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Countries Dumping USD? Failed Treasury Auction: ‘Things Are Just Warming Up’ | Steve Hanke

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the probability of a recession, I think

it's over 90% and the stock market has

to go down. When I say earnings tumble,

remember what's priced in now is is

something on the order of earnings

growth of 10%. And I say no, it's it's

going to be zero or maybe even below

zero. Maybe maybe profits will even be

in negative territory. So So there's a

long way to go. Things are just warming

up. This could be a really bad economic

quarter for not just growth but also

earnings. We'll talk about why. Steve

Hanky joins us today. He is a professor

of applied economics at Johns Hopkins

University and an expert on monetary

policy. Will we'll be talking about his

views on what the tariffs will do to the

economy, also inflation. Welcome back,

professor. Good to see you. Last time I

saw you was in person in Baltimore. It's

it's good good to see you again.

Obviously, I'd prefer in person, but we

can't do that.

Yeah, we're back to our usual grind,

both of us in a suit and you surrounded

by books. Um, last time it wasn't the

case. Um, although there were books in

your office. People should check out our

last conversation, by the way. Link down

below. I visited Professor Hanky in

person. We had a great conversation.

Anyway, today we're going to be talking

about uh what tariffs will do to the

economy. Not good according to uh

consumer sentiment. Take a look at my

screen here. This is from CNBC. Consumer

sentiment um well this is inflation uh

but uh they also had a story on consumer

sentiment. Here we go. Tumbles uh in

April as inflation fears spike.

University of Michigan surveys uh survey

shows. Let's talk about inflation fears

because the consumer believes the

inflation uh number will spike. I'm

going to ask you the expert if you

believe the inflation numbers will

spike. But we'll get to that in just a

minute. Consumer sent sentiment grew

even worse than expected in April as the

expected inflation level hit its highest

since

1981. The survey's mid-month reading on

consumer sentiment fell to 15.8

uh to 57 in March and below the Dow

Jones consensus estimates for estimate

for

54.6. Now if you take a look at the

10-year uh we were just talking about

this offline. Um it's been spiking up.

Maybe the bond market also believes in

higher inflation expectations. But

anyway, let's go back to consumer

sentiment. Is the consumer is the

American consumer right to be worried

about uh weakening wealth prospects and

of course higher inflation? Well, the

they're correct to worry about a

slowdown in the economy. Uh we we've

talked about this a number of times, but

now now we have we have a couple things

going on.

One one thing that you and I have talked

about, David, for a long time actually

is the fact that the money supply is is

the fuel for the economy. And when the

money supply contracts like it's done

since the summer of

2022, you eventually that that gets that

slowdown gets transmitted into the

economy and the economy slows down. So

So that's why I keep using this

expression. Well, a slowdown is baked in

the cake and and it has nothing to do

with whether who's president or any of

those things. It's just a function of

what the money supply is doing. So, so

we had that coming on us this year. Mo

most people, by the way, didn't didn't

haven't seen this coming at all because

they don't pay any attention to the

money supply or the quantity theory of

money.

And then what all of a sudden we get a

second aspect coming in and and that's

the the Trump tariff the Trump tariff

tantrum I would say and and and that is

really throwing

a a lot of sand in the gear shall we say

and and that will just make the slowdown

even worse and and probably will have

you know a recession a technical

recession

And and so that's why people are

concerned. They they they that's one

reason they're concerned. The other

reason is that something I call regime

uncertainty. And that is

that when when you you you get

tremendous activism uh in in a

government where they're they're

changing kind of everything.

uh you you get regime uncertainty and

that that's different than the kind of

pinpointed little micro uncertainties

that develop about this thing or that

thing. It's it's like

everything. And the only time we've had

that, by the way, is with Franklin

Delanar Roosevelt in the New Deal. In

the in the New Deal, the New Dealers

were changing everything in the 1930s

with Roosevelt, even doing things like

making it illegal to hold gold. So they

were they were they were just changing

to tore up the rule books and were

changing everything and and even talking

about packing the Supreme Court and all

kinds of things. This the same kind of

rough scenario that that has enveloped

the Trump administration where just

every everything is on the table to be

torn up and changed and that that

creates regime uncertainty. Now what

what happens with regime uncertainty is

that not not only the

consumer hunkers down and consumer

sentiment goes down but more importantly

investors hunker down and and they stop

investing and and in the New Deal by the

way the regime uncertainty was very

serious and and there was essentially no

investment in the United States from

1929 until the end of World War II and

and the regime uncertainty and the

resulting

uh drought in investment meant that the

Great Depression actually lasted a lot

longer than it would have if we wouldn't

have had the New Deal. The the

propaganda was happy days are here

again. You know, Franklin Delaner

Roosevelt, the New Deal. That was their

slogan. It was absolute propaganda. what

they were doing is just slowing

everything down, making the depression

much worse, let making it last a lot

longer. So, so you have that aspect now

coming in on top of the monetary

contraction. So, it was all it's the

scenario is exactly the same as the

Great Depression. The Great Depression,

the money supply contracted. Of course,

it contracted a lot a lot more than it

has contracted in the United States now.

It was it was down about

38% from from the start of the

depression until the trough of the money

supply. So So the money supply comes

down that that makes everything collapse

and then on top of it you get this

regime uncertainty that that makes

investment collapse and and and and you

really have a big problem. So, so where

we're going with this, it relates to the

stock market and it relates

because if if the slowdown occurs like I

think it will and and still some people

now are talking a little bit about

recession, the probability of a

recession, I think JP Morgan or Goldman,

I can't remember which one headed it,

you know, between 40 and 60% or

something like that. I think it's over

90%. It it's really big. You think it's

over 90%. Yeah, I think it's over 90%

this year. This year. So So as a result

of a slowdown, of course, sales go down

and profits go down. It's it's really

interesting because um I think more

people are turning more bearish on the

economy like you. But uh if you take a

look at the New York Fed probability of

a recession is predicted by the Treasury

spread, it's actually going down, not

up. But that's a different indicator, I

guess.

um 12 months ahead month there there

there's a pretty big difference. I mean

I I'm accurate in the New York

Fed is clueless. Fair enough. Um by the

way uh former uh former St. Louis Fed

President Jim Bullard made a comment on

the news recently and I I think he kind

of echoes your sentiment, but I'd like

to get a response to this. Um he said

that this is looking a lot like a Smoot

Holly. The main diff the main thing is

that this has dramatically raised the

risk of a smooth holly type

outcome. So smooth holly was 1930 other

countries retaliated global trade

collapsed in the great depression was

on. So I think that's what's what has

really people worried about this.

Absolutely. So this this the great

depression you had a two-stage thing.

You had the money supply started to

contract. the economy starts going in

the tank and then you had the smooth

holly tariff wi which which in a way it

was very bad one the worst one we've

ever had in terms of tariffs but it I

don't think it's as bad as what Trump's

doing the rates weren't as high and and

they were much more certain what what

was going on but but then the stock

market crashed after the a the smooth

holly tariff was announced on

The the Smooth Holly tariff was

announced in March of 20 of 1930 of 1930

March and and then the stock market

started really crashing and went down

until July of

1932. It hit a low that it was

83% lower than it was when the tariffs

were announced. So it just to totally

wiped everything out. So I I agree with

Bullard. Um I you know that he he's got

right and and let's get back to the

earnings thing a little a little bit.

So, so we we have a recession

coming and and with a recession sales go

down and if sales go down, profits go

down, earnings go down and and the

consensus uh is interesting. The

consensus on

earnings was 15% growth this year. Then

they then they brought it down to 13%

and and most recently they brought it

down to 10%.

I think it's going to be

zero. I I've always said I thought they

were being the consensus is too

optimistic and and the the basic reason

they're too optimistic. I think Jamie

Diamond agrees with you. Yeah. S&P

earning estimates to fall as companies

pull guidance. He expects uh he's

expecting analysts to slash their S&P

500 earning estimates for growth of 5%

to becoming flat and then as much as

negative 5% probably the next month. So

that's exactly what you're saying. Yeah,

D. Yeah, I'm I'm exactly on the same

page as Diamond. He's got the thing

right.

But so why why is it because of uh

weaker consumer demand? Is it because of

uh global trade? Is it because of a

decreased margins from these tariffs?

What is the reason for this? Well, all

of the above. Okay, let me let me get

into the margin thing for just a minute.

You you mentioned all the key points.

Okay, so let me just go into one aspect

that people don't understand. Yeah. Let

let let's say let's say David Lynn is in

Taiwan. Okay. And and Lynn and Lynn or

one of your relatives over there in

Taiwan is selling Hanky something. So So

there are gains from trade as they call

it. There's a surplus generated by that

trade coming from Taiwan to the United

States be because the Lynn clan is is is

they think it's good. They're they're

making something out of it. Otherwise,

they wouldn't have sold the thing to

Hanky and Hanky is getting something out

of it. Otherwise, he wouldn't have

bought the thing. So, there's a surplus

resulting from that trade between Lind

and Hanky. And what does a tariff do? A

tariff is a tax on international

transactions. So it it drives a wedge

into those profits or those benefits or

the surplus resulting from the trade and

it takes it away like any tax and puts

it in the in in the in in the

government's

pocketbook. So So that's why earnings go

down. the the trade aspect. It tariffs

take away some of the surplus generated

by international transactions. It's just

that simple. Well, uh let's talk about

inflation then. Uh we referenced

inflation earlier in the interview as um

is something that consumers are

concerned about. Uh you talked you said

that they should be concerned about

slower economic growth, but should they

be concerned about higher inflation? So

this is the latest number. Inflation

rate eased to 2.4%. It came down from

2.8 to 2.4%. Uh core inflation rate uh

ran at

2.8%. Um and uh yeah, so basically

inflation is slightly cooling. Well, let

me let me comment on this. Um because

and and one reason I want to comment on

it and I'll I'll give myself a shout out

on this thing. John John Greenwood and I

are the only ones that have accurately

made a forecast of of where inflation

would go up to when they goose the money

supply started gooseing it in 2020 after

the COVID pandemic started. So we got

that exactly right. We said it would go

up to 9%. It went up to 9.1%. No, no one

was even close. They were all talking

about transitory and supply side shocks

and all this other garbage and and and

no one was paying attention to the

quantity theory of money and and

inflation always results from the fact

that prior to the inflation there's been

a a a big upward tick in the money

supply. So the upward tick in the money

supply and then with a lag you

eventually get inflation coming into the

system. Then the Fed put everything in

reverse and started contracting the

money supply once they once they hit the

panic button. And where did Greenwood

and I say inflation would be at the end

of last year. That's that's not very

that's the end of December 2024. We said

it would be between 2 and a half and 3%.

It turned out that it was 2.9%. It was

up on the high end of our range. And now

we're into February's number for 2025.

And where what do we have? We have

2.4%. It's actually a little

below the low end of our range that we

had for the end of

2024. So, so we've nailed this thing

completely using the quantity theory of

money. Remember, inflation is always an

everywhere monetary phenomenon. Now

let's jump into the the I I think people

are over excited about the inflationary

effects

of tariffs. Uh they they they won't have

really any inflationary effects. They

will have big effects

on particular prices on on relative

prices. The the the consumer price index

that you just put up there 2.4 for it

contains over 300 items and some are

going up, some are going down, some are

staying the same. You put a tariff

tariffs on and depending on what the

goods are, some things will go up. But

if the money supply doesn't

change, the overall picture will remain

pretty much the same, which which

doesn't mean that that consumer price

index might become a little bit more

noisy and volatile.

w with the tariffs a a as those things

work into the system. But the the

overall

thrust of of the consumer price index

will continue to go down and I think it

it might even hit the Fed's target at 2%

or maybe even a little below this year.

I I I understand your point about uh

relative prices moving and the overall

money supply still determining the

overall CPI, but take a look at stories

like this. First of all, people have

been commenting on on the internet about

their own experiences. Some stores are

now charging a sir charge tariff tax on

top of their goods. So the the price of

whatever they're paying for those goods

are going up because they're getting

taxed by those stores. Apple is said to

be flying iPhones from India to a US to

avoid Trump tariffs. is reportedly flown

two 600 tons of handsets from Indian

factories as Chinese goods face huge

tariffs. Now obviously they can't keep

doing this indefinitely. I think people

are speculating that the next generation

of iPhones

um will have to go up in price. Reuters

reported that Apple had targeted a 20%

increase in production at iPhone plants

in India. So they're moving away from

China. Uh but also there people are

concerned about whether or not the next

one uh would be higher in price. I mean

on the other hand the consumer can't

afford a more expensive iPhone right

now. So they're in a bit of a pickle,

hence the lower earnings. But anyway,

the point I'm making, professor, is that

a lot of companies are thinking about

raising prices to combat these tariffs.

There there are a couple things to

unpack. You you've you've made a very

dense statement with a lot of

information. So let's unpack it a little

bit. So So one one thing you said that

some stores are putting a a a so-called

tariff premium or tariff tax on the

goods that they're selling. Now that

that has an aspect to it that's

interesting and that is tariffs do

reduce the level of competition. You

know, the best antirust policy in the

world is open

trade- because if if you start if you

start misbehaving and start screwing

your customers, That's right. some some

foreigner is going to jump in there and

and and take you out. So, so tariffs

reduce competition and and and and that

can uh lead to some of these cases that

you're pointing out of the so-called

tariff tax. So, so that's one thing.

However, if you start really unpacking

whatever everything you were saying,

it's it's it's kind

of involves ad hoc theorizing. You're

you're cherrypicking examples to try to

make your point that that tariff tariffs

are going to increase the price of

everything and look at this store or

look at what Apple's doing or look at

this thing and that thing. The overall

thing you have to stand back and say

what is the only reliable theory of

national income determination that means

where is nominal GDP going that's the

real component plus the inflation rate

that's nominal GDP and the quantity

theory of money is the only

reliable established theory for national

income determination. So the the rest of

it is is a lot of kind of ad hoc

theorizing and and you know my my

grandmother my grandmother kind of

stories you know my my grandmother my

grandmother has tennis shoes kind of

thing. So that's that's that's that's

one take on the thing. Now, you did say

something about the the wealth effect

that and the wealth effect comes in

through the stock market because if we

go into recession and earnings come

down, that means that stock prices will

come down and that that means every

everybody's going to that's invested in

the stock market will see their wealth

go down. And when your wealth goes down,

you tend to hunker down a little bit,

not spend as much.

So, so it it it does come in and and and

and there will be a wealth effect coming

in via the the stock market. So, we we

not only have the money supply itself

coming down and contracting, not growing

very fast. Actually, it's growing now

year-over-year at 4.2%. and Hanky's

golden growth rate, a rate consistent

with hitting a 2% inflation target in

the United States is

6%. So, it's not only the stock has

contracted and come down since the

summer of

2022, but the rate of growth, it's never

really picked up to, you know, the

golden growth rate is 6% consistent with

hitting that 2% inflation target. So

there just a lot of things going on now

and and a lot of confusion out there

because by the way if you if you read

the press you'll just be totally

confused and not get it right. But

remember Hanky's 95% rule David 95% of

what you read in the financial press is

either wrong or irrelevant. That by the

way that's true for most podcast except

yours but uh that's another story. All

right.

Actually, I see I actually I do watch a

number of things on on yours and I let's

let's put it this way. I'll be

diplomatic and say I'm not in full

agreement with

with with some of your with some of your

Well, I guess that's why we have a

market that not everybody has to agree,

but I understand your point. Um, okay. I

just want to make one point about supply

chain issues during the pandemic. Um,

yes, the money supply went up, uh, but

also people were saying inflation went

up because the global supply chain uh

got choked up. I I I wonder if that

scenario could happen again um this

time. Well, yeah. No, it it it it will

and and people will point to that like

like the Apple importation uh from India

instead of China and they'll say oh

that's see how that's screwing up the

supply chain and the logistics of

everything but it will be the same story

the same transitory effect supposedly

which was all

wrong that it that that wasn't why we

got inflation. We got inflation because

the money supply, you know, it it went

up, by the way, after the after COVID

hit and the money supply was gooseed by

the Fed. It it went up to 18%

year-over-year. That that's the highest

year-over-year rate that the money

supply M2 had ever grown since the Fed

was founded in 1913. Yeah. So, we had an

unprecedented surge in the money supply.

and and no one none of these people

yakking about the supply chain the

transitory thing ever even mentioned the

money supply do you or they were just

out out to lunch I mean this is this

there'll be a lot of this in the paper I

should warn people there will be what

you what you said will will occur

exactly again they'll they'll get on the

same horse they'll ride the same saddle

they'll be at the same rodeo and they

will be strong as they were when the

inflation started going up in 2020 2021.

Do you think the Fed My question is do

you think the Fed now looking around

will be forced not forced? I mean no

one's forcing them but will they be more

inclined to increase the money supply

this time in light of slower grow uh

global growth prospects? Currently the

money M2 is growing at 3.87% annually.

Well,

uh, I it's it's a little bit hard to

tell. They they might do it, uh, which

would be fine, but but not for the right

reason because they they don't look at

the money supply. They they'll fool

around with the interest rates. May

maybe they'll stop quantitative

tightening. Now, this what's going on in

the bond market, the

10-year re remember I I I I was always

bullish on the 10-year and I said for a

trade, I thought it was a good thing and

it and it was a great trade until until

about a week ago when when Trump laid

into this tariff thing. And what

happened? We had a Treasury auction this

week and usually primary dealers and C

foreign central banks buy around 15 16%

of of each one of the

uh the the supply of treasuries at the

auction this week. They they were they

bought like one one one and a half%

only. And and within minutes after that,

Trump

called for a 90-day pause in the

tariffs. That's what caused that. If you

want to know what was going on, you you

have to understand the plumbing of the

system and how things work. And and that

that auction failure, it was a complete

failure.

And I'm certain Scott Basset, the

Secretary of Treasury, pressed the panic

button, which uh Trump saw and and they

dialed back on the tariffs, put the

90-day pause in and now it's just gotten

worse. The the the if the 10 years over

four and a half% right now. Now, now

that that's going to be a huge problem

for the federal budget because interest

payments are are are accounting for

13.1% of government expenditures

already. A huge thing, you know, because

when you pay interest, when the

government pays interest, no one's

getting anything for it. They're just

servicing debt. They're they're not

getting any product or or paying any

wages or anything. They're just paying

creditors who who've loaned the

government money and and that's going to

go up and and blow a hole in the in the

budget

and cause a bigger deficit. And and that

bigger deficit, by the way, may maybe

the the Fed will be under a lot of

pressure to be buying some of those

bonds that are being used to finance the

the deficit. Or maybe they'll buy

because the dealers aren't buying and

the foreign central banks aren't buying

and the Fed starts buying. And if that

happens, then the money supply will go

up. David, that that's the that's the

way to think about what's going on.

Okay. And if that happens, we'll follow

up again and uh see what happens to the

money supply and uh and uh inflation.

All right. I have a few minutes left. Uh

professor, we have to take a look at the

dollar. U you mentioned the 10-year

yield spiking. So that's what happened.

The dollar though has been going let me

just close this. Dollar has been going

down. Um and this is what um this is

this this this is this is something that

came in from the news again. Uh the Feds

Kashkari says rising bond yields falling

dollar show investors are moving on from

the US. Minneapolis Federal Reserve

President Kashkari said recent market

trends uh show that the uh investors are

moving away from the US is the safest

place to invest. Normally when you see

big tariff increases, I would expect the

dollar to go up. This is true. It went

up in February. The fact that the dollar

is going down at the same time, I think

lends some more credib credibility to

the story of investors preferences,

investor preferences shifting the

10-year yield surge this week. Okay. Do

you agree with the statement? Yes. And

and and what I just told you before

confirms that from a technical point of

view, the the the the bond auction

failed. Central banks were were not

buying.

What are they buying instead now? Do you

know? Of course. Gold. Go. Gold just

made a new high today. Yes.

It's you know it's it's a April 11th as

we speak and and gold just made a new

high. Now that's another area. You know

I I've been right on target with gold.

I'll give myself another shout out. I

mean God you're you're not giving me any

shout outs. I can't believe it. David,

yeah,

your track record speaks for itself.

Well, you you know, when you've got to

toot your own horn, it gets pretty bad.

You have been right. You've also been

right on the bubble uh the stock market

bubble popping. Although that Yeah.

Yeah. That that took a lot of people by

surprise, the magnitude of the downturn.

Let's let's finish off on this question,

professor. Do you think that the worst

is behind us for equities volatility?

Oh, no. I I think things things are just

warming up. Yeah. Especially with the

earnings. Yeah. Right. This things are

just warming up because you got to think

of the big fundamentals and and and and

if if if my big picture is right because

of the one-two punch between the money

supply contraction and then the regime

uncertainty associated with the Trump

administration and the tariffs. You add

those two things together and we have a

recession and sales tumble,

earnings tumble and and and the and and

the stock market has to go down. When I

say earnings tumble, remember what's

priced in now is is something on the

order of earnings growth of 10%. That's

what the consensus of the analysts say.

And and I say no, it's it's going to be

zero or maybe even below zero. Maybe

maybe profits will even be in negative

territory. So So there's a long way to

go yet. Right. Good. Uh let's send it

here, professor. Very good update as

usual. Where can we follow you? On my

Twitter, I think is the best place.

Steve_hanky. That's for kind of real

time information. If for some reason you

want to be added to my weekly

distribution of, you know, I I

distribute, for example, like the David

Lynch show, I that that'll be

distributed this this week on my weekly.

You just write me an email,

hankyjhu.edu and and request to be put

on my mailing list. Thank you very much,

professor. Uh we'll speak again in a

couple weeks. Yeah. Thank you, David.

Great to see you again. Yeah, great to

see you again as well. And uh follow

Professor Hanky in the links down below.

And uh we'll see you next time. Don't

forget to subscribe.

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