(Kitco News) - A 65 percent chance of a recession is "pretty reasonable," said Steve Hanke, Professor of Applied Economics at Johns Hopkins University.
Many analysts are forecasting a stagflation, a period of recession combined with high inflation. Hanke sees stagflation as a possibility. He added that it is "economic stupidity" to deny that excess money causes inflation.
Hanke spoke with David Lin, Anchor and Producer at Kitco News.
Recession on the horizon
"I happen to think there's a fairly high probability we'll have a recession, because the Federal Reserve is flying blind, afraid about inflation," said Hanke. "Usually when that happens, they tend to overdo things, tightening things up too fast, and dumping the economy into a recession."
Hanke said that the Federal Reserve needs to focus on the money supply, instead of just raising rates. A "soft landing," without too much damage to the economy, is possible, he explained.
"There have been three episodes when the Fed raised the Fed funds rate considerably and the money supply didn't go down that much," Hanke remarked. "I'd want to get the money supply to the golden growth rate of 5 to 6 percent of M2, that measure of the money supply. And that would allow, eventually, the inflation rate to get down to 2 percent… It's all about the growth in the money supply… Everyone focuses on these interest rates but they're a very bad indicator of what's going on with the money supply."
Yet Hanke was not optimistic about the Federal Reserve doing as he suggested.
"I think they will probably overdo it, and we will see the money supply go down pretty sharply," he said. "… And if that happens, we'll end up with stagflation… I think Biden will interfere massively. Whatever is going on in the Fed, Biden and The White House will have their fingers all over everything."
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Inflation is inevitable
Hanke said that inflation is "already baked into the cake" and that it will be around for "the next couple of years."
"No matter what you do today, even if [The Fed] overdid a tightening, and you had a recession, you're still going to have that inflation to deal with," he explained.
The U.S. inflation rate is now at a 40-year high of 8.6 percent. Hanke blamed the Federal Reserve's loose monetary policy for high inflation.
"We're talking about a Fed that got us into this mess in the first place, the highest inflation we've had in 40 years," he said. "And they were never able to anticipate or predict it even. They didn't know what they were doing. They were flying blind."
In response to the claim that supply shortages are causing inflation currently, Hanke responded, "There's only one cause [of inflation]: excess money… These people who poo-poo monetarism, they literally don't' know what they're talking about."
To find out Hanke's gold market predictions, watch the above video.
Follow David Lin on Twitter: @davidlin_TV
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