The discussion centers around recent inflation data, monetary policy, tariffs, and their broader economic impacts, with insights from Steve Hanky, a professor of economics at Johns Hopkins University. Hanky critiques both former Fed Chair Jerome Powell and former President Donald Trump for their poor understanding of monetary policy, specifically their focus on interest rates rather than changes in the money supply, which Hanky argues is the true driver of inflation. The recent uptick in Consumer Price Index (CPI) is analyzed, with Hanky cautioning that tariff-induced price increases are mostly temporary “one-time blips,” while the underlying inflation trend remains downward due to a contracting or slow-growing money supply.
Hanky explains the difference between CPI and Producer Price Index (PPI), emphasizing that PPI better reflects long-term price trends, especially for tradable goods affected by tariffs. He discusses the political and economic consequences of Trump’s tariff policies, describing them as a form of economic warfare that has alienated allies like Canada and threatens secondary sanctions on countries like India and China. The conversation also touches on the components of inflation that matter most to consumers—food, shelter, and energy—and how tariffs and monetary policy influence these sectors differently.
Hanky criticizes the Federal Reserve’s current monetary approach, urging a stop to quantitative tightening to allow the money supply to grow at a stable rate (his “golden growth rate” of 6.3%) consistent with a 2% inflation target. He argues that ignoring the money supply causes confusion in understanding inflation dynamics and that the Fed’s and Trump’s fixation on interest rates is misguided. The interview also explores themes from Hanky’s recent book, Making Money Work, which argues that money and the quantity theory of money have been neglected in modern economic thought, especially in post-Keynesian models used at central banks. Hanky advocates for a monetary policy that is neutral, meaning it does not distort income or wealth distribution, unlike the non-neutral policies seen during the C---D-19 pandemic that exacerbated wealth inequality by inflating asset prices benefiting the rich disproportionately.
Finally, Hanky addresses common misconceptions about banking and money creation, explaining how commercial banks create money and credit “out of thin air,” and how savings and interest rates function in the economy. He stresses the importance of positive real interest rates for economic stability and productivity.
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