Transcription
The inflation genie is out of the bottle. It's very hard to argue against not squeezing and tightening things down.
So you don't think it's a certainty the Strait of Hormuz will remain open?
It will be "open" in quotes, but it will be one way or another controlled by Iran going forward. This, this is for the record. I think the the biggest strategic loss the United States maybe has ever occurred in its history.
We're back with Steve Hanky, professor of applied economics at Johns Hopkins University. We're speaking today after Kevin Worsh took the podium as Fed chair at the FOMC for the first time yesterday. We're going to be going over a few key moments from the FOMC and talk about what's next for Fed policy and what the markets are expecting, and importantly, whether or not the economy is able to withstand potentially higher rates. Steve, welcome back to the show. Good to see you again.
Good to see you, David.
Professor, I'd like to start by playing for you a clip from the press conference itself. Here's a reporter asking, um, the new Fed chair Kevin Worsh why interest rates should not go up or should it? Let me just play for you this clip and then we can respond together. I think it sets up the conversation today quite well.
You know, coming to this blind, reading this very nice short statement that I think we've all appreciated in the room. Um, one might wonder why you didn't raise rates today considering what you're saying here, um, about the the risks to US inflation and your mandate. Um, I guess why not and what would you need to see in order to get to that place? Um, and secondly, on your task forces, are there any best practices at other central banks that you'd consider looking at? Thank you.
You know, I'm glad they're in the practice of giving you two questions because my answer to your first question was going to be very curt. I've got nothing more to say than the statement itself. And to the point of the question I got before, market reactions to what we say unfiltered, I think is more helpful than having delivered a statement, me than improvising further upon it. Best practices of task forces. Um, this is a subject I've thought some about. I've been on a task force or two in my life. Um, best practice: find the best minds. Um, ensure that the task forces have a range of people, both by backgrounds and predispositions, so they too can have a bit of a family fight. Um, make sure when you establish a task force that the group that's going to be the recipient of the information feels as they've got some equities in it, too. That's why we're looking for, haven't done the final roll call, some of the most significant talent we have in the building and across the reserve banks on each of these and in some sense, seconding them to this group for a period of some number of months, um, so that the leaders of the task force know what the most, uh, analytical central bank in the world thinks about that they can reflect on it. And a final best practice: we're not outsourcing decisions to anybody. Um, uh, administrations past and present, reserve banks have chosen a group of 19 people around the table. These will be our decisions. We can.
Let's address the first question that he couldn't answer. Why not raise rates yesterday? Because immediately after the FOMC conference, the two-year yield shot up, stocks fell, and bonds fell. Gold also fell, and Bitcoin fell. So the entire bond market has started pricing in not one, but up to three rate hikes by the end of December, according to the CME FedWatch tool. We'll talk about that first, and then address the task forces.
Okay. I think two things. One is that actually the market, if you looked at the Fed funds futures market, uh, in on the Chicago Mercantile Exchange, uh, the the day before, uh, the decision and the announcement, uh, there was a 99.6% chance that the Fed funds rate would stay the same, that nothing would change. So the market had totally priced in exactly what they did, which is steady as you go. That's point number one. Point number two, I think Walsh was was wise to orchestrate a no change for two reasons. One, well, three reasons. One, the market didn't think there was going to be a change. Two, uh, we're we're in extremely uncertain waters with regard to what's going on geopolitically as well as domestically. So, so, you know, you know, steady as you go might might might be a prudent thing to do when there's so much uncertainty about what in the world is actually going on. And and three, the most important part is that you you wouldn't want a big split decision in the FOMC the first time Worsh comes out with a public statement and a public announcement. Why? Why? Why? There there would be disagreement. If if you raise the rates, he would not have had unanimity among all members of the Federal Open Market Committee. So I I think it was just baked in the cake and it it had to be the same. The markets expected it. Internally, that that was a wise thing to do. You you don't want the FOMC, uh, members split like they've been, by the way. And and, uh, and so I I as far as I'm concerned, I think he did the the FOMC did the right thing. I mean, it isn't a wash, by the way. It's the FOMC who votes and decides these things. It's it's not a one-man show.
He, he's, he's the maestro leading the orchestra. But if the or, if the orchestra, I basically, if you would have raised rates, the orchestra would have been very much out of tune because there's definitely would have been a number of votes against that. Before we continue with the video, let me tell you about a very important topic, which is your personal information. Now, your personal privacy is of utmost importance, probably even more so than your personal assets. And your personal information is likely online right now. Your full name, home address, and phone numbers are sitting on data broker websites that anybody can access or buy. I bet you probably didn't know that. So, that's exactly why I use DeleteMe. Our sponsor today, DeleteMe, removes your private information from hundreds of data broker sites. And since June 2024, it's removed 204 of my listings. And my latest report shows 335 listings were reviewed last month. That's what I like. It's consistently and constantly checking so nothing slips through. Getting started is straightforward and easy. Just submit your information and in about a week or so, you'll get a report showing where your data was found and what was removed. And it doesn't stop there. DeleteMe keeps scanning the internet and removes your data throughout the year. So go to joindeleteme.com/davidlin, link in the description down below, or scan the QR code here and use my promo code DavidLynn at checkout. New users who use my code will get 20% off of all US plans. Take your privacy seriously before somebody else does.
Do you think the economic conditions are ripe for a rate hike for at least, uh, the con, the next two quarters? Let's start from next, the next meeting, which will be end of July. Do you think we're ready for a rate hike by the end of July?
What, what's, can you put the federal funds futures market up for the June contract? What's the probability?
Uh, let's first see what the markets think, and then, then I'll tell you what I think.
Okay. Have you ever been not aligned with the markets, though?
So what, what do we have? I.
July, July 26th, uh, sorry, July 29th, uh, 30% chance of, uh, one, uh, 25 basis point hike. As we go further out, the probabilities increase. So now we're looking at, into September, we're looking at a 65, 66% chance of at least one hike. Into October, uh, then we're looking at, uh, 75% chance of hikes. And then into December, it's 85% chance because there's only a 15% chance that it'll stay at 350 basis points. So we're looking at by December, as, yeah, 85% chance that there was going to be at least one hike. So, so what, what this is a very interesting exercise going through this because that's what the markets priced in after the press conference yesterday and knowing what the voting, what what the sentiment was inside the FOMC with the members of the FOMC and and and and what it did, what it tells you is that before the meeting, uh, you had one point of view, and then after the announcement and the, you know, public revelation of what they were thinking, more more tightness came into the thing. There was an increased chance that they'd actually be increasing rates. That's that's essentially what came out of the meeting. And that's why the markets went down and the and the yields went up, and and these probabilities are calculated off those yields. And the probabilities of federal funds increases out into the future by the end of the year have gone up. That's that's what happened at the meeting. That that was the main thing that happened at the meeting. One thing that happened at the meeting, we we've already gone through, they didn't change the Fed funds, but the expectation going forward that they would increase increased a bit, not a lot, but but a bit, and and that was that, that's shown in those probabilities. Those probabilities of rate increases are a little bit higher in those charts that you just showed than than they were two days ago. And if if we look at, uh, you know, we look at the market action yesterday, that's all revealed in the market. But but the point, so you ask me, well, what I, what I think, I I think they probably will be forced to tighten up. And the reason for that is that the inflation genie is out of the bottle. It's at 4.2%, 2% now, and I, and and the target is 2%. That's over double a target. It's not even close to the target. So, it's very hard to argue against not squeezing and tightening things down with with when you have inflation running over double its target rate. And and and now, let's let's get to the meat of the thing. Why, why is the inflation there? The inflation is there because of something the Fed is not paying any attention to, and and that's the rate of growth in the money supply. And and the money supply has been accelerating for the last 18 months. And the biggest contributor, you know, by far to the money supply are loans, uh, that are put out by commercial banks, and and those have been growing at a at at a very hot rate. By the way, now let's let's get into Suki and Hanky's book, Making Money Work. We point out that one of the biggest influences in monetary policy, forget the Fed funds rate, in terms of monetary policy. The key thing is the regulations imposed on commercial banks, because those are big factors that influence the capacity of commercial banks to make loans. And and what is Worsh talking about? He's talking a lot about liberalizing or altering, shall we say, the regulations that are imposed on banks. And those regulations, by altering them, what they're talking about is imposing new rules that would allow for a looser, a looser monetary policy in which the commercial banks would have more capacity to make more loans. And if that was the case, they'd be contributing to a growth in the money supply. Okay? And if there was a substantial growth in the money supply, of course, the nominal GDP, the real growth plus inflation, is going to go up, and and the inflation genie is not going to go back in the bottle. So, so they kind of have a dilemma. They're talking about, "Oh, well, should we be raising interest rates, the Fed funds rate to fight inflation?" And they're ignoring the other side of what I think is a dilemma, what what's going to pose a dilemma to them, and that's the loosening of bank regulations. So they, so they, they're they're in a in in a corner a little bit because the inflation is roaring away. They've kept the Fed funds rate constant. They indicated they're tilting towards increasing those Fed funds rates before the end of the year. That's on the one side. That's what that's what everybody pays attention to in monetary policy. And and it, to some degree, it's a second or third order condition. The first order condition is what, what are the bank regulations? Are you changing the bank regulations? Bank regulations don't change very often. So people don't even view them as part of monetary policy. We don't, we don't have periodic meetings in in which there are press conferences over changes in the bank regulations like we do with the Fed funds rate. But but the bank regulations are much more important. And the reason why, by the way, just so people get it in their head, about 80% of the growth or change in the money supply is created by commercial banks. It's, it's not the central bank. It's not the Fed. The the Fed, the Fed is kind of peanuts in the whole picture. It's, it's all about commercial banks. And commercial banks right now, by the way, one one reason that the bank loans are going up and the and the contribution to the money supply by commercial banks is going up so much, David, is because commercial banks have been, what? They've been very profitable. So their capital goes up, their reserves go up, their capacity to make loans go up, and and they're making loans because, as the commercial banks see it, there are good opportunities. There are good bankable loans that can be made, and and they have the capacity to make them, and and they're making them. The the banks are pretty healthy right now and have quite a bit of capacity, and and they'll have more capacity if if the regulations are loosened. That's my point.
Well, so that's the answer to the first question. Do you want to go to the second?
Yeah, the task forces have been established, a few of them. Uh, they're meant to, um, lead communications, address balance sheet policy, data collection, productivity and jobs, and inflation framework. So there's five. Uh, most interesting to me would be the balance sheet policy task force. So it's been reported in the media, and I can't confirm if Worsh said this himself, but he's widely known as a monetarist. Now, he hasn't mentioned anything about the balance sheet at the FOMC meeting yesterday that was omitted. Uh, we can talk about, um, the way they're communicating now that's different as well. But the fact remains that the balance sheet expansion that's been happening, which we talked about, has not yet been addressed. Uh, the fact also remains that earlier in his career, when he was a governor between 2006 and 2011, his relationship with Bernanke strained following 2009 after he went public in the media about the dangers of QE and the expansion of the balance sheet. So he opposed that. Uh, I don't know what he's going to do now. We, it's yet to be seen. Uh, but I think that's maybe one indication or hint that he embraces monetarism, that he opposed the expansion of the money supply back in 2009. What would he need to do with this balance sheet policy task force to demonstrate to you that he is indeed a monetarist?
Well, he, he, he'd have to explicitly come out and say, "We're embracing the quantity theory of money." MV equals PY. And.
Who's the last Fed chair to have done that, by the way?
Volcker.
Okay.
Greenspan. He, let's put it this way. Volcker was proactive, and and that was it. The quantity theory. Okay, fine. That was very explicit. Worsh appears to be a little, a little bit, he, he's different than Jerome Powell because Jerome Powell and the Fed have explicitly rejected the quantity theory of money and they've rejected monetarism on the record. Worsh has not. He, he does not reject, but I would say if he's a monetarist, he's kind of a monetarist light, if you see what I mean. He's not a, he's not a monetarist in it with a capital M like Paul Volcker. There's no question about that. I I don't think he's made up his mind. He's, he might be a monetarist light. He's focused, you know, he was he was concerned about quantitative easing, concerned about the growth in the balance sheet. That that would indicate that he has some eye on the ball of the money supply. He, he's not rejecting it like Jerome Powell. So, so that's that, I think that's where he's standing. And and, but, but it's hard to say because he, he's never clearly articulated. He, he's had statements about various elements of policy like the Bernanke QE. That statement of skepticism and concern about QE and the expansion of the balance sheet, that that that comes from a monetarist orientation, there's no question about that. So, but, but exactly what he has in mind, we don't know. Now, as far as the task forces are concerned, I think his idea is that he, he wants to change the, shall we say, the the operating procedures at the Fed. Let's put it broadly like that. He, he definitely wants to change. He's, he's indicated that all the time. He doesn't like the way things are operated right operating right now. So what do you do? You get a bunch of task forces together and you come up ultimately with some recommendations. The problem I have with the task forces is the fact that it's, it's all intrafamily. These are all Fed people on these task forces. So you're not going to really have many new ideas. And and and you certainly, it's doubtful you're going to have any hardcore monetarists on any of these task forces. There's no question about it because because there aren't any monetarists at the Fed. That's the point. So that if I was him, I would have the task forces. I would, he, he made it very explicit when he was talking to Claire Jones in that last thing. Claire, of course, is the chief reporter for the US, uh, for the Financial Times. And when he responded to her, he made it very clear it's going to be only family working on these things. Uh, there will, there won't be outsiders, which I think is a big mistake.
Where are the monetarists, by the way, if not at the Fed?
You're talking to, you're talking to one right now.
Well, yes. Yes. Yes. Who, who are the other, uh, uh, academics and economists who subscribe to this school of thought? Where are they?
There, there is a short list of distinguished economists that would be be monetarists. Uh, two that I work with just off the top of my head who who are very well known are Tim Congden in the United Kingdom and John Greenwood, who happens to be a colleague of mine. They, they're they're hardcore monetarists and in the same school that I am. But.
Well, we're digressing a little bit, but, um, from what I've heard from other economists, the, uh, the monetarism school of thought has, uh, has fallen out of popularity since Milton Friedman died. Is that true? And if so, why?
No, that's, that's, that's true. Uh, for the last 30 years, the, uh, of course, uh, and this coincides with the period of some of that 30-year period is after the passing of Milton Friedman, who who was the the leader of the monetarist school, shall we say. The last 30 years, macroeconomics has basically been destroyed because post-Keynesian economics has come into the picture, and and all all the models are post-Keynesian models. And those models of macroeconomics, they, they do not include an aggregate for money. Money is not included in the models. Now, now, just think about it. Just, just as an average person, a a normal person, if you were looking at the overall economy, the macroeconomy, wouldn't you include money?
Isn't money what drives the economy? Isn't money the money the most important thing in in the macroeconomic scene? And the answer to it is unambiguously yes. That's why since the 15th century, all macroeconomics always has, what? Some element of the quantity theory of money in it. But the last 30 years, that's not been the case. The last 30 years, if you, if you go to universities, you, you are not, you're not being exposed to the quantity theory of money. And shall we say, monetarism. And and by the way, there, monetarism isn't that simple because there are various types of monetarism and so forth. And and of course, under the monetarist tent, there's all kinds of quibbling about this thing and that thing, like like all these tents, they're, they're quibbles, there's just isn't one brand, shall we say? But broadly speaking, uh, the monetarists start with the basic proposition that changes in the money supply have a significant impact, with a lag, on asset prices, real economic activity, and inflation. And and I think most people, the average man, even understands that. Yes, it.
It's the economists that get their feet all tangled up with these models and so forth.
I, I want to, I want to get to, get back to Kevin Worsh now. Um.
Okay.
Ultimately, uh, we're trying to find out what's different with the Fed now. And I want to give a few more clues before I get your take on this ultimate question. Take a look at this clip.
I did not submit a, a dot. For me, it's not helpful in the conduct of policy. I suspect by year-end, as I mentioned in my opening statements, there'll be a review about communications broadly, press conferences, dots, uh, meetings, and the like, transcripts, minutes. This will be part of that. I don't want to prejudge the outcomes there, um, but I'm pretty open-minded about what they could be. And I was just incredibly impressed over the last couple of days, my colleagues over the last two days, and frankly, over the first three weeks I've been here, they've been very open about changes. Change isn't easy. Change is filled with risk. But our number one goal is to get monetary policy right. The way to get monetary policy right is to deliver on the remit that Congress gave us to deliver on price stability. And there was, uh, no disagreement on any of those points.
This is a slight departure from Jerome Powell's last practice. You also notice that, by the way, the Federal Reserve, uh, statement at the FOMC is considerably shorter. They've omitted forward guidance in their language. Uh, there was a big discussion at the press conference about the importance of dot plots now that forward guidance is now omitted. So many reporters asked, are dot plots now the de facto forward guidance that we should use? He was not explicitly clear about that, and he just said, as we saw in the clip here, he didn't even submit his own dot. So, uh, that just goes to show that he doesn't, you know, he doesn't, he probably doesn't think that this is a useful tool anyway. Uh, there's a lot of discussion about how communications will change. Uh, a question was asked if press conferences are even useful. Uh, he's open-minded about that, which is to say perhaps yes, perhaps not. We'll see. What, how do you, what's your, what's your opinion on this overall attitude towards forward guidance and and dot plots, which is part of the, you know, future projection umbrella?
Well, I think it's a good, I, it's a good, I think his orientation about communication is more in line with my thinking. And and my thinking is always, you know, if if I'm reading a student's paper, what do I do? I say, "You can write as long as you want, but I'm only going to read the first thousand words." You get, you get my point? In other words, have, what, what he's saying is, have I made myself clear? And and clarity is the key thing. If you can make yourself clear in in one page, so much the better. Why, why do you need some mumbo jumbo going on for three pages and so forth, deflect, you know, and and the, what, what's the been the purpose of these statements of the Fed? It's basically to confuse everybody. You have people working full-time, the Fed watchers, trying to slice and dice these messages to figure out what the Fed is, what what's going on. And and basically Walsh is saying, I, I don't want to do that. Yeah, I, I, I want to make a clear statement in one page and get done with it.
There's, um, quant funds, entire quant funds that have algorithms that scan the, uh, Federal Reserve FOMC, uh, press releases and statements at 2:00 Eastern on on the Wednesday that the FOMC comes out, comes out with their statement, and then, and, and now they have nothing to parse. So they're going to have to rewrite their algos, I guess.
Yeah. Well, I, I hope they get back to plain English and, and, you know, again, the question is, when I look at these things, have I made myself clear? That's, that's, that's the question. And and the Fed invariably does not make itself clear.
Well, the, okay, let's just, let's just in point-blank terms, the FedWatch tool projects a, uh, several rate hikes by the end of the year, mostly because, uh, the dot plots revealed nine members of the FOMC wanted rate cut, rate hikes this year. Do you find the dot plots useful as a tool? Because clearly the markets are using that as a guidepost because they have nothing else now.
Not particularly.
Okay. So, it hasn't been consistent in the record.
Well, that, I, I can't answer that, uh, in the sense that I, I, I haven't done a study or seen any studies where they look at the dot plots to see, you know, if if somebody puts up a dot plot, well, do they change the dot plot? You know, how, how, um, how, how those have comported with actual changes, I don't know.
Okay. From what we know.
So I can't answer it.
From what we know about Kevin Worsh so far, if you were to explain to a layman, how is he different from Jerome Powell? How would you answer that question?
Well, there's one big difference, and that is, uh, Powell rejects unambiguously the quantity theory of money and looking at the money supply. And and that's not the case with Worsh. Does not reject it.
How would you expect that to translate to policy differences?
Uh, it could, uh, when the dust settles and the, you know, they go through the motions of these task forces and so forth and so on, and depending on what Worsh's real view is, maybe there'll be more of an embrace of the quantity theory of money and monetarism. Maybe we, we don't know yet, but maybe he, he has not rejected it. It has been off the radar screen under Powell, be, and Powell has testified over and over again that they, the Fed does not pay any attention to the money supply, as, as Powell has testified to, to use his language. He said that Fed research shows that there's no reliable linkage between changes in the money supply and changes in economic activity, which is just nonsense, by the way. Utter rubbish. But, but that's not Worsh's view. And and and he, he has not rejected it. And and there's some sign that he is friendly to the quantity theory of money and and the money supply and monetarism. And there, and the reason for that, you've already said, he, he was, he expressed concerns over quantitative easing and the increase in the size of the balance sheet. And so, so he has some evidence that that he leans a little bit towards the quantity theory of money and and the money supply. But, but it's not, as I say, if you would put him in the monetarist camp, which I, which I wouldn't, I wouldn't put him in any camp so far, uh, he certainly would be a monetarist light, not not heavy.
It is interesting that the chances, where the probability of rate hikes increased dramatically yesterday. And this happened in the same week that a memorandum between Iran and Trump's administration has been reached. And now all eyes are on the Strait of Hormuz, whether or not it will remain open. Gas prices fell dramatically overnight. It's back down to $75 a barrel for the WTI. Uh, that was it was nearly $90 just a day prior, day before a deal was temporarily reached for now. And so my question is, why do you think the markets aren't paying attention to that? Why do you think the markets are not factoring in oil in their oil in their hike rate hike calculation? Are markets predicting that the Federal Reserve just isn't going to look at this?
Oh, the, the market moved yesterday. It was about 1:59 or 2:00 PM Eastern, and it, it had nothing. Everything I could read on this, I was trying to figure out what was going on myself, and it was all about Trump's press conference. It, it wasn't about Worsh. Worsh was, you know, we've been talking about Worsh in this press conference. That was kind of irrelevant. The, the first order condition that moved the market was Trump.
You mean at the G7?
Yes. Uh, conference.
Okay.
Yes. Yes. If you, if you look at the timing of the thing, it, it was, it was all Trump. It, it was not Worsh.
Any, any, uh, key takeaways from the, uh, G7 that you think may have market implications? Should we come back to that?
Well, I think the long-term market implications, I, I think, uh, this memorandum of understanding, you, you have to realize that the US-Israeli war in in Iran has been one, one of the greatest catastrophes from a geopolitical strategic point of view that in in the history of the United States. So, so if that's the case, it will have market implications. There's no question about it.
Okay, let's talk about that for just a minute. The, uh, the deal with Iran, which was signed at, um, the Palace of Versailles, by the way, which the internet has now mocked Trump for doing that, hawking back, harking back to the Treaty of Versailles, um, imagery here. But anyway, I digress. The, uh, the Iranian deal includes a $300 billion fund, more than half of which is already committed. It's basically war reparations, a $300 billion private fund designed to trigger investment into Iran is outlined in the US-Iran framework agreement. More than half of that sum has already been committed. The fund is designed to give both sides an economic incentive to continue, conclude a final deal to end the war. Uh, this article is not using the words war reparations, but I think that's what that is. That's what Iran wanted, and now they're getting $300 billion in investments. Um, what do you think about this? Is that.
Where the $300 billion is actually coming from, and and maybe it's maybe it's Iran's one, one part of it might be Iran's own money that's been basically stolen and confiscated by the West, who knows? But let's go through the, you, you have to, you have to look at the whole thing in terms of its implications. I think from a, like an event study, you know, we do event studies in the financial markets all the time. You, you have a, the stock of a company, and it's, it's going along, and then bing, there's an event. There's forward guidance that comes out or some some event, and then you see what happens to the stock after the event. So you have a before and after the event kind of analysis. So let's look at, um, the before and after with the US-Israeli war on Iran. Well, before this, the Strait was free passage, open. Now the Strait, maybe there'll be passage, but maybe there'll be a, a maintenance charge, otherwise known as a toll, to go through. And furthermore, it's very clear that the Iranians will in effect control the Strait one, one way or another. So that's one thing. We've had huge budget costs in the United States, uh, associated with the war. Well, those, those weren't before, that was after the reputation loss. No one trusts the United States anymore because we were negotiating two times with the Iranians, and that was just cover so we could go in bomb them, you know. So, three, weapons stockpiles completely depleted. Four, huge worldwide economic cost. And the president yesterday said, "Well, one reason he wanted to sign this thing and get done with it, we'd have an economic, as he said, catastrophe worldwide." Well, why in the world didn't he think about that before he started dropping bombs on Iran? He, he caused what he, what he admits was the potential for an economic catastrophe. So, so that's another, another loser related to the huge worldwide economic cost. I already said the Strait of Hormuz, before it was free navigation. Now it's Iranian control. Uh, and and and basically, what's that mean? That that means they control de facto the, a lot of the economic activity for all the countries in the Gulf. Six, the political cost, of course, for the Republicans, I think will be significant. And and I think the, shall we say, not only the political cost for the Republicans, that's of course small potatoes, the, the big political cost is is again, kind of the erosion of constitutional democracy, you know, just flying in and bombing somebody without without any permission and authority by Congress. That's that sort of thing. Um, and and now, uh, we haven't accomplished anything. Basically, what, what was the purpose of the war? The purpose was to force a regime change in Iran. It never happened.
Did you think the US won?
The US lost big time. Th this, this is for the record. I think the the biggest strategic loss the United States maybe has ever occurred and in its history. It's.
How do we, how do we evaluate win or loss if we don't know exactly what the objectives were to begin with?
Oh, we know what the objective was. It was change a regime. There's no question about it. It's un, it's unambiguous. Once they failed to do that, they decapitated all the leadership. By the way, one, and that was supposed to result in a very rapid regime change in a week or two. It never happened. And then the spinner and chief, Donald J. Trump, kept spinning different objectives. Oh, it was a nuclear stockpile. Oh, it was a ballistic missiles. Oh, it was a Strait. Oh, it was this. Oh, it was that. He kept changing the objectives, but the the real objective was a regime change. That, that's why the war started. Once it failed, he kept changing his tune and and and became, as a result, became more and more unpopular. By the way, that's another reason that he, the, the, the big reason he wanted to sign that thing, whatever, whatever it is. By, by the way, the memorandum of understanding is isn't worth the paper it's printed on. You, everybody knows in business, it doesn't mean anything.
So you don't think it's, so you don't think it's a certainty the Strait of Hormuz will remain open?
Well, I, it, it, it will be "o" open in quotes, but it will it will be one way or another controlled by Iran going forward. That was not the case before.
But Iran will be a major player in the Strait going forward.
Let's suppose. And the, the insurance companies have indicated this, their fear in this. And so we might get the Strait o open. By the way, with ships going out after they get approval by Iran and after they pay a management fee or toll, whatever you want to call it, they might go out. But the question is, who's going to go back in?
Yeah.
And and there's a there's a huge question mark around that. Going out is one thing. Going back in is is another thing with another set of calculations required. So, so the whole thing, this, the Strait traffic of 130 ships a day, which was normal before the war. Remember why, why are we talking about the Strait, David? We're talking about the Strait because of Israel and the US. Before it was free, it was open. On average, 130 ships a day were going through there. That was before. And and and now we have the event. The event was the war. And and who started the war of choice? Israel and the United States. So, let's get the causality right. Israel and the United States shut the Gulf, not Iran. We're looking at this from an economic standpoint as well as a has a regime change been changed standpoint. Has a regime change been implemented standpoint. Uh, the talking point, some may call it propaganda, but the media talking point supporting the war would argue that, okay, yes, it was very costly. Oil went up, and now there's probably $300 billion that has to be paid to Iran. Economically, this was a disaster, a catastrophe, whatever you would call it. But America and its allies are safer because the biggest sponsor of state terrorism has been decapitated, and potentially, uh, as part of this deal, they'll never revisit nuclear weapons again, and so future generations will be safer. Do you agree with that?
No, I think it's pure propaganda. It's absolute nonsense. And and and and one thing that's happened as a change, again, the event study, what, what, what was what was happening before, you, you had the behavior of Iran, the way it was. Now we have a new behavior, and that is Iran has has basically said, if you hit us, we're going to hit you disproportionately. If you, if you hit us, if you hit us with 10, we'll hit you with 20, going back in a counterattack, attack. That, that did not exist before. The disproportionality counterattack did not exist. It exists now. So, so they're potentially more dangerous. More dangerous, not less. This, what the propaganda spin that you gave is utter nonsense.
Okay. So they're, they're, they're potentially much more dangerous now because they, because of the disproportional counterattack position that they've taken?
And and the, and the fact that they know now they can shut the Strait whenever they want to.
Let's, uh, wrap up the conversation. Uh, if I were to summarize what happened this week, so we had a change, changing of the guard at the helm of the FOMC, as well as an MLOU signed with Iran and the US, uh, and on top of that, the G7 summit that's been ongoing, uh, earlier this week. Um, with a new deal in Iran potentially being made, um, Strait of Hormuz reopened for now, gas prices lower, and a new FOMC. Given these changes, how could you extrapolate going forward and look at the trajectory of the economy from this point on to the rest of the year? Uh, how confident are you that inflation will come back down, and how confident are you that economic growth will resume as usual, given these changes?
Well, that, David, you, you're asking for me to get a crystal ball out and for a very complicated thing because we have so much uncertainty with regard as far as Iran goes. It's so uncertain. I don't think anyone can say much that's intelligent about what the outcome actually is going to be. So that, that's point number one. As far as the economy goes, just looking at it, uh, extrapolating the the oil, you said, "Yeah, the oil price has gone down. It's going to go back up because we've depleted all of our oil inventories." That's one panic that Trump was in. He realized that we were going to the bottom of the barrel in terms of inventories, and and we'd run out pretty soon, and something had to happen, or we'd have, we really would have an oil catastrophe on our hands. So, so they'll be refilling the inventories that they, uh, depleted, and and that will, uh, take quite some time to do because we're running a deficit in oil probably through the end of the year, and and and you, you have to run a surplus, of course, using the surplus to add to the inventory. So my view on as far as oil goes, I, I think oil's going back up from here. So that's, that's a market remark. As far as inflation coming down, I, I think the inflation genie is out of the bottle and it's going to stay out of the bottle. So, so that's, that's where we are on inflation. As far as the real economy, it seems to be plugging along, and I think it will continue to plug along because the money supply, it's the money supply. The money supply has been accelerating, and when the money supply accelerates, nominal GDP with a lag accelerates, and that means it supports real economic growth, which is okay. It isn't, it isn't booming, but it's okay. I think that it looks like it's probably going to stay okay. And inflation, a lot of inflation. That, that, that's what the money supply is doing. It, it's supporting real growth, that, that's okay, not spectacular, not dismal, just okay. And it's, it's, uh, it's pumping, uh, quite a bit of inflation into the system.
Okay, good. Well, let's, uh, let's end the discussion here, and we'll continue next time. Tell us where we can follow you, professor.
Uh, on on X, @ve_hanky, or, or the usual. If you want to get on my weekly distribution, just send me an email at hanky, h, k, e, j, h, u, dot, edu.
All right, we'll put the link down below. So, make sure to follow Professor Hanky on X, as well as write to him for any topics you'd like us to visit and discuss next time he's on the show. Thank you very much, Professor. We'll speak again soon.
Oh, thank you, David. Great to be with you.
Great to be with you as always. And thank you for watching. Great to have you on as always, the audience. And we'll see you next time. Take care for now.