30% Market Correction + Recession 'Baked In The Cake' | Steve Hanke

**Steve Hanke** (0:00)
With the contraction we've had in the money supply, nominal GDP is slowing down.
And I think the real component will slow and add to the picture, the regime uncertainty, and we might even see a recession like this year. I wouldn't be surprised if we had a 15% to 30% correction in the market.

**Adam Taggart** (0:29)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Over recent years, today's experts been consistently one of the best predictors of where the inflation rate's headed. So, where does he see it headed from here? And how about interest rates? And why is he calling the Federal Reserve, quote, an engine of income inequality? To find out, we've got the good fortune to sit down today and get a full update from Steve Hanke, Professor of Applied Economics at the Johns Hopkins University in Baltimore, Maryland. Steve, thanks so much for joining us today.

**Steve Hanke** (1:01)
Great to be with you again, Adam.

**Adam Taggart** (1:04)
All right, Steve. Well, look, an awful lot has happened since the last time you and I talked. So I very much want to get your latest thoughts, your latest outlooks. I've been reading one, your very active X feed, but also a lot of the other interviews you do out there in the world. Sounds like you've got a lot to say about what's going on right now. So let's dig into any and all of it. If we can, though, let's just start from a very high level. I'm going to ask the question I like to ask you when you first join me here. What's your current assessment of the global economy and financial markets?

**Steve Hanke** (1:37)
Negative.

**Adam Taggart** (1:40)
Pretty easy. I like how you don't mince words. All right. A little exposition on that one. Why negative?

**Steve Hanke** (1:46)
Okay. So first, let's start at home and then we'll go around the block.
In the United States, the thing that really drives the economy has an influence on real economic activity, obviously, and also inflation, or changes in the money supply. And what we've had since about the summer of 2022, the Fed is throwing things in reverse, and we've had a contraction in the money supply, and the stock of money in the United States now, measured by M2, that's the broadest measure the Fed has, is actually lower than it was in June of 2022 That kind of contraction, Adam, has only happened four times since the Fed was founded in 1913 And all four times, we had recessions that followed the money supply contraction. And actually one of the four times was 1929, 1933 You know what happened then, we had a great impression. Of course, the money supply really contracted, it went down by about 38% in the Great Depression era. So a slowdown is pretty much baked in the cake, because the way it works, you get the change in the money supply, the slowdown in the money supply, and then it takes a while for it to transmit into the economy. And it's taken actually quite a while this time. I thought we'd be slowing down before now. The reason we didn't slow down quite as fast as we normally do is that after the pandemic, the Fed goose the money supply so much that there were so much excess cash balances in the system that it took a while for that excess to burn off. And it did burn off late last summer. And now we're kind of running on fume, shall we say. So that's the background in the United States.
In addition to that, of course, we've got a new administration in which there are a lot of changes being made. And something called regime uncertainty, I think, is setting in. And what I mean by that is that all the rules of the game are kind of changing. And people become very uncertain about their private property rights, and the rights that they have, they might own the title to something. But the question is, well, what's the free cash flow going to be from that, whatever it happens to be? So we have this regime uncertainty, which it's different than uncertainty. Uncertainty is kind of spotty, this thing and that thing could happen, but regime uncertainty basically means you're upsetting the apple cart changing everything. The best example of regime change uncertainty in the United States was the New Deal with Franklin Delano Roosevelt. Now remember that the propaganda about the New Deal was, happy days are here again. Well, it wasn't so great. There was a lot of regime uncertainty. There was nationalization of property.
Big changes in the tax code, changes in union rights, et cetera, et cetera, et cetera. Many things were changing. Many new bureaus and agencies were set up, and the expansion of the US government was quite large. The grabbing hand of the US government became a lot more significant. And for example, just on the monetary part of the thing, the gold clause was abrogated. And the gold clause, that happened in January of 1934 Now, what the gold clause said is that any bonds, any dollar denominated bonds that had been issued under the gold clause, gave the owner the right to principle and interest being paid in dollars or gold. And gold at the rate at the issuance at the time of the issuance of the bonds. Well, all of that changed when they abrogated the gold clause in 1934 And the dollar became 41% lighter than it was before. So that's part of regime uncertainty. The whole monetary scheme was being changed. We had nationalization, we had tax the rich, we had union power, we had this monetary change, all in the name of a national emergency. We have a national emergency, the Great Depression, happy days are going to be here again. We have to make all these changes. Well, what happened is that investors became very uncertain about the veracity of their private property rights, and as a result, they hunkered down and they stopped investing. So from 1929 until actually after World War II, there was almost no investment in the United States. And what the regime uncertainty did, in a nutshell, it elongated the Great Depression, it made the Great Depression last much longer than it would have if we hadn't had all these regime changes. So that's what we have with the current Trump administration. And you mentioned tariffs. Well, yeah, tariffs are actually one thing. But you've got the rule of law with retribution coming in, international relations. Well, we basically got everybody in the world mad at us, with the exception of a few countries. And President Trump, he wears two sets of clothes. On Ukraine, he's the president of peace. He wants peace in Ukraine. In the Middle East, and including obviously, Iran is the main target. He wants war. And then we've got Elon Musk and Doge in there, restructuring the government. And we also have something going on. A lot of ex post facto laws coming in, because for example, universities, universities have research grants. They've taken a lot of those away or stopped payment on them. Well, that's breaking, they're breaking contracts.