In a recent discussion on economic policies and their implications, Professor Steve Hanke from John Hopkins University highlighted what many modern economists seem to be neglecting: the Quantity Theory of Money (QTM). This theory, a cornerstone of economic thought dating back to the 16th century, is crucial for understanding the impacts of changes in the money supply on the economy. Unfortunately, Hanke argues that many current analysts and central banks have 'thrown it out the window', focusing instead on immediate, data-dependent analyses which often overlook the longer-term effects of monetary policy.
Hanke contends that despite the central banks' increasing dependence on data from today, the real determinants of current economic conditions lie in the changes in money supply that occurred years ago. He likened this approach to "driving while looking in the rearview mirror," meaning that many policymakers are not considering the broader influences of historical money supply changes which set the tone for future economic trends.
Looking ahead to 2024, Hanke discussed predictions made at the beginning of the year regarding inflation and GDP growth. Utilizing the QTM, he and his co-author anticipated a year-end Consumer Price Index (CPI) reading between 2.5% to 3%, a forecast they believe aligns with observable trends. While they accurately predicted inflation trends, the anticipated slowdown in the real rate of GDP growth has not materialized as rapidly as expected. Hanke attributes this delay in part to ongoing adjustments in money supply dynamics, which he underscores as the primary driver of economic indicators.
Hanke mentions that the stock of money in the U.S. economy is currently lower than it was in the summer of 2022. Historically, contractions in the money supply have preceded economic recessions, with the most drastic example being the Great Depression, which saw a significant reduction in money supply. He believes the current slowdown may be similarly “baked in,” albeit manifesting at a slower pace than originally predicted.
Understanding Monetary Policy: The Role of Money Supply
A crucial point made during the discussion was the distinction between monetary policy and simple interest rate management. Many analysts tend to focus on interest rates while neglecting the changes in the money supply that directly influence asset prices, economic activity, and inflation. Hanke argued that true monetary policy revolves around understanding and monitoring the growth rate of the money supply.
The interaction between central banks and commercial banks is vital in this context. Hanke reminded listeners that approximately 80 to 90% of money is created through commercial banks when loans are issued. Therefore, understanding banks' lending behavior — especially in an environment where banks may be cautious in their lending practices due to deteriorating economic conditions — is critical for predicting changes in the money supply.
Addressing broader systemic issues, Hanke discussed the implications of fiscal spending in light of expansive deficits and the role of quantitative tightening (QT). He contended that while current fiscal deficits in the U.S. are significant, the Federal Reserve's current QT strategy drastically limits the growth of the money supply, suppressing economic growth more than anticipated.
Throughout the conversation, Hanke noted how various countries, particularly in Europe and China, are grappling with different economic hurdles. For instance, the European economy is plagued by low growth and high inflation, while China is facing challenges due to stagnant money supply growth relative to its inflation targets. He pointed out that China’s approach to monetary policy seems overly cautious, potentially leading them to a stagnation comparable to that which Japan has experienced over decades.
The Impact of Political Leadership on Economic Policies
Hanke also addressed the intersection of politics and economics, particularly in the context of potential future political leadership changes in the U.S., such as a return of Donald Trump. He emphasized that while political decisions can tangentially influence economic conditions, the fundamental determinant of inflation remains the rate of growth in the money supply, not just fiscal policy changes or political rhetoric.
This perspective offers a cautionary note for market analysts and investors looking for economic signals in political shifts. The overarching lesson remains that the influential dynamics of money supply should not be overshadowed by transient fiscal or regulatory actions.
In conclusion, Steve Hanke reinforced the notion that understanding the quantity theory of money is essential for grasping the complexities of the economy. He called for a renewed focus on money supply data, advocating for its significance as a vital indicator of economic health. Hanke’s insights serve to remind policymakers and analysts alike that while the economic landscape may change rapidly, the foundational principles governing money supply remain a pivotal aspect of economic forecasting and analysis.
Listeners were encouraged to engage further with these concepts through Hanke’s publications, including his newly released book on capital theory, and to follow his insights on social media platforms. The discussion underscores the need for continuous discourse on monetary theory to guide sound fiscal and monetary policies moving forward.
Part 1/11:
The Quantity Theory of Money: An Overview
In a recent discussion on economic policies and their implications, Professor Steve Hanke from John Hopkins University highlighted what many modern economists seem to be neglecting: the Quantity Theory of Money (QTM). This theory, a cornerstone of economic thought dating back to the 16th century, is crucial for understanding the impacts of changes in the money supply on the economy. Unfortunately, Hanke argues that many current analysts and central banks have 'thrown it out the window', focusing instead on immediate, data-dependent analyses which often overlook the longer-term effects of monetary policy.
Part 2/11:
Hanke contends that despite the central banks' increasing dependence on data from today, the real determinants of current economic conditions lie in the changes in money supply that occurred years ago. He likened this approach to "driving while looking in the rearview mirror," meaning that many policymakers are not considering the broader influences of historical money supply changes which set the tone for future economic trends.
The Current Economic Climate: 2024 Insights
Part 3/11:
Looking ahead to 2024, Hanke discussed predictions made at the beginning of the year regarding inflation and GDP growth. Utilizing the QTM, he and his co-author anticipated a year-end Consumer Price Index (CPI) reading between 2.5% to 3%, a forecast they believe aligns with observable trends. While they accurately predicted inflation trends, the anticipated slowdown in the real rate of GDP growth has not materialized as rapidly as expected. Hanke attributes this delay in part to ongoing adjustments in money supply dynamics, which he underscores as the primary driver of economic indicators.
Part 4/11:
Hanke mentions that the stock of money in the U.S. economy is currently lower than it was in the summer of 2022. Historically, contractions in the money supply have preceded economic recessions, with the most drastic example being the Great Depression, which saw a significant reduction in money supply. He believes the current slowdown may be similarly “baked in,” albeit manifesting at a slower pace than originally predicted.
Understanding Monetary Policy: The Role of Money Supply
Part 5/11:
A crucial point made during the discussion was the distinction between monetary policy and simple interest rate management. Many analysts tend to focus on interest rates while neglecting the changes in the money supply that directly influence asset prices, economic activity, and inflation. Hanke argued that true monetary policy revolves around understanding and monitoring the growth rate of the money supply.
Part 6/11:
The interaction between central banks and commercial banks is vital in this context. Hanke reminded listeners that approximately 80 to 90% of money is created through commercial banks when loans are issued. Therefore, understanding banks' lending behavior — especially in an environment where banks may be cautious in their lending practices due to deteriorating economic conditions — is critical for predicting changes in the money supply.
The Challenges Facing Current Economies
Part 7/11:
Addressing broader systemic issues, Hanke discussed the implications of fiscal spending in light of expansive deficits and the role of quantitative tightening (QT). He contended that while current fiscal deficits in the U.S. are significant, the Federal Reserve's current QT strategy drastically limits the growth of the money supply, suppressing economic growth more than anticipated.
Part 8/11:
Throughout the conversation, Hanke noted how various countries, particularly in Europe and China, are grappling with different economic hurdles. For instance, the European economy is plagued by low growth and high inflation, while China is facing challenges due to stagnant money supply growth relative to its inflation targets. He pointed out that China’s approach to monetary policy seems overly cautious, potentially leading them to a stagnation comparable to that which Japan has experienced over decades.
The Impact of Political Leadership on Economic Policies
Part 9/11:
Hanke also addressed the intersection of politics and economics, particularly in the context of potential future political leadership changes in the U.S., such as a return of Donald Trump. He emphasized that while political decisions can tangentially influence economic conditions, the fundamental determinant of inflation remains the rate of growth in the money supply, not just fiscal policy changes or political rhetoric.
This perspective offers a cautionary note for market analysts and investors looking for economic signals in political shifts. The overarching lesson remains that the influential dynamics of money supply should not be overshadowed by transient fiscal or regulatory actions.
Final Thoughts: Returning Focus to Money Supply
Part 10/11:
In conclusion, Steve Hanke reinforced the notion that understanding the quantity theory of money is essential for grasping the complexities of the economy. He called for a renewed focus on money supply data, advocating for its significance as a vital indicator of economic health. Hanke’s insights serve to remind policymakers and analysts alike that while the economic landscape may change rapidly, the foundational principles governing money supply remain a pivotal aspect of economic forecasting and analysis.
Part 11/11:
Listeners were encouraged to engage further with these concepts through Hanke’s publications, including his newly released book on capital theory, and to follow his insights on social media platforms. The discussion underscores the need for continuous discourse on monetary theory to guide sound fiscal and monetary policies moving forward.