Steve Hanke, professor of applied economics at the Johns Hopkins University, sketched a monetarist’s view of “Inflation—Why We Have It and Where It’s Going,” for the Jewish Policy Center’s August 4 webinar. The Biden administration, Federal Reserve, and news media are “looking for inflation in all the wrong places,” he said.
With inflation —often called a “hidden tax” since it reduces the value of wages, investment earnings, and other income for the public—running at an annualized rate of 9.1 percent, many Americans tell public opinion pollsters it’s the number one problem, Hanke said. But since the Covid-19 pandemic struck early in 2020, “all we’ve had” has been “a grab-bag of ad hoc reasons” for the surge, highest in 40 years, in prices above income growth.
Supply chain problems, accelerating oil prices, and “the most absurd” explanation, Russia’s war against Ukraine, have been erroneous, according to Hanke. “The one and only cause” has been a dramatic “increase in the money supply.” The “excess money supply in the system” fuels inflation, he asserted.
Hanke is also a senior fellow at the Cato Institute in Washington, D.C., head of its Troubled Currencies Project and co-director of Johns Hopkins’ Institute for Applied Economics, Global Health and the Study of Business Enterprise. He noted that in a Wall Street Journal Op-Ed column a year ago he and co-writer John Greenwood forecast coming inflation of six to nine percent. “We hit the bulls’-eye … [and] as far as I know we were the only ones to actually put a number on inflation and got it right.”
Hanke dismissed references to “global inflation” and the Fed’s earlier contention, since dropped, that price increases would be “transitory.” “We’ve had some supply chain problems,” but somehow in the second and third largest economies after the United States, China and Japan, inflation has been running at 2.5 percent.
As for “transitory,” “inflation will be persistent and end up around five percent through 2023, this year probably ending around seven percent,” Hanke said. That is regardless of the Federal Reserve’s expectation of three percent and the agency’s string of interest rate hikes. So, there is “a high probability we’ll enter a recession later this year” with “a big economic slowdown.”
Since the 16th century the quantity theory of money—championed in the second half of the 20th century by economist Milton Friedman, a leading advocate of free markets and limited government—has shown itself better able to predict inflation, Hanke said. The theory holds that MV = PQ, that is, the Money supply times the Velocity of money in circulation equals the Price level times the Quantity of goods and services transactions.
Allowing for use of an expanded money supply “to fuel growth in real incomes” and to accommodate an actual increase in demand for money—treated like other goods in monetary theory—the United States still has about 28 percent too much cash in circulation, Hanke said. But he noted that President Biden has proclaimed “Milton Friedman is no longer running the show” and Fed Chairman Jerome Powell “actually said ‘we have to unlearn the quantitative theory of money.’”
“Seven hundred and eighty economists work for the Fed,” Hanke said, and “none of them got it right” concerning current inflation. One reason, perhaps, is the ratio of Democrats to Republicans among agency economists, according to one survey, 48.5-to-1.
The administration’s voluminous “Inflation Reduction Act” “has nothing to do with reducing inflation,” Hanke said. “It will change relative prices … but it looks to me like a tax increase” and is “ill-conceived when the economy is going down.”
“The markets don’t see things the way John Greenwood and I see it,” Hanke acknowledged. “They’ve bought into these ad hoc theories” of inflation. Because current conventional wisdom ignores the quantity theory of money, an “increase in financial volatility” is on the way.”