Transcription
The Fed is not going to put the inflation genie back in the bottle. The money supply is accelerating now. Accelerating and and and that means more inflation, not less inflation. But all we have, we have a lot of negatives in the United States. We have the financial negative that you talked about. We have an economic negative. We have a political negative, and a huge reputational damage because China will come out ahead, Russia will come out ahead, BRICS will come out ahead, the global south will come out ahead. Everyone's pivoting away from the US. In fact, it was just announced earlier this week, you know, that the French have finalized the removal of all their gold they in the United States. That that pivot is is is one of many little symptomatic things that happen.
Hello everybody. Thank you so much for joining us. I'm Lyanna Petrova with a new episode of World Affairs and Context. Today, I'm very pleased to welcome Dr. Steve Hanky. Dr. Hanky is a prominent American economist, professor at Johns Hopkins University, columnist for Fortune magazine, and distinguished senior scholar at the Mises Institute. Dr. Hanky recently published a new book titled Making Money Work, which we will hopefully discuss here on the program soon. Dr. Hanky, welcome back. It's so great to see you. Thank you for making the time.
Well, it's great to see you, Lena, and thank you for having me.
It's great to have you. It's been too long. Um, so let's let's begin. There's so much to discuss and there's so many questions that I want to ask you, but let's begin with the sort of macro view. Uh, President Trump has repeatedly described the US economy as experiencing quote "a golden age," citing record stock market highs, high oil gas production, and successful tariff policies. However, this narrative contrasts with reports of job losses, rising inflation, and slowing wage growth. I would love to get your perspective on the macro view first and the state, the overall state of the US economy today. Where are we today? And is the US economy as strong as the Trump administration claims it is?
Oh, on Lena, on on April 8th, 2026, as we speak, the day after the the so-called ceasefire with Iran was uh signed, sealed, and delivered. Uh, we'll we'll start by making a a general statement, and that is there's there's a big gap between President Trump's rhetoric and reality. And if you look at the general economic scene, shall we say, the so-called macroeconomic scene in the United States, it's quite different than the spin coming out of Washington or out of Trump's mouth. For one thing, let's look at gross national product or gross domestic product actually, the value of all final goods and services produced in the economy, GDP. And in 2024, GDP was uh at two and a 2.8% per year. And the first year of Trump administration, 2025, it it fell to 2.1% per year. So it it it didn't go down. It wasn't a golden era that GDP actually went down. So that's that's one aspect. The job market you mentioned is another aspect. And in 2024, the year before Trump came in, 2.2 million jobs were produced. And in 2025, there were virtually none that were produced. 100 181,000 jobs total were produced. And we talk about manufacturing because remember Trump's tariffs were supposed to bring all these manufacturing jobs to the United States and create a manufacturing boom. Well, the job aspect was dismal. A negative 108,000 jobs. Actually, we had fewer jobs at the end of 2005 in manufacturing than we had at the start of the year. So, so that's a big that was also a big negative. If we look at productivity, labor productivity, how how much each worker produces uh per hour of work, the productivity dropped from 3% uh plus in 20 2.1% in 2025. And and if we look at the tariffs, tariffs are are a big part of that. Terrorists terrorists didn't create jobs. They they destroyed jobs and they they slowed the economy down and they they threw a lot of what I call regime uncertainty into the picture. That is Trump was changing everything, not not just tariffs, but tariffs were big. I mean, this is the biggest change by the way since the Smoot-Hawley tariffs in the Great Depression. So we have to go back a long ways to to get anything approaching what Trump was doing with tariffs in 2025. So all of that uh created a a a reality that's much different than the rhetoric and the spin coming out of Washington. And and quite frankly, even even the spin that comes out of the press, e even even looking at press that's, you know, so-called left of center like the New York Times, the big paper of record in the United States, you you don't you don't you don't see what I'm telling you. I mean, the the narrative coming out of the New York Times and other mainstream media isn't isn't really the the arrow going down. That's never really emphasized. So, that's that's the background to kind of set the table, so to speak.
And and then we, in addition to the tariffs that we had in 2025, then we enter 2026 and and we've had two military attacks, wars of choice against Iran going on in 2026. So that's that's a huge negative. And if you put it all together, I I think what you have is that there Trump bobs and weaves. And people say it's well, it's hard to figure out what what the guy's got on his mind. Well, it it is, but there are certain things that that fall out of the picture and and and they're big things. And one thing is interventionism. The idea of there are three there are three big isms that that fall out. One is interventionism. And interventionism simply means a a more activist government state intervening in in everything we do. The government's got their finger in the pie more so than than before. So interventionism is one. The second thing is protectionism. We've already talked about that. We we've gone from essentially minimal protectionism protectionism again with all administrations have been going down down down down down down down and then we have Trump and we have a huge spike up going back to the Great Depression, really. We haven't had anything like it. So that's protectionism. Interventionism one, protectionism two, and militarism three. And militarism. You can see it with the war, but you also can see it. You you always have to look at a budget to figure out what in reality what does what does a president really believe in? What's he what's he talking about? And and you can find it in the budget, the balance sheet. There's nothing more important, you know, than a balance sheet. And so if we look at defense and militarism, he wants to increase defense expenditures from 1.1 trillion to 1.5 trillion in the next fiscal year. Now that's a that's a huge increase in in defense expenditures and and it's an increase in defense expenditures that are monstrous. You you if you look at the 1.5 trillion Lena and and you you ask the question, well, how much do other countries spend on defense? You you have to add up and cumulatively add up 37 countries before you get a number that comes up to 1.5 trillion. So, we're spending we're spending we will spend if the 1.5 trillion number eventually gets passed by Congress, we will be spending as much as as the top 37 defense spenders in the world all combined. So, this is a this is just a massive thing. Uh and and and by the way, the home of waste, fraud, and abuse is where? It's in the defense department. For 29 years, they've never been able to audit. I mean, you're an accountant, and you know what an audit is. They've never been able to audit the defense department. It it's so dysfunctional and disorganized that no auditor will stamp a CPA good housekeeping seal of approval on the accounts. So that's that's that's where we're at.
Um, and and I think the disruption caused by the war, which by the way isn't over. We we had a tentative ceasefire, but we we don't even know what is what the two sides are even negotiating for sure about. Uh, and and and and we're left with a situation, I think, where in in the immediate term, let let's assume the ceasefire works perfectly. The Gulf uh opens up, the Strait of Hormuz opens. Everything is normal today starting on the 8th of April. Let's assume that the the tremendous damage has already been done. And to get some handle on that, it takes four to six weeks for oil to transit from the Strait of Hormuz, the Persian Gulf to wherever it's going. So we will see by the end of April. We're into I think the six week uh period already in the war, but but certainly by the end of April, all the oil that had been that had exited the straits before the war will will have been delivered. And then you have a huge gap because we've had this six-week period where essentially nothing, very little has come out of the Gulf. So, and as they say, you you can't print molecules to to make up the to make up the difference. There'll there'll be a gap. And there's already a physical shortage of oil in Asia. Most of the Asian countries, the average inventory of oil in in those countries is it's only 30 days. So, so that will run out. There'll be there'll be this gap and oil prices are already up in Asia in the physical market, the spot market. They're much higher than the paper market. What you read in the press now, WTI, West Texas Intermediate Crude is trading about $95 a barrel today. But but that's that's much lower than the price of oil that's actually being delivered in the spot market in Asia and and other locations. Now, so what will happen when the shortage really hits at the end of the month? The the futures market or paper market as they say will be mugged by reality and those paper prices will will actually go up again. They'll go up to to meet the physical prices. So, I I anticipate by the end of the month we'll see oil up, not not down. It it will go up. So, there's there's a lot of damage that's that's already in the system. And I I think the markets have been very complacent and not they're not they're not pricing in all the collateral damage that that is being produced by the shutdown that we've had and and maybe maybe the shutdown will continue or or be regulated. We we don't know. But the the the damage is has already been done. We've had six weeks of damage in there. Sulfur, for example, 50% of the traded sulfur in the world comes out of the Gulf. And and it comes out because when you refine sour crude oil, one of the residual elements that comes out of thing is sulfur and and sulfur prices are going up. Now, where do you use sulfur? Well, you use sulfur to make sulfuric acid. You have to use it to make fertilizers. You have to use it in metal energy uh to produce steel, copper, nickel, things like that. Well, nothing's been coming out. So, you can draw down old inventories that you have, but then when they're gone, they're gone and have to replace them. So, so we have that. We have aluminum snag with aluminum. Uh diesel fuel shortages, jet jet fuel and diesel were really where the short physical shortage. They will come even in the United States. Everybody everybody says, "Oh, the United States uh e exports more oil than it imports." That that's not true, by the way. We we actually import more than we export. If you take all the petroleum products together, lump them all together, we export more petroleum products in if you include oil and so forth and natural gas, LNG and everything that than we import. If you just look at oil, we we actually import more oil oil than we export. So even even those things really aren't picked up or reported in the press. And this gets to Hanky's 95% rule. 95% of what you read in the press is either wrong or irrelevant.
Yeah. Let me just give a few little facts because especially when the war started, there's most of the what's reported in the press is is filtered through the intelligence community, the CIA and other places. They feed the press. So remember that the press tells us that the economy was collapsing in Iran and that if we just decapitated the leadership, everything would change in two or three days and there'd be a revolution on the streets and everything would be fine. Well, it turns out that the economy wasn't collapsing. Actually, if you look at 2008, that's when the great financial crisis started, and and you index the GDP per capita, which I've done, and set it equal to 100, it it goes from 100 up in Iran up to about let's say 115. It's 114 and change. If you look at Saudi Arabia, it goes from 100 to 115. Almost exactly the same. If you look at Kuwait, it goes from 100 down to 59. If you look at the UAE, it goes from 100 down. If you look at Oman, it goes from 100 down. So all the countries in the Gulf with the exception of two, Iran and Saudi Arabia, which GDP per capita grew at almost exactly the same number. All the other ones went down. Now you don't read that in the press. And and another thing you don't read in the press after the war started, by the way, what happened with Iran? It started exporting more crude oil. Number one, and it was selling at higher prices with lower discounts. So the the revenue coming from the war after the war started was was much greater for Iran than before the war. And surprise, the Iranian real didn't collapse. It actually appreciated by 9% against the US dollar since the war. And inflation came down from was a little over 90%. Inflation came down to something a little a little below 60%. I I measure the inflation every day. I'm I'm the only one in the world who knows how to do this and can do it. So those are the numbers. The real the currency got stronger after the war started and the inflation got became lower, not higher.
Where do you read that in the press? Have you ever read that, Lena?
No, I don't think I came across anything like that.
No, they they they won't report it because the press is essentially self-censored.
Yep. It is available because I I have I have the third highest number of Twitter followers of any economist in the world at 842,000 followers. And I tweet on this stuff every day. And and by the way, the press does follow my Twitter. I I do know that, but they don't report these numbers.
Um, as you mentioned, the US and global economy are experiencing extreme volatility and uncertainty with the war in Iran having become a major destabilizing wild card. The two-week ceasefire looked promising, but now we're learning that there have been violations uh by Israel who just bombed Beirut, downtown Beirut. So, there's really no telling yet whether the ceasefire will lead to meaningful negotiations and whether that will actually end up leading to peace in the Middle East. How would you characterize the overall economic impact of the current war so far? Are we looking at a temporary economic shock? Or if the ceasefire ends up being broken and it doesn't work out, it doesn't last two weeks, are we looking at something much more structural than just a temporary economic shock?
Uh, well, in in a word, I think it's more structural. You've got the outcome of the war from the economic point of view. There, it's very hard to tell because we don't know what the scenario, we don't know. We know what's happened from the start of the war until today. Okay, that's bad and you know, unambiguously bad for for the economy, world economy, European economies, Asian economies, US economies, BRICS economy, everybody, it's bad except except Russia. Russia, Russia is an unambiguous winner out of the thing because where do where do you get all the all these things that we rely on uh coming in big quantities coming out of the Gulf? Where can you get them? Well, you can get them in Russia. You get helium, you get fertilizer, you get aluminum, you get oil,
You get sulfur, you you name it. And to some extent that's been acknowledged and and this is actually one benefit of the war from my point of view is that many of the sanctions on Russia have been lifted at least temporarily and I think I think maybe it will be the start and the unraveling of the international sanctions regime that we have, which is very bad, by the way. Sanctions are very bad. They they never work. They're like protection. They're protectionist type of thing. So from my point of view, if we got rid of all the sanctions, that would be great. But we at least temporarily have gotten rid of some of them. Even why why has Iran been able to sell more oil? Because they've temporarily lifted the sanctions on Iranian oil. So the US goes to war with Iran and then li and temporarily lifts lifts the sanctions for them for shipping out oil. And and why did they do that? They they didn't want the price of oil to spike even higher than it actually has. So So the so Russia is an unambiguous winner and I think geopolitically China is a huge winner. So so supposedly there are three great powers in the United States, China and Russia. There are only three great powers. And what what's happened, the stupidity, I think, of the Trump administration and starting this war has has actually benefited China and Russia for sure and damaged the United States and and damaged it not only economically. We're totally talking about economics, but obviously it's damaged the Republican brand and the Republican party and the Trump. So, I think the bi-elections uh will not go very well for the Republicans. The only the only strong card the Republicans have or the it's the Democrats. The opp the opposition's so bad that it's that that's the only the only thing going for the Republicans is the opposition, the Democrats in a way. So, but but the the Democans will be damaged and weakened and I I think their showing will be pretty bad actually. Uh so that's a political local thing. But the big the big damage will be very long term and that's a reputation of the United States. Who who wants to deal with the United States when the US behaves like this? And and who can believe the US because they one day they say one thing, the next day they say the next thing and they never follow international law now. Whatever the international law is, the United States just ignores it. Israel's been doing this for a long time, by the way. Israel totally ignores it. And you mentioned the ceasefire. Now the prime minister of Pakistan is leading the negotiations for the peace or ceasefire, whatever ceasefire agreement. When when this was announced, the prime minister of Pakistan indicated that this this would cover everything including Lebanon. And right away, who who broke it and said they they said they were going to break it. The Israelis said, "Oh, it doesn't cover everything. We we agree about Iran, but we're not about Lebanon." And by the way, the attacks were ferocious today in in Lebanon. They they had, I think, over 100 air strikes.
Uh, and and there were many deaths. I don't know what the total number is, but it's I I think it's in triple digits.
It is. The the the reign of terror of the Israelis is expanded enormously after the ceasefire. And and you say, well, will the ceasefire hold? That that in a way that depends on what the Israelis do because the Israelis don't want it to hold with Iran. We're talking about Iran now. So, how so how do they how do they unwind the thing? They they do a number of false flag operations by setting off bombs and things like that and and Dubai and Saudi Arabia, Kuwait, places like Oman and and they say everybody reaches the right conclusion with the false flag. They say, "Oh, it's the Iranians who did that." That that's how you break these agreements. I mean, people people have to get real. This this is how we're talking, Lena, about how the world actually works.
Exactly. And and it's it's I think it's become clear that if the Trump administration cannot restrain Israel, then there's not going to be a ceasefire. And it's it's there's no point in negotiating with the United States that is unable to restrain Israel. But uh from history, we know that going all the way back to, you know, probably the 1980s, the United States has not been able to restrain Israel. And um it's it's unlikely to do so now, it appears.
Well, it's not it's not only not not having capacity to restrain, but with the Trump administration, they're they're taking orders from Israel.
Right?
I mean, it's not it's it isn't Trump giving Netanyahu orders. It's Netanyahu. He gives Trump orders. Why why did they start this war? On the recommendation of the Mossad, the intelligence agency in in Israel, the chief of the Mossad said that a decapitation would work, that the war would work. And that that is if if you if you killed the Supreme Leader and the leadership, a lot of the leadership, that within it several days, the whole thing would collapse and there'd be a regime change. Well, that's very interesting because number one, that's not what the Mossad historically has said. The head of the Mossad coned before the new head had always taken a position decapitation wouldn't work. Regime changing wouldn't work. And and they went to the scholarly literature, which I'm very familiar with, and and regime changes just don't work. The United States has been been involved in about 70 regime change operations since World War II. And they they've all been a disaster. They they they just don't work. So that that was the position of the scholarly literature. That was the position also by the way of of the deep state and the United States, the intelligence community with regard to Iran right now. So you had the Mossad saying decapitation now would work and you had the intelligence community in the United States saying it wouldn't work. And and what did Trump do? He took orders from Jerusalem. He he did what the Mossad said to do. That that's my point. It's very clear who who's giving the orders and how things work. So and and and and it's very clear that the position of the Mossad, which I think was correct before, has changed with the new leadership of the Mossad and we know what the result it it true to form, true true to history, to all the scholarly literature. It didn't work.
Y and and all you have to do by by the way, if people want to see a good reference on this, a book that was written a few years back by Lindseay Oor. Her book was called uh Covert Regime Change, I think is the exact title, Covert Regime Change, and it was published by uh Cornell University Press, a scholarly treatment of the thing. And and she goes through all these cases and how disastrous they were.
Yes. And and of course, another another good book that I would recommend to our viewers is The Israel Lobby by Professor John Mearsheimer. That is a good one. I just finished reading it and it's it's actually very eye-opening. Many things that are being discussed now is is not new. And it goes all the way back to uh to to the Kennedy administration when Israel declined any attempts to allow um international um, you know, nuclear observers to inspect the Dimona uh nuclear uh station and so on and so forth. So it's very interesting and I that's another good book in addition to the one that you mentioned that our viewers might want to consider uh reading.
Well, yeah. Yeah. Of course, Mearsheimer is a friend and uh, you know, one of the one of the great analysts of of these kinds of things. Uh, and and so far as far as the war in Ukraine goes and and the dealings with Iran and the war in Iran, Mer Mer John Mearsheimer, professor at the University of Chicago, he he's he's nailed it. He's got it right. Now, who who is Lindseay Oor? Lind Lindseay Oor happened to receive her PhD from who? John Mearsheimer. So, so, so, so at any rate, u, if people really want to get an in-depth view of what's going on on on almost a daily basis, they should uh check the YouTube podcast that various people are interviewing Merch timer. He's he's a hit now and and you can find him on YouTube. I mean, he he's on all Almost every day there'll be some new interview with John Mearsheimer.
Yes. His his definition.
By the way, it's very it's very interesting. You know, he's he's the most distinguished man in this field in the world. I mean, any any scholar would know this, but he he's almost never quoted in the mainstream media. So, but you will find him on these podcasts and and he obviously enjoys doing it. He's very articulate and clear and so I'd highly recommend uh listening to what what he has has to say.
Um, recently I read that the United States has already spent close to $280 billion dollars on the on attacking Iran, on the Iran war, and yet the United States government is insolvent. As you recently mentioned in a fascinating article in Fortune magazine that you published um just probably about a week or so ago, maybe two weeks ago. The article is titled "The Treasury Just Declared the United States Insolvent," and uh I was absolutely fascinated by the argument and by the article itself. um could you walk us through the data that you examined that you referenced in the article and uh your conclusions as well?
Okay, I'd be happy to do that. I I can see why you probably like that being a CPA. You you you could get into the get into the balance sheet and get into the weeds. Now, I I I wrote I co-authored that with a good friend and colleague of mine, uh Dave Walker, who was the controller general of the United States. So, uh we teamed up to look look at the financials when when they came out. By the way, the the US government does every year produce the financials. So if you look at them though uh let's let's look just look at the budget itself before we get into the off-budget. So the budget itself, you you have assets of about $6.1 trillion and the liabilities are uh about $48 trillion. So when when assets are much smaller than liabilities, you're insolvent. So, so that's the that's the budget. Uh, I I should say that's the balance sheet, not the budget, that's the balance sheet. But there there there actually is another big balance sheet. Uh, that's that's off-budget and that includes Social Security and Medicare. And that that adds to the $48 trillion liabilities that you have to add a little over $88 trillion more. So it's, you know, almost doubling the size of the assets. So So if you combine the combined on-budget and off-budget items together, uh, and those off-budget items are basically unfunded liabilities. I mean, there there there's no no provision for funding these things. They're they're just liabilities of the federal government. The federal government promises to pay and if they're unfunded and and they promise to pay and they deliver on the payments. What's that mean? That that means that either taxes are going to have to go up to direct taxes to pay them or you'll have an inflation tax to to inflate the liabilities away. And e either way, somebody down the line is going to get hit with one hell of a big bill, $88 trillion dollars already and and climbing. So, so the bottom line, if you combine the combined budgets, Lena, are we $6.1 trillion in assets and $136 trillion in liabilities. So that's the insolvency. So, what what do you do about this? Well, Walker and I uh pointed to a couple pieces of legislation that are actually uh in in the works now that ultimately would would start tackling the problem. One one of those would be to set up a fiscal commission and and there is a bill to do that. HR 3289 is the number if anyone wants to look at it. It's co-sponsored by Bill Huizenga and Scott Peters. Both one one is a Republican, Huizenga from Michigan, and Peters is a Democrat. And then it's I think they're over 40 co-signers. So So what would this commission do? Well, it would start trying to put a spotlight on what the problem is that we're talking about and and how to clean it up. So, so that's kind of shall we say the the short-term fix of the of the insolvency problem that I just outlined that they would start tackling that. The the next bill is in a way more significant and that that was sponsored by uh Jody Hice from Georgia and and that would call for a constitutional convention to rewrite the US Constitution. And and that um bill is actually HR. It's a resolution. It isn't a bill. It's a congressional resolution. uh 15, number 15. And and what that would do, it it would force the if if acted upon, it would force the Congress to do what they're mandated to do anyway. And since 1979, two-thirds of the states have proposed that we should have a constitutional convention, a limited one that would be limited on focusing on constraining the politicians so that they couldn't engage in these activities that rendered us insolvent. So it there are many possibilities, but one you'd put a debt break in the constitution. You you'd amend the US Constitution, put a debt break in it like the Swiss debt break that was put in in 2001 in Switzerland. And and and what the Swiss do, they say government spending can't increase any more rapidly than the rate of growth in the economy. So, so the by doing that, the the government can't crowd out the private sector. It could get smaller, but it couldn't get any bigger as a proportion of GDP than it is right now. So that would that would be one aspect. The second aspect over the over over the business cycle, you would have to balance the budget. That would be a good thing. At least an attempt.
So, so at least that means over the business cycle, you couldn't be adding to the debt because you would the deficit would have to be zeroed out. You'd have to you'd have to balance revenues and expenditures and and the expenditures could not grow any more rapidly than the economy was growing. If the economy is growing at like last year at 2.1% real rate of growth, then the inflation real rate of growth in the government spending could only be 2.1%. It's it's much greater than that now, by the way. It's over double that.
So that means the government's expanding. That means that means that that Trump, of course, who has no interest in fiscal sanity. He he he's latches on to what I call fiscal lunacy. And the fiscal lunacy is that our deficit is over 6% of GDP. A very high number. So that that means we'll have to be issuing a lot of Treasury bills and bonds to finance it. And hopefully the Fed will not monetize those. The Fed won't buy. The Fed's already buying them. By the way, in December, the Fed changed from quantitative tightening where they were shrinking the size of the balance sheet and and letting the bills and bonds that they had run off and shrinking shrinking. Now they've gone into quant from quantitative tightening to quantitative easing and they've actually produced since December, they they've bought over $40 billion worth of bonds, mo most bills actually, most of them bills, treasury bills, short-term treasury bills, and that means what that means they've increased their contribution to the money supply. The Fed is but when they buy those, they they create credit and that is increases the money supply and that eventually feeds into more inflation. So, forget the infla we haven't talked about inflation. The Fed is not going to put the inflation genie back in the bottle. The money supply is accelerating now. Accelerating. And and and that means more inflation, not less inflation.
And if we turn to deficit very quickly, um, I recently read that based on early 2026 data, the US federal budget deficit is projected to reach approximately $1.9 trillion for the fiscal year, with $1 trillion deficit already recorded through February of 2026. Dr. Dr. Hanky, at what point does a large and growing deficit become a crisis rather than a manageable condition?
Well, it's two ways. One one is if if for some reason the bond vigilantes get on their horses and start riding, they they will to buy Treasury bills or bonds, they will demand a higher interest rate. And a higher interest feeds back into the budget because right now interest expenses are increasing at a very rapid rate and and they're eating up uh the exact number off the top of my head I can't remember today, it's around 15% of the budget, which is a very high number, by the way. Now that's 15% of of budget expenditures that that that are going to just service the debt. I mean, it it's not buying anything or or it's not transferring money back to taxpayers or anything like that. It's going to people who bought the bonds and and so that that's that's one channel that could be could create a crisis because if interest rates go up, it's not only going back and feeding back into the federal budget and and meaning that there's basically less being spent on real goods and services out of the federal government budget or or being transferred from one taxpayer to another taxpayer. It's just money money going in in a way into a black hole.
Okay.
So that's that's one aspect. Another aspect is if we have a situation like when when we had COVID, remember we we had the the lockdowns and the economy was locked down and the revenues going into the government went down, but at the same time expenditures went up and we had a monstrous deficit and what happened? That about 90 over 90% of that monstrous deficit was financed by what the Treasury issuing bonds and bills that were bought by the Federal Reserve and monetized. You monetize the debt and we had what? All of a sudden the money supply shot up. It was growing faster than it ever grown before. Was growing over 27% per year. And with a lag, what happened? Well, we got inflation went up to 9.1%. That's where the inflation came from. Forget this supply chain shocks and temporary, remember team temporary inflation was going to be team temporary. No, it was a natural thing. The money supply skyrocketed, growing at a more rapid rate than any time since the Federal Reserve was founded in 1913. And sure enough, with a lag of about a year, inflation revved up. And and by the way, the only people who made a forecast of that with John Greenwood and I using the quantity theory of money, we we said in in an article published in the Wall Street Journal for the record that inflation could go up to as high as 9%. Well, everybody thought we were nuts at the time. And and what happened? Well, it went to 9.1%. I I think that's why you first contacted me because because of that forecast. Actually, you you you saw it and recognized you said, "Well, maybe these guys know something."
Yes. And and it's it's interesting because there's so many things going on in the US economy right now that sort of they're flashing red. Um, one of them is the jobs market because despite the most recent headline labor market data, I noticed that household survey showed that year to date, the United States has lost 1.4 million jobs. So, the US economy is weakening, and that's on top of the the effects of the Iran war. Um, and so now with the rise in energy costs, it may be safe to say that we're on the path toward a full-blown stagflation and the Federal Reserve is now stuck between sort of fighting inflation, as you said, it's not going to put that genie in a bottle and supporting economic growth. How does this situation complicate decisions for central banks like the Federal Reserve and maybe other global banks? uh let's just take the EU for example.
Well, it it puts them in a very difficult situation because what what you have, you you've had misguided monetary policies in the United States and and and Europe and Great Britain. And you've also had misguided fiscal policies. No one has any room to wiggle. There's no wiggle room left. Everybody's running huge deficits. They have very high levels of debt. Uh, and and in monetary policy, they're they're trying to get inflation back towards targets, but the inflation's above targets. So So that's a situation before you start the war. And and the war is to use jargon, a little bit of jargon, but people will understand. The war does what? It imposes a huge negative exogenous shock in the system. And the system's all very fragile before the fiscal thing is not correct, the monetary thing is not correct, the tariff thing, trade is not correct, everything is not correct. And then you've got in the US, the the the the world's biggest economy and most powerful great power. You you've got this regime uncertainty where not only everything is not not correct, the standard monetary fiscal, it's not correct. It's off-balance. And then all of a sudden you've also got surrounding at this regime uncertainty. So you've got the biggest economy kind of teetering on one leg and then you start a big war. Th this is just this just lunacy. And and and by the way, we don't know what the next lunacy coming out of the box will be because this this ceasefire thing we we talked about, I I think is very fragile at at best. At at best it's very fragile. And and the spoiler will be Israel. Israel wants to keep this war going and and and they will attempt with all kinds of false flag operations that will be very hard to detect, by the way, because the censorship in Israel is almost total. And and you notice that none of none of the reporters, by the way, they can't they can't even go into Gaza.
And and I think of the reporters, the one thing Israel is pretty good at is assassinations. And they've assassinated, I don't know what, I can't remember what the final count on, but it's it's in the hundreds of journalists that have been assassinated. So if the Israelis don't like what you're reporting, boom. So all all the reports you see from the Middle East, they're all reporting from Jerusalem or Tel Aviv, the reporters. But all all of that is all totally censored. And and and and there are two things that the Israelis are very good at: assassinations and censorship. It turns out that the glorious Mossad, who who knows everything and never makes mistakes and so forth, they they made a big one in Iran. The decapitation strategy didn't did. We know unambiguously where it came from. It came from the Mossad. And we know unambiguously that it did not work. It failed. And and we know from the scholarly literature and history that decapitations almost never worked.
And I think
All all of that was known. And and we also know, by the way, that the deep state and the United States did tell Trump just what I've told you. But Trump went ahead and that's that gets back to the Israeli lobby. That gets back to Professor Mearsheimer. Why why did he not listen to the deep state? Why did he take orders from Netanyahu and basically the Mossad? Because the the Israeli lobby is is very powerful.
Exactly. Exactly. And I would just add that it may be fair to argue that uh the decapitation strategy actually backfired because if you talk to uh people from Iran or of Iranian origin who now live in the West, they would tell you that it actually um the assassination of Ali Khamenei actually united Iranians again around the state. It didn't cause them to want to be bombed. It didn't cause them to want for their infrastructure to be destroyed. It actually united them around the state and against the aggressors, the US and Israel. So it it backfired arguably. This is this has happened uh this has happened many times in in the, you know, Persian history, Iranian history and Persian culture and u and and and this is one of my colleagues uh Professor Vali Nasr at the Johns Hopkins School for International Studies has written a book on the and I think his latest book is was published in December. I think it's called The Iranian Strategy. You can Google that. But he's another one to watch on YouTube because of course he's a very distinguished scholar. Haven't he was born in Tehran. His father he got his PhD at MIT. His father is also a very distinguished scholar who also received his PhD from MIT. So, so his his he's he's gone through the history to understand Persia and for thousands of years, but more recently, let's say since 1500, that Persia has always been in in a defensive position in a in a way because number one, they are not Arabs. They're they're not Arabs, but they're surrounded by Arabs. So, you've had the Arab, shall we say, challengers. That's that's been one thing. You've had Russia challenging him. You've had Great Britain challenging him. You've had the United States challenging. You had Israel challenging. Always these challenges, but but but they persist with this rally around the flag. When they're when they're attacked and people try to destroy them, what do they do? They rally around the flag. And and that he goes through this and he he he indicated he anticipated even before the the earlier war this year with Iran that that's exactly what they do and that's what they've done. And and and and his conclusion, as well as Mearsheimer's, by the way, they're they're both on the same page that that the longer the war stretches out, the the better it is for Iran. They they will be they will be beneficial and and that you don't get that spin in the United States. The propaganda machine says, you know, they've been destroyed this thing and that thing. But but in fact, they've they've they've been what? The the war has actually helped them because they they control the Strait of Hormuz, the choke point. There are eight choke points in the world. One of them happens to be the Strait of Hormuz. They control that. And the other one is a strait going into the Red Sea. And who controls that? Houthis.
Yep.
Bob and Deb. You're right. Exactly. So those two straits, if they if they actually were shut down, we we would have pretty much a catastrophe in in the world economy. So So keep that in mind. So So and and and finally, some somebody apparently told Trump that he's going to destroy the world economy if this thing keeps up. Now he'll spin it as as we won everything. I I've gotten everything I wanted. It's been beautiful. On so forth. But all we have, we have a lot of negatives in the United States. We have the financial negative that you talked about. We have an economic negative, we have a political negative, and and a huge reputational damage because China will come out ahead, Russia will come out ahead, BRICS will come out ahead, the global south will come out ahead. Everyone's pivoting away from the US. In fact, it was just announced earlier this week, you know, that the French have finalized the removal of all their gold. They in the United States. That that pivot is is one of many little symptomatic things that happening. You can't totally pivot away. By the way, just to make clear, the the greatest power in the in the world is the United States. There there's no way you can do 100% pivot. But at the margin, you can pivot and move away. And this will be very damaging to the United States, I think, in the long run. The long run cost of of these tariffs and the war against Iran will be very significant.
Dr. Hanky, and maybe the last question for today, what is Trump's economic endgame? He is several months away from midterms and we're in a complete catastrophe with the cost of war mounting, inflation rising, the labor market weakening. What is his endgame here?
Well, I think it's rhetoric versus reality. We'll see if his rhetoric is powerful enough to convince people that the economy is booming and he's making America great again. Now, I if you look at the economic numbers that I just gave at the start of our interview, that that's not true. It's a it's just factually not correct. That that's the end of that story. Uh, and and I think the public is basically realizes what I just told you factually. His polling numbers on all economic indicators, they're going south. So, so the po that the public opinion for whatever that's worth. Now, Trump will say it's it's a bunch of rubbish. It isn't worth anything. And until he gets a good number, if the numbers are bad, he says it's rubbish. If the numbers are good, he says, "God, these guys are geniuses." Uh, so, so that's where we're at. PE people have to be very careful about the the spin coming out of Washington. And remember, Hanky's 95% rule. 95% of what you read in the press is either wrong or irrelevant. And that that's very hard for people to swallow and and uh and get a grip on. See, see, by the way, Merch, this what we're talking about the rhetoric versus reality. Now, you know the school of of international studies that the that Mearsheimer, he's a realist.
Right?
That's that's a realist school.
And and I'm a realist and not only international economics, but international politics and economic policy. You just you got to look at the facts and see see what it says and try to understand what's happened in the past and how that relates to today and today's numbers and and all these things. So as they say, uh, got to know how to connect the dots.
Exactly. Dr. Hanky, thank you so much for joining us. This was a fascinating conversation. I really enjoyed it and I know that our viewers would absolutely love to have you back on the program again soon. So I look forward to having you on the program again.
Well, I look forward, Lena, to joining you again. Thank you for having me.