With the United States inflation cooling off, economists remain cautious about whether the economy is truly out of the woods, as projections for a recession still loom on the horizon.
In this regard, professor of Applied Economics at John Hopkins University Steve Hanke has warned that a recession could strike as early as the first quarter of 2024, noting that the current trajectory of the money supply indicates an imminent downturn, he said during an interview with David Lin on June 30.
Hanke explained that economic activity typically responds to changes in the money supply with a lag of around six to 18 months. Analyzing the data, he pointed out that the money supply measure began declining significantly in July 2022 and has continued to decrease since then.
This places the economy within the anticipated time frame for the emergence of weakness and recessionary conditions. He emphasized that this outcome is already “baked in the cake,” given the crucial role of money in driving economic activity, asset prices, and inflation.
“We are already in this six to 18-month zone where we start seeing weakness showing up in the economy, and that’s why I think by the first quarter of next year we’ll see a recession, and it is baked in the cake because money is what drives the economy,” he said.
Inflation back to 2%
Hanke’s warning comes at a time when various economic indicators have raised concerns about the future trajectory of global growth. Factors such as supply chain disruptions, rising inflation, and policy decisions have introduced significant uncertainties into the economic landscape.
Notably, with US inflation cooling to 4%, Hanke stated that there is a chance the rate could hit 2%.
It is worth noting that the scholar has long warned that the economy is on the verge of recession. As reported by Finbold in July 2022, Hanke pointed out that the chances of a recession stand at around 65%. The economist did not provide specific timelines at the time, noting that it all depends on the Federal Reserve.
Interestingly, the professor has ruled out the possibility of inflation returning to 2%, blaming the Fed for excessive money printing. Hanke noted that due to the excess money already in the system and the current conditions, it might not be possible to reverse inflation back to 2%, and there could be both a recession and inflation.
Investment products collapse
It is worth noting that amid the rising inflation, most investment products, such as stocks and cryptocurrencies, such as Bitcoin (BTC), underperformed. Notably, Bitcoin failed to rise as a potential hedge against inflation.
Furthermore, Hanke has previously criticized Bitcoin, stating that the asset is a bubble with ‘no inherent value and is terribly overpriced’. Previously, the economist slammed the cryptocurrency as a highly speculative asset, adding that “buying Bitcoin is a fool’s game.”
Additionally, the economist has criticized El Salvador’s decision to make Bitcoin a legal tender.
Watch full interview below: