Recession Risk Spikes (Uncut) 03-08-2025

Economy ‘Going Off The Cliff’, Recession Risk Spikes | Steve Hanke

We’re going to react to Trump’s State of the Union Address. In particular, we’ll be talking about tariffs, the trade war, the implementation of the tariffs this week, markets are up in arms. We’ll be talking to Professor Henke, Steve Henke, Professor of Applied Economics at Johns Hopkins University, who will break down the implication of tariffs on the economy and the longer-term growth prospects of the economy following what’s been happening this week.

Professor, welcome back to the show. Good to see you. Yeah, great to see you, David.

Markets have been up in arms this week with a bit of a rebound today on the 6th or 5th of March, rather. On Wednesday, the S&P and the Nasdaq were both up. I want to play for you this clip from the State of the Union Address.

Let’s react together. If you don’t make your product in America, however, under the Trump administration, you will pay a tariff and in some cases a rather large one. Other countries have used tariffs against us for decades, and now it’s our turn to start using them against those other countries.

On average, the European Union, China, Brazil, India, Mexico and Canada. Have you heard of them? And countless other nations charges tremendously higher tariffs than we charge them. It’s very unfair.

India charges us auto tariffs higher than 100 percent. China’s average tariff on our products is twice what we charge them. And South Korea’s average tariff is four times higher.

Think of that four times higher. And we give so much help militarily and in so many other ways to South Korea. But that’s what happens.

This is happening by friend and foe. This system is not fair to the United States and never was. And so on April 2nd, I wanted to make it April 1st, but I didn’t want to be accused of April Fool’s Day.

That’s what that’s not just one day was cost us a lot of money. But we’re going to do it in April. I’m a very superstitious person.

April 2nd, reciprocal tariffs kick in and whatever they tariff us, other countries, we will tariff them. That’s reciprocal backing. Reciprocal tariffs.

First of all, is he right that America is simply responding to the existing tariffs that other countries and trading partners have imposed on America? And second part of the question, Professor Henke, what will happen to the economy? Well, no, it’s a lot of a lot of nonsense. The whole tariff routine that the president’s going through. But we have to put this thing into context.

What is bothering Trump? The trade deficit is what bothers Trump. And it bothers him because he’s a mercantilist and he thinks that foreigners are engaged in all kinds of nefarious activities that basically screw the United States and cause us to import more than we export and have a trade deficit. It’s all complete rubbish.

The deficit is created in the good old USA. We have a deficiency of savings in the United States relative to investment. And as a result, that deficiency or gap between savings and investment, it gets filled in by foreigners who fortunately are standing by to fill the gap.

And fortunately, the U.S. can easily finance that trade deficit. So you end up with the American consumer benefiting. We’re consuming a lot more than would be the case if in fact exporters, foreign exporters, weren’t exporting things into the United States to fill the savings deficiency gap.

OK, but but but OK, so hold on. So so so the first point is trade imbalances are created domestically. China has a huge surplus in its current account and its trade account, its international dealings.

And the reason for that is that they have a huge surplus of savings that are much greater than the investments that occur inside China. So by definition, they will they will have a trade surplus. Same with Japan, same with Switzerland, same with Germany.

We we happen to have a big deficiency. Since 1975, we’ve we’ve always had a trade deficit. And most of that savings deficiency, by the way, all of it is accounted for by the fact that we have a deficiency in the federal accounts and state and local government too.

If you add state and local government and the federal together, the savings in those public sector activities is much less than the investment that’s occurring in the public sector. And as a result, you’ve got what’s called a fiscal deficit. And the fiscal deficit really is what generates the trade deficit.

The trade deficit is exactly equal to the fiscal deficit in the United States. If Trump thought that the trade deficit was a problem, and he does, by the way, I don’t think it’s a problem. Most economists wouldn’t think it’s a problem.

But let’s let’s go along with Trump for a minute. And he’s thinking and we’re trying to solve Trump’s problem. Trump’s problem is a trade deficit.

How do you solve that? You solve it by balancing the budget. If you balance the budget, the trade deficit is going to go away. Okay, so we’re not going to balance the budget by simply implementing retaliatory tariffs.

No, that won’t have anything to do with either, won’t have much to do with balancing the budget because tariffs aren’t going to bring in very much money. And it’s certainly not going to change the trade balance, because that is dependent on the magnitude of the fiscal deficit. And if the fiscal deficit doesn’t change very much, then the trade deficit is not going to change very much.

Okay, before we continue with the other parts of the State of the Union address, let me just show you what the Atlanta Fed GDP Now tracker is doing. As you’re probably aware, it went from a positive 2% all the way down to negative 1.5 and now negative 2.8 in just two readings. It says here, after this morning’s release from the U.S. Census Bureau and the Institute for Supply Management, the now cast first quarter real personal consumption expenditures growth and real private fixed investment growth fell from 1.3% and 3.5% respectively to 0% and 0.1%. The GDP now cast model in the first quarter of 2025 is negative 2.8% on March 3rd, down from negative 1.5% on March 28th.

What’s your response to this? I mean, is this, I haven’t seen this in a long time, Professor. Well, this is all driven by something that we’ve been covering on various podcasts that we’ve done together, David, and that is the money supply calls the tune of the economy and big changes in the money supply with a lag eventually work their way into the real economy, the thing that you’ve got up there from the now cast, as well as inflation. And I’m not surprised.

I’ve been anticipating that this going off the cliff would have happened before. The lag has been very long this time. We have a stock of the money supply now that’s actually less than it was in June of 2022.

So the money supply has contracted. That kind of big contraction has only occurred four times in the history of the Fed since 1913. And each one of those has been followed by either a depression in 1929-33, contraction of the money supply by 38%, or in the other three is just a garden variety recession.

And that’s why I have kept saying that a slowdown and recession, those things are baked in the cake because what happened a couple of years ago to the money supply. So it’s basically confirming finally what I’ve been anticipating for some time. I’ve been a little ahead of myself.

I’ve said we’re going to have a recession when? Before I said late last year, remember? It didn’t happen late last year. It looks like it’s going to start happening early this year. Well, Professor, are you surprised at the speed at which the now cast is changing from positive to negative? I mean, if it goes from 1.5 down to 1, down to 0.5, down to 0, then to 0.0. You get the idea.

Then I guess a more gradual decline into negative territory could be justified, but it went from 1.5 all the way down to 2 to negative 1.5, then to negative 2.8 in a matter of two weeks, Professor. So maybe something triggered it. Maybe new data came in that took the Fed completely off guard.

What’s your reaction to the speed of this change? I’m not too surprised because remember, again, going back to earlier sessions on the David Lynch show, I’ve told you, we’ve talked about this. I said, well, if you really get under the hood, the headline numbers in the job market and in manufacturing might not look that bad or look okay, but if you look under the hood, they don’t look so great. By the way, the manufacturing sector has been more or less slowing down for quite some time.

Okay. Not the labor market. The labor market, you’ve really got to look at the details of what’s going on.

The headline stuff doesn’t look all that bad, but if you look at the details, it looks a little bit more grim in the labor market, which would probably surprise most people. But the manufacturing sector has been in a decline and getting weaker for some time. So I’m really not surprised.

You said, am I surprised? No, I’m not. Okay. So you’re doubling down on your recession call for 2025.

It looks like it’s probably about to happen soon. Yeah. Now I’m really getting in the saddle again.

Yeah. All right. Well, because prior, I think a couple of weeks ago, you came on my show and you said that we could have slower growth, perhaps just still in positive territory, slower growth, but not necessarily an outright negative.

What I said is that since I’d been anticipating this recession for some time and it didn’t occur, I said, let me not use the R word. Let me just say slowdown. A slowdown will happen for sure.

And now I’m still with a slowdown is going to happen for sure. And maybe a recession, there’s a pretty good chance that we’ll get the R word working. I’d like to get your reaction to this take that I’ve heard from another guest on my show, Professor, which is that a recession in today’s economy, just generally speaking, will not happen unless there’s an exogenous shock to the financial system and or economy, such as a pandemic or a war or something like that.

And the oscillations you see in the textbook, which is expansion of the economy followed by some sort of contraction that oscillates around or above the zero percent growth range. In other words, we could have a slight contraction, but still in negative territory in what you what you may call a slowdown. So this particular gentleman’s analysis is that unless we get some sort of major black swan, we will not have naturally occurring recessions in the business cycle.

Do you agree with that viewpoint? No. Okay. And it’s driven by the money.

Mainly because of the money supply. The fuel in the economy is the money supply. And if you cut the fuel off, you’re going to slow down.

It’s just that simple. So all of these fancy ideas people throw around, they have a lot of ad hoc theories. That that’ll be the story and narrative today.

And in a month or so, since everybody’s data dependent, if the data change in a month or so, they’ll change their story and so forth. Hankey is not changing his story. I’m looking at the money supply and the money supply dominates.

It calls the tune of what’s going to happen. Forget all the noise in between changes in the money supply, in between those changes in the real economy, and in between changes in the money supply and inflation. Those lags, the duration of the lags change, and they’re tricky, hard to get a handle on sometimes, but they always happen.

Let’s go back to the State of the Union address. This is about balancing the budget, which we just talked about. Take a listen.

And it’s not going to be pretty. By slashing all of the fraud, waste and theft we can find, we will defeat inflation, bring down mortgage rates, lower car payments and grocery prices, protect our seniors and put more money in the pockets of American families. And today interest rates took a beautiful drop, big beautiful drop.

It’s about time. And in the near future, I want to do what has not been done in 24 years, balance the federal budget. All right, per your assessment on how the government is spending money right now, their tax plans and their budgeting plans for the military and other spending outlays, what is your assessment of what he just said, Trump just said, will they balance the budget in this current administration? How likely is that? Not very likely.

If you look at the budget that just came out of the House, you had Speaker Johnson sitting right behind President Trump on his left-hand side, right in back of him, and they just have passed a budget that’s increasing government spending. So all this hoopla about Elon Musk and cutting waste, fraud and abuse, you know, that’s fine. I’m all for it.

And I think most Americans are all for it. But what’s the House done? It’s just passed a budget. They’re spending more money, spending more money in defense.

I thought we wanted to go in and cut defense. They’re spending more. So this is a lot of these speeches that these politicians are giving.

There’s a lot of jingoism involved here. One of the things that I found interesting was this particular conversation between Musk and Trump on Hannity, on Fox. Take a listen.

Musk was explaining the relationship between reducing the deficit, inflation, and interest rates. I’d just like to see if you agree with any of the points he’s making, and we’ll respond. Deficit spending, the waste in the government, then we can actually address inflation.

So provided the economy grows faster than the money supply, which means you stop the government overspending and the waste, and the output of real, useful goods and services exceeds the increase in the money supply, you have no inflation. And you also drop the interest payments that people pay. Because if the government waives life, yes, the reason the interest payments are so high is because the national debt keeps increasing.

So the government is competing to sell debt with the private citizens. This drives up the interest rate. So if you cut back on the deficit, you actually have an amazing situation for people, because you get rid of inflation, and you drop the interest rates.

And that means people’s mortgage payments go down, their credit card payments go down, their car payments go down, their student loans go down, their life becomes more affordable, and their standard of living improves. How quickly? Can you just assign a grade to Student Musk here, based on what he just said? At 30,000 feet, in kind of broad terms, he’s more or less okay. He’s okay.

At 30,000 feet, for just the general public, let’s say his thesis is correct. If he was actually in one of my classes, he’d get marked down. There are a lot of quibbles that I have, let’s put it that way.

Not a rejection, but a lot of quibbling. So he’s not going to get a clean A, that’s for sure. Okay.

But from a 30,000-foot perspective, can you lower the interest rate by simply reducing the deficit? No. He got into that. See, he has little contradictions in there.

He said he got the money supply in there, and that’s the key. The key is the money supply. And if the money supply is under control, he put it in a way that I wouldn’t formulate it quite that way.

He said, if the output of the economy is growing faster than the money supply, obviously inflation is going to be tamed. In general terms, that’s right. I’d say it a little bit differently.

But at any rate, it’s the money supply. So he got the money supply in there, but then he starts tangling it up with waste, fraud, and abuse, and all these other things. And basically, if the money supply is not growing, it isn’t faster than the rate of growth in the economy.

You have to grow the money supply faster than the rate of growth in the economy because the demand for money goes up. The economy is only growing at about 2 percent, and the demand for money is growing about 2 percent, and the inflation target is 2 percent. 2 plus 2 plus 2 is 6. That’s Hankey’s golden growth rate for the money supply.

So it’s a little more complicated than his presentation. But at any rate, he’s kind of on the right track, shall we say. But if you control inflation, then the interest rates come down.

That’s why the interest rates come down. So there’s a three-step process that’s a lot simpler to explain than some of the things that Musk was talking about. One, get the money supply growing at Hankey’s golden growth rate that’s consistent with the inflation target of 2 percent.

That’s about 6 percent. Okay. Then inflation is going to come in around 2 percent or a little below 2 percent.

When that happens, that’s the second step. Money supply control, second step, inflation control, third step, yields on bonds always follow what’s going on in inflation. And the bond yield, Trump mentioned this in his speech, the 10-year bond yield has been coming down the last 10 days or so.

Why? Because the inflation numbers start looking better and better all the time. I’ve gone over this in the David Lynch show, and I recommended a trade. When the yield on the 10-year was about 10.8 percent, I said, this is a good trade because the money supply is contracting, inflation is going to keep coming down, and yields on bonds follow changes in inflation.

And if yields on bonds come down, by the way, the price of the bond is going to go up and you’re going to have a nice little capital gain on top of everything else. Right. And with the 10-year at 4.28 percent right now, are you still recommending long bonds? Yes.

It’s come down a lot already. Yes. Yes.

Well, they were lower. Look where they were. Go to the left of that peak that you have.

Yeah. The last dip, how low did they go? 3.6. What? 3.6. Oh, so we’ve got some room. We’ve got some room.

Even now, we’ve got some headroom. I’d have no problem as a trade, by the way. I’m saying as a trade.

I think the 10-year is still looking pretty good. And in light of the fact that you have this Atlanta Fed now forecast of a slump in the economy, Hankey’s agreeing with that. So we have, what’s the background? We have the money supply contraction a couple of years ago.

That is working its way into the economy. The economy is going to slow down. Inflation will keep slowing down.

And Trump is throwing so many curveballs into the picture with this trade war thing that it throws a lot of uncertainty into the picture and it undermines confidence. And if confidence is undermined, that just conflates the thing and makes it even worse. So contracting money supply, contracting economy, inflation coming down, confidence coming down, all of those things lead into a pretty good bond trade being long.

Very good. Finally, Professor, I’d like to touch on geopolitics. As you know, there was a disastrous, well, the mainstream media is calling a disastrous meeting between Zelensky and Trump and J.D. Vance at the Oval Office.

This was Zelensky’s post on X. I would like to reiterate Ukraine’s commitment to peace. We really do value how much America has done to help Ukraine maintain its sovereignty and independence. And we remember the moment when things changed when President Trump provided Ukraine with javelins.

We are grateful for this. Our meeting in Washington and the White House on Friday did not go the way it was supposed to be. It is regrettable that it happened this way.

It is time to make things right. We would like further cooperation, future cooperation, rather, and communication to be constructive regarding the agreement on minerals and security. Ukraine is ready to sign it at any time.

How do you feel about the idea of signing an agreement where Ukraine would give away its rare earth minerals and critical resources in exchange for U.S. military support? Trump wants back pay, so-called back pay for the billions of dollars sent to Ukraine already under the Biden administration. Well, the whole idea of this agreement is kind of a little bit murky because a lot of the minerals we’re talking about are in the four eastern Donbass regions that are occupied by the Russians, not the Ukrainians. And any peace deal, by the way, or ceasefire, whichever way you want to call it, is not going to occur if the Russians leave those areas.

The Russians have strict conditions, and Trump understands these perfectly. One is that they’re not leaving Crimea, and they’re also not leaving the four Donbass that they occupy. Point number one.

Point number two is that there will be no peacekeeping, Western NATO peacekeeping troops in Ukraine, and there will not be any NATO membership in Ukraine. That’s also in stone. So that’s why I say signing an agreement for what? I think the whole agreement idea is nonsense, by the way, in the first place.

But it’s pretty clear it’s nonsense if you don’t know what you’re buying. Well, yeah, I understand your point, but what should be done? We have a big problem. We have the Europeans want to go to war with Russia, and Trump does not want to go to war with Russia.

So the whole meeting after the Zelensky affair in the White House, there was a Sunday meeting in London where especially President Macron and the Prime Minister of Great Britain led the troops, and it was basically an anti-U.S. meeting. The London meeting literally was an anti-U.S. meeting, and it was a war meeting. It was like a war cabinet.

But there’s a little problem. The West can’t go to war with Russia unless the U.S. provides cover. The whole reason we’ve had this war going on, dragging on for three years in Ukraine, is because the U.S. has supplied a lot of money, a lot of weaponry, a lot of intelligence, and a lot of satellite facilitation and things like that.

This could not be done by the Europeans have no army, and they’re broke. They can’t finance a war. It’s all infeasible.

The war is only feasible if the United States finances it, supplies most of the weaponry, supplies the intelligence, supplies all the cover and so forth required. That’s the only reason this thing is drug on. So if Trump cuts these things off, which he’s temporarily doing, this thing is going to wind down pretty fast.

What do you think Putin is going to do in response to a cut off military aid? Cut off military aid to who? Ukraine? Ukraine, yes, from the U.S. The Russians are going to keep doing what they’re doing right now. Until there’s a ceasefire or some agreement, the Russians are in the driver’s seat. Do you think we’re going to see a more aggressive push westward by Russian forces? I don’t know.

I said they’re going to keep doing what they’re doing. They’re going to keep moving further and further to the west. And what Trump is proposing to do is shut the thing down as fast as possible so they don’t destroy more of Ukraine and kill more Ukrainians.

I mean, what’s the war done? It’s done. It’s destroyed Ukraine. The Western propaganda just doesn’t get it.

This is this has been a war that has been a catastrophic failure for the West and for Ukraine. They’ve destroyed a tremendous amount of Ukraine and they’ve killed a lot of Ukrainians. So what does Trump need to offer, I guess, as a negotiating tactic or either as a proposition to Putin to make him stop doing what they’re doing, to quote your words? Well, he needs a ceasefire, if you will.

He needs to continue to open up the negotiation with, in particular, before Putin, you’ve got Foreign Secretary Lavrov, and Lavrov has been in contact. He was in Riyadh in Saudi Arabia, the first initial meeting. So they have to form a contact group.

I mean, they have to get their embassies functioning again. With Biden, Biden never talked to Putin. They never had any communication.

So you have to start talking to each other. So we’re at the very preliminary stages. The idea that Trump has that he can just shut this thing down with a click of a switch is fanciful.

It’s not going to happen. But it’s moving in the right direction. Looked like with Lavrov and Marco Rubio, the Secretary of State of the United States has looked like they’re moving forward so they can make contact, start deliberations.

And we know what the elements of the deliberations are. The Russians are essentially going to say, you’re going to have to make Ukraine like Austria was made after the Second World War, a neutral country that can’t be a member of NATO and they’re neutral. That’s going to be one of the preconditions.

The other thing is the geographic territory that the Russians have already taken. People don’t realize they’ve won the war. So when somebody wins a war, you don’t come in and tell the victor what to do.

The victor tells you what to do. They’ve won basically because they’ve taken what they wanted to take, which is the eastern part of Ukraine. Is that what you’re suggesting, Professor? Well, I don’t know what they wanted to take.

The reality is they’re where they’re at and they’ve taken what they’ve taken. And so that’s basically their starting point in the negotiations, plus this neutrality thing. The reason the war started in the first place was the provocation by the West of inviting Ukraine into NATO, into the Western alliance.

Unfortunately, when the Warsaw Pact was dissolved, they should have dissolved NATO. Then we wouldn’t have this war. Yeah, that is a conversation for another time.

NATO and what Trump wants the NATO members to do with their military spending. We’ll talk about that next time, Professor. Great talk.

Thank you very much. We can follow Professor Henke in the X account down below, as well as his email if you have questions for us next time. Please do email Professor Henke and or myself.

I’ll put both our emails down below. Thank you, Professor. Great to be with you.

Have a great visit with your relatives and friends in Taiwan. Thank you very much. I enjoy speaking with you as always, and we’ll speak again in a couple of weeks.

Take care. Great. Thank you.