Economist predicts a ‘big’ recession in 2023, and that’s not necessarily due to higher interest rates

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Investors in the financial markets fear that the United States is on the verge of an economic recession, as central bankers in Jackson Hole reaffirmed their determination to raise interest rates to control inflation.

Steve Hanke, a professor of applied economics at Johns Hopkins University, said he thinks the US is headed for a “tremendous” recession next year, but that’s not necessarily because of higher benchmark interest rates.

“We’ll have a recession because we’ve had five months of zero M2 growth – money supply growth – and the Fed isn’t even looking at it,” Hanke said in a statement. interview with CNBC on Monday. “We are going to have a big recession in 2023.”

M2 is a measure of the money supply that includes cash, checking and savings deposits, and shares in retail money mutual funds. Widely used as an indicator of the amount of currency in circulation, the M2 measure has stagnated since February 2022, following “unprecedented growth in the money supply” that began with the COVID-19 pandemic in February 2020. ( See chart below)

“There has never been sustained inflation in world history, that is, inflation above 4% for about two years, that has not been the result of unprecedented growth in the money supply, which we had from COVID in February. of 2020,” Hanke said. “That’s why we have inflation now, and that’s why, by the way, we’re going to continue to have inflation until 2023, probably until 2024.”

SOURCE: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

US inflation moderated in July with the Consumer Price Index rising 8.5% from a year earlier, down from a 41-year high of 9.1% in June, raising hopes that an increase in the price level has reached its peak. Maximum point.

But according to Hanke, he predicted last year that US inflation would be between 6% and 9% in 2022. “We hit the mark with that model. Now the model is running at 6% to 8% at the end of this year year over year, and 5% at the end of 2023 and going into 2024,” he told CNBC.

Watch: Fed likely needs to raise interest rates above 3.5% and keep them there until 2024, Williams says

Nevertheless, President Powell reaffirmed in his Jackson Hole speech last Friday that the central bank still plans to keep raising interest rates to bring inflation back to its 2% target, even if it results in “some pain” for American households and businesses.

“The problem we have is that the president doesn’t understand, even at this point, what the causes of inflation are and were,” Hanke said. “He keeps talking about failures on the supply side. He hasn’t told us that inflation is always caused by excessive growth in the money supply, which fires up the printing presses.”

Hanke is not alone in predicting a much deeper economic recession that could last into 2024. Stephen Roach, former chairman of Morgan Stanley Asia and a former Federal Reserve economist, warns that the United States needs a “miracle” to avoid a recession.

“We will definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach told CNBC on Monday. “They have not been activated at all at this time.”

Roach said that Chairman Powell has no choice but to adopt the Paul Volcker approach to adjustment. Volcker served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure, Volcker aggressively raised interest rates and successfully swept inflation out of the economy, but at great cost: he drove the economy into two consecutive recessions with stock market crashes. and high unemployment.

“Let’s go back to the kind of pain that Paul Volcker had to impose on the American economy to make inflation sound. He had to get the unemployment rate above 10%,” Roach said.

Watch: Job openings number 11.2 million, showing US job market remains strong

The unemployment rate returned to its pre-pandemic level in July and tied for the lowest level since 1969. Nonfarm payrolls rose 528,000 in July and the unemployment rate stood at 3.5%.

However, markets are awaiting the US employment report for August, due for release on Friday. Wall Street estimates that the nonfarm payroll will show the economy will add 318,000 jobs in August. The jobless rate is projected to hold steady at 3.5%, while average hourly earnings are estimated to rise 0.4% after rising 0.5% the previous month.

Watch: Financial conditions show ‘cracks’ as stocks fade and recession looms, Wells Fargo warns

US stocks traded mixed on Wednesday, breaking three consecutive days of falls. Dow Jones Industrial Average DJIA,
-0.02%
it fell 36 points, or 0.1%, to 31,754. The S&P 500SPX,
+0.12%
it rose 3 points, or less than 0.1%, to 3,988. The Nasdaq Composite COMP,
+0.23%
it gained 50 points, or 0.4%, to 11,930.

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