In a recent conversation, Steve Hanke, a distinguished economist and applied economics professor at Johns Hopkins University, expressed his concerns regarding two critical issues troubling the U.S. economy and markets: rising inflation and inflated stock prices. Hanke, often referred to as a “money doctor,” fears that inflation could spiral beyond the Federal Reserve’s control, jeopardizing the central bank’s target of stabilizing price growth by 2026.
Hanke’s anxiety over stock valuations is also pronounced. He noted that his “Dr. X’s Bubble Detector” indicates that equity prices are at an all-time high, suggesting the presence of a market bubble. Despite a slight cooling in headline inflation last November, it remains significantly above the Federal Reserve’s 2% target, leading Hanke to assert that inflationary pressures are far from contained.
One of the key factors contributing to Hanke’s inflation concerns is the recent surge in the M2 money supply, which measures the amount of cash flowing in the economy. According to Federal Reserve data, the M2 money supply has increased by $3.5 trillion over the past five years. Hanke emphasized that this metric is crucial for predicting inflation trends, warning that it appears the money supply could be excessively expanded again.
Looking ahead, Hanke identified several developments that might further fuel inflation as the new year approaches. First is the Federal Reserve’s recent interest rate cuts, which, while intended to stimulate the economy, could provide the conditions for increased price growth. The Fed’s halt on quantitative tightening—an effort to tighten financial conditions by shedding long-term Treasuries—also raises alarms about impending inflation spikes. Additionally, the easing of lending regulations, particularly around banks’ capital requirements, is expected to empower banks to increase the money supply further, exacerbating inflation pressures.
Another concern for Hanke is the U.S. Treasury’s increased issuance of T-bills to fund government deficits, which could also augment the money supply and add to inflation. He remarked, “My concern is that, after letting the money supply explode in 2020-21 and imposing inflation on Americans, the Fed has failed to put the inflation genie back in the bottle.”
The outlook for the stock market appears equally grim. Hanke highlighted inflated valuations particularly in the technology sector, attributing this to a burgeoning enthusiasm for artificial intelligence (AI). He cautioned that the market may be on the brink of experiencing a “Wile E. Coyote moment,” a reference to the character’s sudden realization that he’s running off a cliff. Hanke advised investors to consider rebalancing their portfolios in light of these risks.
Throughout his career, Hanke has been known for his bearish outlook on both the economy and the markets, consistently warning of potential crises. Recently, he suggested that, while concerns about an imminent recession had eased somewhat due to rising inflation, the precarious nature of both inflation and stock valuations remains a source of unease. His insights serve as a cautionary reminder of the complexities facing the U.S. economy as it navigates the challenges ahead.
