A leading economist has warned that there is likely to be a massive recession in 2023 in the United States and that this will not necessarily be down to interest rates alone. According to Steve Hanke, a professor of applied economics at Johns Hopkins University, inflation will remain at high levels throughout 2024 due to the growth in money supply following the pandemic.
Like other central banks worldwide, the US Federal Reserve has been aggressively hiking interest rates in response to soaring inflation. Furthermore, central bankers have recently reiterated their intention to take steps to lower inflation, which has caused concerns among investors and impacted stocks.
Impact of zero M2 growth
Many fear continued interest rate hikes will lead to a deep recession across the country. However, Hanke said that while interest rate increases might be a contributory factor when it comes to the risk of a recession, they are not the only factor.
In a recent interview, Hanke said: “We will 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. We’re going to have one whopper of a recession in 2023.”
M2 is used as an indicator of the amount of currency in circulation, including savings deposits, checking deposits, and cash. The measure is said to have become stagnant since February 2022 due to “an unprecedented growth of money supply” that began in February 2020 with the onset of the pandemic.
Hanke added: “There had never been sustained inflation in world history – that is inflation above 4% for about two years – that had not been the result of unprecedented growth of money supply, which we had starting with COVID in February of 2020. That is why we’re having inflation now, and that’s why, by the way, we will continue to have inflation through 2023 going into probably 2024.”
One of the other things that Hanke said was the Fed chairman, Jay Powell, does not understand the key causes of inflation. This came after Powell gave a speech last week stating that the central bank would continue taking action regarding interest rates to control inflation. Hanke said that Powell has failed to tell people that ‘turning the printing presses on’ and causing excess growth in money supplies was a major cause of inflation.
Further predictions of a recession
Other industry experts also warn of a significant recession next year, including Stephen Roach, former chairman of Morgan Stanley Asia and former Federal Reserve economist. He said there would need to be a miracle for the United States to swerve a recession at this stage, adding that the economic downturn could continue into 2024.