This market will be in ‘great turmoil’ as inflation rises to 6% by 2023 - Steve Hanke (Pt. 2/2)

now in the second part of our interview today we're going to be talking about monetary policies around the world in particular china we're going to be comparing chinese monetary policy with that of the u.s now you wrote an article an op-ed recently and you said that the chinese are following what you call orthodox monetarism can you describe what that is and what you mean by that you know so just to be straight i i am i'm a monetarist i i'm in the monetarist tribe and and the chief of the tribe is milton friedman okay now what now what is that that that is allowing the money supply to grow at a rate that is consistent with hitting an inflation target so if in the united states if we want to hit our inflation target on a sustained basis the inflation targets two percent if we want to hit that the golden growth rate for the money supply is 6.3 which i calculate if you look at the growth in the last 17 months of the money supply in the united states what do you what do you get um and when i say money supply i'm just defining it the way the fed does broadly at m sub 2. it's 20.2 percent so the golden growth rate that a monetarist would prescribe so that you could hit and would hit the inflation target 2 is 6.3 percent the actual growth rate has been about three times higher than that for the past 17 months in the united states and that means what that means first of all that we will see asset prices go up we we had a monetary supply surge and monetarism says that the next thing that happens in a with a lag of one to six months asset prices go up so the stock market's gone up houses have gone up all real assets have gone up and and that's the first phase the second phase after a an injection of the monies in the money supply and with and with a monitors way of thanking and model is that in a 16 to 18 month lag the real economy starts revving up that's happening right now the last phase the last phase david is inflation and inflation comes at the end of the of the train and that's about 18 excuse me a 12 to 24 month period a one to two year lag after you've injected the money supply into the system so what we're seeing right now with inflation everybody's all worked up with inflation and and the fed and almost everybody the market participants all say oh this is just temporary and it's because you know you used car prices are going up and you've got you've had disruptions in the supply chain and the economy is revving up as a monetarist would predict after six six to 18 months after the monetary injection the economy revs up but once once it does that we we've had covet and we've had all kinds of restrictions disruptions and so forth things are slow getting started in some sectors and so you're seeing prices jump up and and everyone has concluded this is contemporary well there is a temporary component but remember what milton friedman taught us a long time ago inflation everywhere is a monetary phenomenon so sustained inflation comes from the money supply being goosed at three times higher than the golden growth rate okay and that will be the next phase coming in and that's why in 2022 the inflation rate get given uh my monetarist model will be a little under six percent uh a little under five percent excuse me for 2022 23 and 24 it'll be a little bit under six so it's coming and the and there'll be a big there'll be a big uproar in the bond market believe me that that is not priced into the bond market right now but it but it will it will start being priced in and and we'll have a great turmoil in the bond market that that's we'll we'll see the disruption occur there big turmoil in the bond market why is that do you think it's because the fed's going to raise rates well no inflation will pick up in other words the the fed story they're trying to manage inflation expectations and they they tell us the percent cpi number we just saw is a temporary a a flash in the pan it's going to be gone don't worry about it but they don't tell you that they have been for the last 17 months growing the money supply at over 20 percent when they should have been at about six and a half percent and and that will lead to ultimately sustained inflation in in 2022 a little under five percent 2023 a little under six a little under six in 2024 that that's all baked in the cake that's we i i know that's going to happen it isn't something i where i'm looking into crystal ball and trying to figure the damn thing out we we know what the numbers are the numbers are the cake is already baked and when inflation picks up when inflation picks up what happens interest rates follow inflation yes interest rates follow inflation yeah if you were to come in and and and when they do what does that mean that means bond prices have to go down yeah as interest rates go up yeah absolutely if you were to compare the chinese monetarist model to the fed's model which do you think which central bank has been doing a better job at hitting their targets for inflation or any other any other mandate that they've set oh china there's no question about it china china milton friedman gave china and visited by the way an important meetings of the chinese and they are now they are now following milton friedman's monetarist rule and and that is the golden growth rate since 2014 i calculated the golden growth rate is 11.5 for m2 growth and the average growth rate in the money supply since 2014 and china has been 10.6 they've been right right in the uh almost at the golden growth rate and and they've been hitting their inflation target at three percent so they they they've been they've been doing a very good job following milton friedman they had a spell where they followed another one of my great mentors the late robert mundell bob mundell had them fix the exchange rate at 8.28 won per dollar which they had pretty fixed from two from 1990 after they devalued the one in 1994 until 2005 they they did have a fixed rate and they essentially had no monetary policies so they weren't they weren't following a friedman rule they were following a mondel rule both nobel laureates the chinese don't fool around they get the heavyweights in there if they're doing things and the first phase of china's liberalization they were following a mundell rule to fix the exchange rate it did it worked like a charm they had very controlled modest inflation stability very very rapid growth and then after they decided to switch to a more flexible exchange rate they adopted eventually some some bumps were in the road but eventually they latched on to friedman's monetary rule and now they're they're monetarist okay and uh okay let's finally tie this back into commodities now you have uh your hanky crew or hanky coffin uh i rather the gold sentiment index let's take a look at that chart now and uh tell us what you think of uh your sentiment right now you've talked about this two weeks ago you were very bullish then uh what happened here you're now more neutral okay okay i i fund that number one i fundamentally i am very bullish and the reason the reason for that is the inflation expectations that the fed is trying to manage are going to be thrown out the window as the monetary surge starts to bite remember i told you that 12 to 24 month lag it's going to start biting in 2022 23 and 24 and when that does of course that's very good for gold so that's the fundamental long-term picture for gold the sentiment score and the hanky koftness sentiment score you're seeing right now is has moved from it was positive two weeks ago remember when i talked to you and two weeks ago and the price did go up this is this is sentiment short short term we're reading this hour by hour and and we're we're reading all the publications that come out about gold and we're trying to decipher through text mining techniques that we've developed whether the stories coming out are bullish or bearish and right now they're kind of neutral and the gold market is is kind of neutral since i talked to you last the gold market has been pretty flat and and and right in line with a hanky coughness gold sentiment score so right now hold your long position um but don't anticipate that there'll be much of a move one way or another in gold and until we see that sentiment score he either go left or go right excellent professor hanke thank you so much for coming in today excellent updates as usual and i look forward to speaking with you again soon that'll be great david have a good evening thank you you too and thank you for watching kikko news i'm david lynn you

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Keywords: gold, silver, finance, news, investing, investing news, finance news, financial news, economy, precious metals, gold price, silver price, gold price today, silver price forecast, gold price forecast, kitco news, steve hanke, steve hanke economics, steve hanke johns hopkins, david lin, david lin kitco, inflation, milton friedman, bond market, fixed income, bonds, gold sentiment, monetary policy, china, macroeconomics

Id: Bpsdh3rFgHg

Length: 11min 56sec (716 seconds)

Published: Thu Jun 17 2021