Sunday afternoon says you know we're we're going to meet on Monday and decide on these Financial sanctions against Hong Kong and and I was requested to get your opinion on it so we talked for about 35 minutes I was of course adamantly opposed Pompeo was adamantly for and and ultimately the next day uh I I got a message back from the White House that just basically said hanky you won there won't be any there won't be any sanctions on Hong Kong yeah well it was a great move and thank God thank God for your contribution because sometimes these things are reactionary and they don't really factor in all of the the long-term consequences so so I I uh before we go to the audience um by the way the Hong Kong thing is interesting in the sense that the Hong Kong dollar is is issued by the Hong Kong monetary Authority which is a currency board and and and and it trades on a fixed exchange rate of 7.8 Hong Kong for one US dollar and it's backed 100% with US dollar reserves so the Hong Kong dollar is is in effect a clone of the US dollar so if you put sanctions on Hong Kong what what would be Financial sanctions you'd basically be attacking the US dollar so it would it would have been stupidity you know do doing the same thing over and over again expecting different results it would have been a complete disaster well said well said sir all right let let's go to uh let's go to some outside audience questions when an election year with an election year in government refinancing coming due can more liquidity keep on powering the stock market in 2024 and Beyond this is from Jay from New York City uh actually the the stock market right right now is not actually being there there really isn't excess liquidity so so it it isn't kind of a liquidity boom I I I I think it it's it's basically a Hightech boom with with a this AI fed if you look at the multiples on the stock market in general it's about 21 and the Hightech stuff's about 30 or north of 30 right so so it's all concentrated that that's what's going on that's that you know it's not a broad-based thing due to huge amount of liquidity hanging around right um it's it's interesting the uh the the earnings are not bad on certain companies though right I mean the these certain tech companies have done uh very well um if you take out that Magnificent Seven though I get your point that the the overall Market is not doing as well I get I guess um yeah here here Anthony Here's the the the thing if we look forward and this is the thing we kind of were talking about this in a in a various ways and that is we we've got this kind of optimism and and and kind of you know sleepwalking maybe into disaster now when you talk about earnings all the earnings forecast are going up but but what happens if the economy is going into their recession earnings go down they don't go up but but no one almost no one thinks there's going to be a recession I do and I and I do because the money supply is contracted since July of 2022 that's only happened four times in our history and every time it happened we had a recession so I I think the I think the earnings forecast are are wildly optimistic Point number one and I also think the multiples are are are high on on the high end so if you if you crank if you don't slap a multiple of of 20 one on on on earnings that are forecast to be too high uh and put a multiple that's lower what do you what do you get you got lower earnings and a lower multiple and you got lower stock prices yeah no it it's fascinating because uh you know it's Crystal Clear with your analysis is I I I guess the secondary question though is if they they start cutting rates let's say they cut three times you know over the next year or four times well that you know reduction in rates which uh eases financing uh will that help the market you've got two things going on with the the FED policy you've got the interest what's going on with the federal funds and and if the federal funds come down that's not going to hurt the market if anything it's going to help the market but but opposed to that and and something that is going to continue to drag on the economy is quantitative tightening and and that if that continues uh we'll we'll still have an overtight monetary policy because monetary policy whether it's loose or tight is not determined by the federal funds rate forget that it's all about what's going on with the money supply and and if quantitative tightening continues even if they reduce the FED funds rate you will have continue slow slow growth in the money supply and you you'll just you get certainly no no Goose out of that that's for sure it's it's dragging now remember the the the money supply right now is is actually growing at uh currently six1 of a percent year-over-year six1 of a percent year-over-year Anthony to hit their inflation Target at 2% it should be growing at 6% right so that's that's how that's how much of a drag this thing is on the on on the economy all right let's go to the next question I mean it's really really insightful Point thank you sir gm Ford and stallant should exit the Chinese market as soon as they possibly can a Bank of America analyst said the other day and so the question from Michelle from Detroit is how does Detroit stay competitive this is this is an age-old problem I remember when I was on Reagan's Council of economic advisors in in the early 80s the same question was being asked and of course then remember it was a Japanese cars yes exactly remember those voluntary restraints that that unfortunately Reagan was forced to to do that by elements in the Republican Party protectionist elements in the Republican party uh and I I was of course opposed to that but but it turned out let let me just walk you through that what happened the the Japanese said we're not going to send we we agree voluntarily we're not going to send as many cars to the United States as we have been sending but what they did they sent all the high pric models with big margins and Toyota and all the Japanese car companies made out like Bandits and and and nothing happened in Detroit I I mean did did Detroit's been in sick Bay for you know at least 40 or 50 years so so I guess I guess the uh um the question is they never fully get there anymore right there's just too much competition right I mean these cars are okay but they're not I mean some of them are okay but some of them I mean are just subpar compared to the uh International competition yes and I I'm I'm a un atal free Trader so I I'm I'm all for free trade uh that that makes life better for everybody for some people specifically where the competition is super tough it's it's not that good a deal and so the general population benefits from all the free trade but there are few groups get who get squeezed and the few when you when they get squeezed they make a lot of noise in Washington and even a free Trader like Reagan had actually a pretty mixed picture on on free trade he was much better than than Trump or Biden there's no question about that but still it it wasn't a perfect reaganesque kind of picture it it was it was kind of a mixed bag there there was some good but some bad and and and and it was the the squeaky wheel who caused the problem and and squeaky wheel was was who it was Detroit yeah it makes sense sir let's go to the next question bought a start home a few years back with record housing prices would renovating be a better investment than trying to buy bigger in the next couple years this from Dave from Long Island yeah in general because it it let's say let's say you're in a good Lo you're in a good community and you want to stay in that Community but your your house is not quite up to where you want to be you you want to you want to stay in that house and renovate it because number one it's going to be hard to find another acceptable house in that Community number one and and number two if if you get out of your low interest mortgage you're going to be facing a high interest mortgage if you move so so that that's Ju Just the financing cost switch is something to consider but realistically uh renovation has has lots of uh it's a lot it's attractive well said and I and I agree let's go to the next one what impact does the SEC news that ethereum will be considered a security have on the crypto market so I'll take this one uh this is from Jamie from Connecticut I I think that the ethereum decision by the SEC to approve it is going to take some of the market share away from Bitcoin and so as you look at a pie chart if you're going to be a crypto investor uh some of that money from a a pie chart perspective is going to go into ethereum uh so it marginally helps the overall Market but it may weaken Bitcoin at least in the short term all right well uh that that was our last ask questions or any other final thoughts for us before I uh no I I mean I mean the honestly I'm really looking for your health and beauty secrets okay because I did I did Google you and looked at your Wikipedia page you're a fellow Capricorn and I I got your age and you look about 15 18 years younger than you actually are so I mean I probably should have asked you who your dermatologist is before before we ended you know an Anthony you you know how to make a guy feel good I I think uh the company of Mrs hanky and her diet does a pretty good trick all right well there you go okay so you got to eat right I think that's the that's probably the you got to invest right and eat right those are probably the two best tips that me and Professor hanky can give you for this coming weekend well thank thank you very much for joining us on speakup I really do get it Hing to get a chance to see you soon I'm a huge fan of your your work of course and uh was delighted when you accepted our invitation great to be with you thank thanks for inviting me great to meet you if you like this video you'll like this video as well check it out

Channel: Wealthion

Views: 17,694

Keywords: Business, Economy, Finance, Personal Finance, Wealth, Geopolitics, US Markets, USD, US Dollar, Investing, money, financial freedom, Wall Street, Real Estate, AI, Housing, Bitcoin, Gold, Precious Metals, Bullish, Bearish, Banking, Asset Management, China, Oil, Portfolio, inflation, economy, crash, steve hanke, MBA, business school, anthony scaramucci, The fed, Finances, business news, CNBC, federal reserve, stock market, empowered mindset, options trading, decision making

Id: 1TDPz1fSmVE

Length: 40min 18sec (2418 seconds)

Published: Fri Jun 21 2024