Portia Crowe/Business Insider
- Investors are ignoring the risks of market turmoil and a recession in early 2024, Steve Hanke warns.
- The full impact of the decline in US money supply hasn't been felt yet, he says.
- Hanke is worried about the federal debt, but doesn't see BRICS nations threatening dollar dominance.
Investors are too complacent and risk being blindsided by an economic slump early next year, Steve Hanke has warned.
"We're sleepwalking into turbulence in the market," the professor of applied economics at Johns Hopkins told Stansberry Research in a recent interview. "We're basically sleepwalking into a recession."
Hanke cautioned investors against buying into the "soft landing" narrative, which suggests the Federal Reserve can crush inflation without tanking the economy or causing unemployment to spike.
"The soft-landing folks say, 'Oh, see, the labor market's still strong, the stock market's still strong, the economy seems to be running okay now, and inflation's coming down, we're going to have a soft landing,'" he said.
"I'm saying, 'No, we haven't seen the decline in the money supply hit the real economy yet,'" Hanke continued. "With the usual lags, that will be early in 2024."
The US money supply expanded 26% in one year at its pandemic peak, but it's been shrinking in recent months, the former economic adviser to President Ronald Reagan noted. There's usually a delay of six to 18 months before the full impact of a contraction is felt by the real economy, he said.
"Money is a fuel that runs the economy, and we had a huge buildup of excess fuel," Hanke said. "Now that excess fuel has been drained out of the tank, and and we're running on fumes now."
The declining money supply, combined with the Fed reducing the size of its balance sheet and possibly raising interest rates even higher, bodes poorly for the economic picture in Hanke's view.
"The fumes are going to disappear and when that happens, you have a recession," he said.
The veteran economist also rang the alarm on the federal debt, warning the US government is poised to spend more and more of its budget just paying interest. Separately, he described Fitch's shock downgrade to America's credit rating as a "demerit," and dismissed the BRICS nations' plan to launch a reserve currency to rival the US dollar as "grasping for straws" and a "pie in the sky" idea.