Weekend Edition: Does money supply determine economic health?
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Why do economists ignore the quantity of money in modern growth models?
Tariffs aside, could the US have been heading for a recession anyway? My guest today is an economist with a long history dating back to the Reagan years, and he reckons economists are missing a trick by ignoring the quantity of money in circulation. And he uses the theory to trade in currencies and commodities, and it's working out for him. So why have economists ignored the quantity theory of money? And do they do so at their That's this week. The morning call from Nab with Phil Dobby. The weekend edition. So two things, first of all. First, the views that you'll hear today and on any of our weekend podcasts don't necessarily reflect the views of NAB. I'll put that disclaimer out there first of all. And secondly, this was recorded more than a week ago, so things have changed.
TAFs have come and gone. There's been enormous volatility in stock markets and bond markets, and people are starting to talk about the possibility of a US recession. But my guest was talking about a US recession before any of that for a very different reason. Why? Because of the quantity of money. An argument that is worth listening to, irrespective of what's going on with tariffs. So Steve Hankey is a professor of applied economics at Johns Hopkins University in Baltimore. He's been an advisor to many heads of state across the planet, including a spell with Ronald Reagan's Council of Economic Advisors. He was also an economic advisor for an engineering company working on the Snowy Mountain scheme. So he has an Australian background as well.
And he's not just an academic or an economist. He is also a trader, as I said, in currencies and commodities. So he's got some skin in the game. And he seems to be saying in his latest book that economists and policy makers don't pay enough attention to the supply of money. His book, by the way. Which is out at the end of April. It's called Making Money Work, How to Rewrite the Rules of Our Financial System. There we are, I've got the plug-in straightaway. Now, one of the the themes of your book, Steve, seems to be that we misunderstand the importance of money and the quantity of money. I think you refer to it as being invisible to economists in the same way that water is invisible to fish. So why is the quantity of money so important and why is it being discounted by so many economists?
Okay, first Phil, it it's great to be with you and and be down on Australia again. I have fond memories of my work there in the in the mid seventies when actually I was work working on water and wa wastewater problems in Australia. There was a big nationwide project uh that I was involved in uh with an in fact snowy mountain engineers. Uh why is money important? Think think of it this way. I it it really is the fuel that that drives the economic engine. And and if the fuel L let's take the latest episode uh that's been experienced after February of two thousand twenty when the COVID pandemic hit. The central banks tended to goose the money supply. uh raise its uh its rate of growth significantly and and and that means the fuel goes up.
And and when the fuel goes up with a lag, asset prices go up. Now what's that mean? That means the price of land goes up, the prices of h real estate goes up, the stock markets go up, and and so forth. And and then with another lag, the real economy, real economic activity revs up. And and then with another lag, inflation raises its
How does Steve Hanke link money supply to recession risk in the United States?
ug ugly head. And and in reverse now now we're kind of in the reverse that all that peaked out, the central banks got panicked. and in in particular in the US and threw things into reverse. And in the US, the money supply has actually contracted since the summer of two thousand twenty two. And the stock of money is less now in the United States than it was back then. And a as a result, we can expect to have inflation continue to go down and uh an economic slowdown this year I think is baked in the cake. Because remember, once you have the change in the fuel going in to the economic engine, there there's a lag in the transmission between that change in fuel level and and asset prices, real economic activity and inflation.
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Chapters
7 chapters
1
Why do economists ignore the quantity of money in modern growth models?
0:01–3:43
2
How does Steve Hanke link money supply to recession risk in the United States?
3:43–9:10
3
What is the historical background of the quantity theory of money and its relevance today?
9:10–14:56
4
How do velocity of money and money supply together determine nominal GDP?
14:56–20:24
5
Why are commercial banks considered the primary source of broad money creation?
20:24–25:54
6
What role do bank regulations and fiscal policy play in shaping money supply growth?
25:54–31:09
7
How does Australia’s current money‑supply growth compare to the ‘golden growth rate’?
31:09–31:26