In a recent in-depth interview, distinguished economist Steve Hanke delivered a stark message to policymakers: the U.S. economy is adrift, guided by practices that ignore the fundamental laws of money. Hanke argues that the Federal Reserve must cease its fixation on interest rates and return to the critical, yet often neglected, principle: the quantity theory of money.
Hanke, a professor at Johns Hopkins University and a leading expert on monetary policy, laid out a powerful framework for understanding current instability, inflation, and growing wealth inequality. His insights suggest that without a fundamental policy shift, the current path risks further economic turbulence and disproportionate benefits for the elite.
The core of Hanke’s critique—and the central theme of his recently co-authored book, Making Money Work—is that the Federal Reserve (Fed) has forgotten its primary textbook function: controlling the money supply. According to Hanke, the Quantity Theory of Money (QTM) is the true mechanism driving inflation and economic stability, not the m**********n of short-term interest rates that has dominated Fed strategy for decades.
Hanke pulls no punches when discussing recent Fed actions. He argues that policies like quantitative easing and tightening were aimed at interest rates rather than genuine money supply control. The result? Wild swings in the economy and massive distortions in asset prices.
“When the Fed focuses on interest rates instead of money supply growth, they are looking at the symptom, not the cause,” Hanke states.
This focus on interest rates, coupled with the liquidity i********s of QE, has created a significant wealth transfer. As money supply increases flow directly into asset markets initially, the wealthy—who hold the majority of financial assets—see their net worth soar while the broader population deals with subsequent inflation. This non-neutral policy has been a primary driver of the wealth gap.
To combat this instability, Hanke proposes a clear, science-backed target for monetary policy: Hanke’s Golden Growth Rate.
He advocates for a steady annual money supply growth rate of about 6%, which historically aligns with a stable, manageable inflation target of 2%. By sticking to this predictable, neutral growth rate, Hanke argues the Fed could provide the stability currently lacking in the system.
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The discussion also ventured into the current macroeconomic challenges facing the U.S. economy:
Hanke acknowledged the ongoing commercial real estate (CRE) challenges, noting they are tightly linked to post-pandemic work habits and the accelerated technological change facilitated by AI. As fewer employees return to city centers, the core valuation of major commercial properties continues to erode.
While many fear projections that AI could displace 15% or more of the workforce, Hanke remains cautious about such alarmist figures. Citing historical precedent—from the Luddites to the rise of automation—he argues that technological advances typically shift labor requirements rather than eliminate fundamental jobs. While certain tasks will be automated, demand for new, complex skills will emerge.
Despite the economy appearing relatively resilient on the surface, Hanke expresses deep concern over mounting government intervention and the recent contraction in the money supply. He argues that the dominant consumption patterns of the wealthy have kept aggregate demand robust, masking underlying issues. However, historical data strongly links sustained money supply contraction trends to inevitable slowdowns, if not outright recession.
The increasing tendency toward government intervention, Hanke warns, stands in stark contrast to the free-market, limited-government principles championed during the “Reaganomics” era. Without a neutral monetary policy, increased money supply will only serve to further enrich the wealthy rather than sparking broad-based economic benefit.
Ultimately, Steve Hanke’s analysis serves as a powerful reminder that stability requires adherence to proven economic laws. He concludes by stressing the need for practical skills and critical thinking in economic education, ensuring that the next generation of leaders is prepared to navigate an increasingly complex and evolving economic landscape.
For further in-depth analysis and discussion on monetary policy, inflation, and the future of the American economy, watch the full video from Sachs Realty.
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