Rates To Jump 50 Basis Points: ‘Red Zone’ Next Warns Economist Steve Hanke

**David Lin** (0:00)
The Iran War escalated yet again today. The 10-year Treasury yield touched 4.81% this morning on September the 2nd, its highest since November 2023 Brent crude oil climbed above 96 morning. This morning, the US struck Iran's southern coast near the Strait of Hormuz. Iran fired back at American bases in Bahrain, Jordan, Kuwait and Iraq. Iran now says its aim is to drive US forces out of the region entirely. This is the heaviest exchange between the two countries since July, with at least 19 Iranians killed in the attacks. Meanwhile, in Venezuela, the United States is signing the biggest oil deal in the country's modern history, says the Trump administration. The Energy Secretary says production will more than double. And our next guest, Steve Hanke, professor of economics at Johns Hopkins University, is the economist advising Venezuela on its currency and hyperinflation crisis. So he's going to talk about whether or not this deal is going to go through and make a significant impact on the global oil price. Professor Hanke also highlights how important the 10-year Treasury yield is because not only does it follow inflation expectations, it is the benchmark on which all our consumer debt costs are based. Everything from our credit card interest rates to our mortgage rates. So how high will the long end of the Treasury curve go now that the Iran war has heated up? Once again, oil is skyrocketing. Let's turn to the prediction markets.
Right now on Caoshi, traders are predicting that there's a 34% chance that the 10-year yield will go to 5% or above by the end of the year. Professor Hanke is going to give his prediction and what would happen to the economy if the interest rate goes too high.
In fact, what would happen if it goes to exactly 5%? Spoiler alert, it's not good. So stay tuned for his prediction and his explanation. If you agree with the market, the $150 trade could yield $137 if you're right and the 10-year hits 5% by the end of the year. This video is sponsored by Cauchy. It's the largest prediction market in the United States. Unlike a sports book, you're trading pure to pure on real world events from economic data to political outcomes and the price moves based on public opinion, not a house. Go to the link in the description down below or use my code here, scan the QR code here, use my code Lin, L-I-N, and new users can get $25 when they trade $25.
Cash is CFTC approved and available in all 50 states, including California and Texas. Professor Hanke, welcome back to the show.

**Steve Hanke** (2:30)
Yeah, great to be with you as usual.

**David Lin** (2:33)
Before we talk about Iran and the surging oil prices, let's look at the bond market first. Like I mentioned, the 10 year is now at the highest level in three years. Is the bond market significantly major trouble for the US economy, professor?

**Steve Hanke** (2:44)
Well, yes. Now, this goes back months ago on the David Lin show, I indicated that one should really be staying away from bonds, long bonds, in particular. And the reason for that is there are several aspects to it. One is that always the underlying factor on bond yields starts with changes in the money supply. And if the money supply is growing excessively, that means inflation eventually will kick in, and yields follow inflation. So where are we at? If we look at the Divisia M4 measure of money, which is put out by the Center for Financial Stability, where I'm associated, now we have the Divisia M4 growing, the latest number that's come out, 7.9% per year. And last year, at this time, it was only growing at 5.4%.
So that's, yeah, that's not Divisia. That's just-

**David Lin** (4:00)
No, it's not. This is just to illustrate the point that M2 is growing, but yes, please.

**Steve Hanke** (4:04)
Yeah. But so you have a very big acceleration in the growth rate and the money supply. Now that, with the 12 to 24 month lag, will lead to more inflation, higher inflation. And then yields follow that and they go up. So I think the inflation genie is out of the bottle due to this monetary increase. And that means that the yields are going to stay high or go higher. I think there could be another 50 basis point increase in the 10 year and 30 years. So that puts us really into a red zone, shall we say.
So that's one aspect to the thing. But there are other problems that are making it, the bond market vigilantes come out of hibernation, as I like to say. And one is Besson himself seems to be losing credibility. He's spending more time on this war in Iran than he is paying attention to the Treasury, US Treasury. Of course, the US Treasury is the one that's responsible for weaponizing the dollar and putting sanctions on. They have a huge unit that deals with terrorism, and that is at the Treasury, and that is the unit that invokes the sanctions on various countries and weaponizes the dollar and the US international financial system, and the dollar-based system that is for money transfers and whatnot.