Economy Is ‘Treading Water’; Economist Reveals Next Asset Explosion | Steve Hanke
Summary
Commodities Supercycle: The guest urges a pivot away from high tech into hard commodities, citing a new supercycle driven by supply constraints and geopolitical shocks.
Gold Bull Market: Strongly bullish on gold with a secular target range of $6,000–$7,000, noting current consolidation and potential for renewed upside.
Crude Oil Outlook: Expects further oil price spikes due to chokepoint risks and inventory drawdowns, discussing elasticities, OPEC dynamics, and UAE’s exit implications.
Rare Earths Dependence: Highlights that over 95% of critical materials and rare earths come from China, making munitions restocking and defense supply chains highly vulnerable.
Global Rearmament: Re-arming across countries (e.g., Germany) boosts demand for metals and materials, reinforcing the commodities upcycle.
Market Risks: Warns of bond vigilantes and higher rates if deficits expand, which could temper gold in the short run but not derail the long-term thesis.
Macro Backdrop: US growth is described as lackluster with AI hype overstated, while data center investment persists amid broader geopolitical uncertainty.
Positioning: Favors heavy assets with low obsolescence across Energy and Materials, staying long commodities with expected non-linear, spike-driven moves.
Transcript
The war in Iran has strengthened China tremendously. China's a winner and Russia is a winner and the US is a strategic loser. It's probably one of the most significant strategic losses the US has ever had in the war. You want to be pivoting away from high tech and and I I think and into hard commodities because we're we're entering a super cycle with the commodities. when gold really started taking off, I said, "Well, God, may maybe maybe I better put a range on the thing." 6 to7,000. And I that's still where I'm at. 6 to7,000. >> It's the 30th of April, and we're back with Steve Hanky, professor of applied economics at Johns Hopkins University. On the agenda today, GDP growth, the Iran war, oil at a 4-year high, and the FOMC see the most descents in 40 years, almost 40 years since 1992. Welcome back to the show, Professor Hecky. Good to see you as always. >> Good to see you, David. >> Many things to talk about today. What has been keeping you up at night, if anything, when it comes to looking at current events, world geopolitics, and or market movements? Let's start with that. I don't think I've ever asked you that before. >> Well, I've been sleeping like a baby if you want to know the truth. >> Okay, that's good to hear. We like to know you're in good health. >> Nothing keeps me up at night. But thinking about things, it's it's kind of 247, you know, if you're in in involved especially in trading uh or or have any interest in geopolitics, it's just a whirlwind. I mean, it's it's Hanky's school boy theory of history. It's just one damn thing after another. >> I was having this conversation with a family friend over dinner just a couple days ago. And he asked me, "Do you think the uh US is going to run out of money when it comes to fighting Iran? I mean, basically the Iran war is going to stop because the the US will literally run out of money and run out of munitions. By the way, how would you answer?" >> They Yeah, we we'll never run out of money. you can just print it, you know. So, so that that's that's kind of a, you know, it's it's not going to happen. They they can always print money and never run out of money. So, that that's one aspect, but but uh that could create problems like like inflation problems if you print too much money. If you if you grow the money supply over Hanky's golden growth rate of about 6% per year for money measured by him too, you're you're never going to hit the inflation target of 2%. So that's one aspect of the thing. The other aspect is that the the bond vigilantes are are out there and they've they've oh they've woken up. And if you look at the 10-year bond, what what's where is it now? It's like 4.4 or something. It's It's been creeping up and and so if you are spending a lot of money on defense and and and that causes the deficit to go up and you have to issue more treasuries and and those treasuries aren't monetized and sucked up by the Federal Reserve, they're they're sold to the non-bank public. And the non-bank public, the bond vigilantes demand higher interest rates. uh because because they're worried that maybe the printing press will run and maybe we'll have inflation, maybe the value of the dollar will go down relative to other currencies and it'll lose its purchasing power and and therefore u I need higher interest rates if I'm buying a dollar denominated bond. So, so the answer to the question you you ultimately the the the question was how in the world's the US going to pay for the war? You got to pay for it. And and yes, you can print money. They're not going to run out of money, but maybe higher interest rates, maybe higher inflation. >> Are they going to run out of munitions? By they I mean the US >> military. They've already pretty much run out of munitions. And I I uh Jeffrey Wing and I just published an article that was released in Fortune magazine about two hours ago. And we and we get into this. We we with the munitions the US has supplied in their proxy war with Russia. That means the Ukrainian war because it it has been largely a proxy war with the US and Russia because we we provide not only the most of the ammunition but a lot of the finance and and a lot of the intelligence and a lot of the targeting of targets and things like that. So, so the idea somehow the US really isn't involved is is just far-fetched. That's Ukraine. Now move to the other one where it's more transparent that we're involved. The USI Israeli war in Iran and and we've burned up lots of munitions and and it's widely reported from the New York Times on down that the cupboard is bare. You're going to have to replace these things. And and the point that Jeffrey Wang and I raised is okay fine, but how much material in the way of critical materials raw earth and specifically are required in each one of those weapons and they're tremendous amounts and over 95% of those rare earths and critical materials come from China. So in short, to to repenish the stockpile of munitions, we we we really are going to have to get permission from Chairman Z. So the these people in Washington haven't thought through the thing. If you're burning up munitions and you have to replace ammunitions, where do you get the raw materials to do the replacements? Well, the key ones all come from China. And end of story. It It's a simple story, but it's one clearly the bright boys at the Defense Department, the bright girls never thought about. And Trump, of course, has no clue about what's going on. So, so that's it. When when Trump meets Chairman C, believe me, he'll be on his best behavior. Trump will. 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Has this conflict with Iran changed fundamentally the relationship between China and the US? Take for example a reporter asked Trump recently. Is he bothered by the fact that China is supplying weapons or arms to Iran or just funding them somehow? And to which Trump replied, "Well, we're doing that with other countries, aren't we? So, you know, why should I be upset about that?" Well, it it it well in in a way he he in a little truth slid off of Trump's tongue when he said that. But but the the key thing is geopolitically the war in Iran has strengthened China tremendously. China's a winner and Russia is a winner and the US is a strategic loser. It's probably one of the most significant strategic losses the US has ever had in a war. I mean, you know, we lost the war in Afghanistan, but you know, I mean, okay, we lost the war in Vietnam. Yeah. Okay. We we we we really didn't win anything in Iraq. Well, okay. But but this Iranian thing is much different. And it's different because Iran either directly or indirectly controls two of the big checkpoints in the world. One is a straight of Hormuz and the other is a straight going into the Red Sea because the Houthis actually control that and as we know the Hoodies are allies of the Iranians. So chi China is a huge winner and and just in a narrow sense go back to the point that that Jeffrey Wang and I I made in our fortune article. If you're burning up all your ammunition and you have to replace it and the only place that you can get the key raw material to do that is China, it looks to me like China has all the cards. China wins. It It doesn't take rocket science to figure this stuff out. But you have to remember, David, that the folks in Washington DC are in general aren't the sharpest knives in the drawer. >> Before we move on to the economy, I like to get your opinion on this. How does one win a war against a country, not a small country, that's able to supply and rearm itself at a much lower cost than you are and can probably hold out their positions for longer than you can before you explode your deficit. >> Well, that's that's tough. And and we're seeing this occur in in a variety of ways with this war with Iran. They they can take a lot of punishment. Uh, as I said, the old Muhammad Ali Rope a do strategy. They take a pounding and and wait for the the big the big giant to become exhausted and then they land a knockout blow and and and they clearly can do this with the straight of Hormuz is very significant. And if you add the Red Sea to it, uh you you got you got two out of the eight choke holes in the in the world under the control of what? Ba basically Iran. >> Yeah. >> And and we know by the way that now this is in in the press. We know it's not only oil, it's fertilizer, it's aluminum, it's sulfur, it's all all kinds of key things. very large segments proportions of the world trade on on sea anyway is it goes through the the straight of hormones >> Brett crude is now at 110 briefly spiked to 126 overnight at the highest level since 2022 uh meanwhile the GDP advance uh first quarter GDP advanced uh estimate came out today from the BEA and it is at a pretty healthy 2% %. Are you surprised that higher oil has not put their economy into a recession just yet? >> Oh, yeah. There's always a lag between these prices and and and and the that's one thing. By the way, 2% is not that great. That's not that's not a that's not a great number. I mean, the yearly year-over-year last year was just 2.1%. So, it's not even as as hot as the yearly average for last year. It's about the same. And and and by the way, forget the AI. You do you see the AI hype coming in this? The AI people said it was going to be five or 6%. >> So So let's let's let's get into the oil price thing a little bit because what happens >> in the short run, you have to remember that oil prices don't destroy much demand. There's not very much demand destruction as prices go up because the price elasticity in the short run is very low. It's about 0.1% 0.1. That that means if you have a 10% increase in the price of oil, you only get a get a 1% decrease in the quantity of oil demanded. So it doesn't things don't adjust very fast. So I'm not surprised that the price of oil increasing hasn't had much of an effect. So far, I mean, I I I think since the first ceasefire, the price of oil, it's now over 60% increase. It it that it was it was about 60% the few days ago, and that means that you can only expect kind of a 6% drop in demand in the short run. In the long run, it's a little higher. The elasticity is about 0.3. So you get with a 60% price increase, you'd have about an 18% reduction in quantity demanded. So what's what's going on? Basically, we're we're drawing down our inventories. So So nothing has happened much. The quantity demanded hasn't changed that much. Factories haven't shut down or anything due to the fact that they're running out of oil because we're using the inventory is drawing that down. Now, when the inventories come to an end, maybe the price is going to really go up. There'll be a lot of factories that shut down. >> So, so the longer this continues, this this shows you the stupidity of the American blockade in the straight. By the way, if you if you have a tight blockade and it continues, pretty soon you're going to run out of oil in the inventories and the price will spike again. Let me remind our the viewers that on the program we had at March 28th, the David Lynn show, I said that we would have a spike in the price of oil at the end of April. Well, you said at the start of the show, the date today is April 30th. It spiked just exactly like I said it was going to spike. >> And and and by the way, we we've had of course a lot going on. And in addition to the spiking of the oil price, we had the announcement of the United Arab Emirates that they were going to leave OPEC the 1st of May. And and that's a big deal. Something that I anticipated because I I was an advisor to the Financial Advisory Council. I was a member, not an adviser. I was a member of the UAE's financial advisory council from 2008 until 2014. and and I of course talked a lot about my optimum produ pumping model depletion model for insitu resources like oil and and of course they they they learned their lesson looked at the model understood the model and the the model shows you that if you think the real price of oil is going to go down you start pumping more Today you have a take the money and run kind of move. So that that for the last couple years the UAE has been arguing that they want to increase in their production quota with OPEC but they haven't been given that. So that that's had them sore. Then we had the war with Iran and and the war with Iran does another thing that works into my optimum pumping model and that is if if you don't think you're going to have the oil in the future to pump what do you do? You increase a discount rate that you're discounting that future potential oil production those oil revenues out in the future. you discount that at a much higher rate, meaning that those potential revenues aren't worth very much in present value terms. And and you tilt your pumping. You accelerate your current pumping. And and that's what they that's what their thinking is with regard to the war in Iran. It's changed everything. This is a blowback from the war because they they know now that the Iranians will be able to shut the straight. And if they shut the straight, that's a problem for for the UAE. They won't be able to ship out most of their oil. So, so it's like having an expropriation of their oil fields if that happens. The other thing that could happen, of course, they have drones and other weapons, ballistic missiles, and they they could clearly destroy the uh oil production capacity in the UAE. And now, and now the UA knows this. So you plug in a higher discount rate to the model and what happens? The future value of oil that you're producing in present value terms is lower than it would otherwise be and you start producing more today. So So to do that you got to get out of OPEC. If you're an OPEC you can't you can't produce more today because you're bond quota. >> Yeah. And does that apply to other OPEC members? In other words, do they have similar >> incentives? They they they they all know the pumping model. I I g introduced this to the Kuwaitis when I was on the international board of the National Bank of Kuwait. So they they they understand this. >> So why does OPEC anyway OPEC is basically kind of a dead letter anyway? But but but at any rate, it's in the news. It's a big deal now. And and and there will be a a realignment of of of that cartel. There's no question about that. >> Do do you think other OPEC members will follow suit and leave like the UAE did? >> Hard to tell. >> Okay. But if they do, I'm not saying they will, but if they do, what happens to global oil? >> If if they do though, if they if they do, the Gulf States have a big incentive to produce more now than later. If they're if they're using my model for optimum pumping rates or depletion rates for insitu resources, they they would all be increasing their discount rate and and that means oil produced in the future isn't worth as much in present value terms. So if that's the case, you take the money and run. You get out of there. So So what it means is lower oil prices at at some point. Not not right now, by the way. Not right now. Right. Right now, you want to be long because there'll be more spikes as the straight remains shut. Th this this increase pumping is a theoretical idea. If the straight is closed, you're not going to increase pumping. Where are you going to put it? You're out of storage capacity already. You can't put it any place. You have to shut down. >> Okay. Uh, professor, let's return to the US economy. This is what drone Powell had to say about AI and data centers and growth overall. Speaking of data centers, take a listen. This is what happened. Um, this was what he said yesterday at the FOMC meeting. >> How would you describe the economy outside of the misbehaving inflation? I mean, um, it's still awfully resilient given all of the blows. >> I don't know that you can be awfully resilient. So it's actually quite resilient I would say cuz it's a positive thing if I can if I can have that amendment. Yeah, that the you know growth is really solid across our economy. Some of that is um that consumer spending is hanging in pretty well. The the most recent data are good and some of it is just the apparently insatiable demand for data centers all over the United States. So a lot of uh business investment going into building data centers and every reason to think that that continues. So you've got an economy that's growing at 2% or better. PDFP which is private domestic final purch purchases that which is really a better signal of of uh of a momentum in the economy actually higher than that. So that's you know that's a positive thing. >> Do you agree with that assessment overall? >> Yeah, I I I it but it but it isn't very hot and and it tells us nothing about where it's going by the way. >> Yeah. the he he reported the current status is as accurately reported by the chairman and and and I would say instead of his positive spin on the thing, I would say it's a a very lackluster. It it's it's it's not hot, not cold. It's it's it's right in there. It's it's about where the yearly average was last year for the United States. So nothing has changed very much from what was going on last year, which which wasn't all that great. I mean, remember the first year of Trump's presidency, the the the GDP declined. >> Okay, >> the rate of growth in GDP was lower in 2025 than it was in 2024. The rate of productivity increase was lower in 2025 than in 2024. So So we're we're losing steam. We're not we're not gaining, we're we're losing or let's say treading the water. We're we're >> we're not sinking. We're keeping our nose above water and that's that's about all. >> Okay. You've rejected the notion that the oil price shock has caused higher CPI prints in the last uh print. So, let's talk about Kevin Worsh and what he may do. Now, Kevin Walsh is a monitorrist. This is an article from Forbes. Let me share this with you. Worsh has expressed admiration for the intellectual tradition known as monitoriism especially its emphasis on rules-based policy. However, implementing a monitor's polic uh sorry implementing monitor's principles in the modern financial system poses serious challenges. Central banks do not directly control broad money because financial institutions are central players in monetary creation. I'll let you comment on that. More broadly, what do you think he's going to do with the money supply? This is the bank balance uh central bank balance sheet. We talked about this last time. It's on the rise and uh I'm guessing if Kevin Walsh is a monitorist, he might look at this a little more closely than the current uh Fed chair and perhaps reign in what people are calling now QE light. What do you think? >> Well, uh the uh who who was the author of the Forbes article, may I ask? >> Uh let me find that for you. Um, James Bugal. >> I I I I don't know who he is, but but in any case, uh, let's let's get back to the wash. Uh, it it you you can control the growth rate in the money supply because he he said one thing. He said banks are the biggest contributor to the money supply. That's true. About 80% of broad money is produced by commercial banks. We've talked about this over and over again. A and and it can be controlled very easily by changing reserve requirements uh changing bank regulations and all this is laid out which you have to put up on your screen at some point. The book Matt Sukuri and I wrote that's that's almost a year old. It was issued May 6th n 2025. So, we're coming up on a one-year anniversary, and all of this is laid out how to do it >> from the monitorrist point of view, what should be changed, and and in and the Fed. And of course, Borch is aware of this. So, I hope he adopts everything in our book, including he wants to shrink the balance sheet. We've got that laid out in the book, making money work. and Suki and I last week had a op-ed in the Wall Street Journal specifically laying out how you can shrink the balance sheet easily. So all all of these things can be done. The author of the Forbes article clearly hasn't read the book. So it's it's really a road map in a in a way. Let let us assume Worsh is a monitorist for a minute. Okay, >> let's just assume just assume he is. Then then then the book lays out a very clear and very detailed scholarly road map for how he should proceed what what changes what what changes should be made at the Fed and and how he should be proceeding. So that's one aspect of war wash. The the other aspect that that we pretty clearly know if you if if you know how to listen to him and and read his record and so forth, he he does want to let's say reform the especially the research department at the Fed. He he wants to overhaul that and get get new new people in there if necessary and and have a new way of thinking about things because if you're a monitorist that's completely different than what they're doing at the Fed right now. They they are not monitorous. They don't look at the money supply. They reject it. They're data dependent. They're just looking at in data coming out every day. this data, that data, and then with their finger in the wind, they have and using kind of an ad hoc approach to setting monetary policy instead of having it in stone and regularized with the quantity theory of money. They that's the way they do it. I think I think Wars basically wants to change that now. How he will do that I I don't I don't know. and and and for to some extent he's got really a big job ahead of him because the research staff of the Fed system they have over 750 economist and and the the number of the ratio of Democrats to Republicans is is over 50 to1. So they're almost all Democrats. Now if you're a Democrat, what what economist has a target on his back? Milton Freriedman, the dean of monitoriism. So, so, so you get the picture. >> No, sorry. Sorry. Can you please explain to us how how did monitoriism become partisan? >> Well, monitoriism becomes part of it if it's a partisan thing because the dean of the dean of monitoriism, modern monitoriism is Milton Freriedman, Nobel laurate, professor at University of Chicago. Everybody knows who Freriedman is. And and just think about Joe Biden be when he was elected that one of the first things he said was Milton Freriedman isn't going to run the show anymore. That's what Biden said when he was elected. So it's a big deal with the Democrats. They don't they don't like Freriedman. They they don't like anything about Freriedman. He was a free market economist, a monitorist, a free trader. They they don't like any of those things. So, so in that sense it's partisan and and it is relevant if you look at the political affiliation of the research staff at the Fed. That's also all I'm saying. >> So, let's suppose next administration will be Democrat and they asked the central bank to increase the money supply because maybe raising taxes on the rich isn't working. They need more money supply for income redistribution. Let's just >> they wouldn't because they they I just said they they they they don't look at the money supply. They're not monikerous. These things have political overtones. Not directly. I I'm I I'm I'm not arguing, by the way, that every everyone on the research staff who's affiliated with the Democratic Part Democrat, is a registered Democrat, would reject monitoriism. I'm I'm not saying that. I'm just saying that's the tendency of of the Democratic party and and the tendency is is is very clear when you look at who the dean of monitoriism is, Milton Freriedman. And who what economist is the enemy number one of the Democrats? It's Milton Freriedman. There's no question about it. And if you want proof, just Google the quote that I gave you by Joe Biden when he indicated that Milton Freriedman isn't going to be running the show anymore because I'm I'm elected and I'm a Democrat and I don't believe in anything Freriedman was was touting. So if if if you watch these things carefully, you you know what's going on. Plus the fact forgetting about partisan, you know, about monitoriism and what model of whether you're post Keynesian like the research staff is or whether you're monitorist like I am or like Wash is. Forget all of that. Just look at the look at the ratio of Democrats to Republicans. You got 50 to one. There's 50 Democrats on the research staff for every one Republican. So naturally, the the, you know, if you have a Republican president who's an activist and wants to influence things at the Fed, they they would they'd want that ratio to be changed a little bit. Plus the fact there's another factor. Most of the most of the Republicans are old-timers and they're about ready to retire. So, so, so you've got that if if you if you actually look at the younger demographic, the ratio of Democrats to Republicans would be way higher than 50 to1. >> Well, let's sum it up for investors. If you're looking ahead, which asset classes would be most at risk of a price correction? In other words, maybe you're sleeping like a baby, but some other people shouldn't be. Who would those people be? >> Oh, you want to be you want to be tilting. you want to be pivoting away from high-tech and and I I think and into hard commodities because we're we're entering a super cycle with the commodities. We're talking about the oil price going up but you know if you if you look at things I look at ferro venadium since December it's up 90% malibdum up 25%. Lithium carbonate up 39%. Lithium hydroxide up 49%. Lithium spotamine up 52%. Tanelum up 133%. Nobium up 28%. Aluminum up 22%. Tin up 21%. Steel up 16% and and on and on you go. So we're entering a super cycle. And one reason for that goes back to our original conversation and that is we're rearming. We're restocking the munitions. It's look at Germany. They're they're rearming. Everybody's increasing the proportion of GDP, the proportion of GDP they're spending on defense. Well, defense requires arms and arms require raw materials and that means commodities. So you want to go with, you know, you you want to go with halo, heavy assets, low obsolescence. That's the category you want to be in. So you want to be long commodities and and and and of course that won't be a linear thing with the prices just going up up up. You have spikes. A super cycle and commodities always has spikes associated with it. So the general drift will be going up spike and then it come down and then go up spike and then come down. So so that that would be my advice. I I'm maybe the reason I'm sleeping easy easily is I've made the pivot a long time ago. >> How does oil lift the tide of all boats meaning commodities? How does oil cause a commodity super cycle? Well, it it c in in the sense that most commodity indexes are heavily weighted in oil. >> I see. I see. Does this >> If you look if you look at the Bloomberg index, the Bloomberg commodity index, uh, which I can't remember exactly the waiting right now that we're speaking off the top of my head, but it it's very heavily skewed to oil. >> Okay. So, so in the commodity in the commodity basket, if you want a basket of commodities that are traded, not not things not things like lithium and venadium that there's there's no futures market or anything. All the things that you have in the futures market, just Google a thing, look at the Bloomberg thing and see what the weight of oil is. It'll be a big chunk of the thing. >> Okay. Uh, finally, professor, I'd like to bring to your attention this chart. Gold versus the US tang yield. uh it's reestablished its inverse relationship um somewhat. It's not perfect, but more or less when yields go up, gold goes down. Now, if you're if you're want to believe that the bond vigilantes are going to take control and sell bonds and the yields are going to go up, does that mean bad news for gold going forward? Well, it it it takes a little steam out of the gold bull run, but I think the gold bull run, a secular bull market will peak out. As I've said on your show before, between in fact, I announced it first on your show. >> Yes. >> 6 6,000 is the first thing I said. And then I I revised that when when gold really started taking off where that blue line is almost going vertical. When when that happened, I said, "Well, God, may maybe maybe I better put a range on the thing. Six to 7,000." And I that's still where I'm at. Six to 7,000. And it it's consolidating now, you know, little between 45 where where are we at today? 46 something changed. It's consolidating and it's pulled back a little bit, but it it'll take off again. Thank you very much, professor, for your update. Uh, let's follow your work. Tell us where we can follow you for now. And, uh, tell us about one of your more recent books that we can check out in the meantime. >> Okay. So, um, first you can follow me on X where I've got, you know, 846,000 followers and change. So, at Steve_Hanky, that's one thing. If people want to write me and get me on my weekly distribution, they send me an email hankyjhu.edu. And and if they want to really understand macroeconomics, the macro picture, there are two books that I've written recently. One's on capital theory I wrote with Leland Jerger that's called capital interest and waiting. So that's capital theory. Now the monetary theory, I wrote that book with Matt Sukurki, making money work. If you put both of those together, capital theory, macroeconomics is just capital theory and monetary theory in my in my view. If you put those two books together, that's it. >> Okay, good. We'll put the links down below. And uh please do follow Professor Hanky and check out some of his work in the links there. And do consider writing to us, email me or Professor Hanky if you have any questions for our next interview in a couple weeks. Professor Hank is a regular on the program and we welcome any guest questions. Thank you again, Professor Hanky. See you next time. >> Well, thank you, David. Great to see you. >> Great to see you as always. Have a great afternoon and thank you for watching. Don't forget to like, subscribe,
Economy Is ‘Treading Water’; Economist Reveals Next Asset Explosion | Steve Hanke
Summary
Transcript
The war in Iran has strengthened China tremendously. China's a winner and Russia is a winner and the US is a strategic loser. It's probably one of the most significant strategic losses the US has ever had in the war. You want to be pivoting away from high tech and and I I think and into hard commodities because we're we're entering a super cycle with the commodities. when gold really started taking off, I said, "Well, God, may maybe maybe I better put a range on the thing." 6 to7,000. And I that's still where I'm at. 6 to7,000. >> It's the 30th of April, and we're back with Steve Hanky, professor of applied economics at Johns Hopkins University. On the agenda today, GDP growth, the Iran war, oil at a 4-year high, and the FOMC see the most descents in 40 years, almost 40 years since 1992. Welcome back to the show, Professor Hecky. Good to see you as always. >> Good to see you, David. >> Many things to talk about today. What has been keeping you up at night, if anything, when it comes to looking at current events, world geopolitics, and or market movements? Let's start with that. I don't think I've ever asked you that before. >> Well, I've been sleeping like a baby if you want to know the truth. >> Okay, that's good to hear. We like to know you're in good health. >> Nothing keeps me up at night. But thinking about things, it's it's kind of 247, you know, if you're in in involved especially in trading uh or or have any interest in geopolitics, it's just a whirlwind. I mean, it's it's Hanky's school boy theory of history. It's just one damn thing after another. >> I was having this conversation with a family friend over dinner just a couple days ago. And he asked me, "Do you think the uh US is going to run out of money when it comes to fighting Iran? I mean, basically the Iran war is going to stop because the the US will literally run out of money and run out of munitions. By the way, how would you answer?" >> They Yeah, we we'll never run out of money. you can just print it, you know. So, so that that's that's kind of a, you know, it's it's not going to happen. They they can always print money and never run out of money. So, that that's one aspect, but but uh that could create problems like like inflation problems if you print too much money. If you if you grow the money supply over Hanky's golden growth rate of about 6% per year for money measured by him too, you're you're never going to hit the inflation target of 2%. So that's one aspect of the thing. The other aspect is that the the bond vigilantes are are out there and they've they've oh they've woken up. And if you look at the 10-year bond, what what's where is it now? It's like 4.4 or something. It's It's been creeping up and and so if you are spending a lot of money on defense and and and that causes the deficit to go up and you have to issue more treasuries and and those treasuries aren't monetized and sucked up by the Federal Reserve, they're they're sold to the non-bank public. And the non-bank public, the bond vigilantes demand higher interest rates. uh because because they're worried that maybe the printing press will run and maybe we'll have inflation, maybe the value of the dollar will go down relative to other currencies and it'll lose its purchasing power and and therefore u I need higher interest rates if I'm buying a dollar denominated bond. So, so the answer to the question you you ultimately the the the question was how in the world's the US going to pay for the war? You got to pay for it. And and yes, you can print money. They're not going to run out of money, but maybe higher interest rates, maybe higher inflation. >> Are they going to run out of munitions? By they I mean the US >> military. They've already pretty much run out of munitions. And I I uh Jeffrey Wing and I just published an article that was released in Fortune magazine about two hours ago. And we and we get into this. We we with the munitions the US has supplied in their proxy war with Russia. That means the Ukrainian war because it it has been largely a proxy war with the US and Russia because we we provide not only the most of the ammunition but a lot of the finance and and a lot of the intelligence and a lot of the targeting of targets and things like that. So, so the idea somehow the US really isn't involved is is just far-fetched. That's Ukraine. Now move to the other one where it's more transparent that we're involved. The USI Israeli war in Iran and and we've burned up lots of munitions and and it's widely reported from the New York Times on down that the cupboard is bare. You're going to have to replace these things. And and the point that Jeffrey Wang and I raised is okay fine, but how much material in the way of critical materials raw earth and specifically are required in each one of those weapons and they're tremendous amounts and over 95% of those rare earths and critical materials come from China. So in short, to to repenish the stockpile of munitions, we we we really are going to have to get permission from Chairman Z. So the these people in Washington haven't thought through the thing. If you're burning up munitions and you have to replace ammunitions, where do you get the raw materials to do the replacements? Well, the key ones all come from China. And end of story. It It's a simple story, but it's one clearly the bright boys at the Defense Department, the bright girls never thought about. And Trump, of course, has no clue about what's going on. So, so that's it. When when Trump meets Chairman C, believe me, he'll be on his best behavior. Trump will. 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Has this conflict with Iran changed fundamentally the relationship between China and the US? Take for example a reporter asked Trump recently. Is he bothered by the fact that China is supplying weapons or arms to Iran or just funding them somehow? And to which Trump replied, "Well, we're doing that with other countries, aren't we? So, you know, why should I be upset about that?" Well, it it it well in in a way he he in a little truth slid off of Trump's tongue when he said that. But but the the key thing is geopolitically the war in Iran has strengthened China tremendously. China's a winner and Russia is a winner and the US is a strategic loser. It's probably one of the most significant strategic losses the US has ever had in a war. I mean, you know, we lost the war in Afghanistan, but you know, I mean, okay, we lost the war in Vietnam. Yeah. Okay. We we we we really didn't win anything in Iraq. Well, okay. But but this Iranian thing is much different. And it's different because Iran either directly or indirectly controls two of the big checkpoints in the world. One is a straight of Hormuz and the other is a straight going into the Red Sea because the Houthis actually control that and as we know the Hoodies are allies of the Iranians. So chi China is a huge winner and and just in a narrow sense go back to the point that that Jeffrey Wang and I I made in our fortune article. If you're burning up all your ammunition and you have to replace it and the only place that you can get the key raw material to do that is China, it looks to me like China has all the cards. China wins. It It doesn't take rocket science to figure this stuff out. But you have to remember, David, that the folks in Washington DC are in general aren't the sharpest knives in the drawer. >> Before we move on to the economy, I like to get your opinion on this. How does one win a war against a country, not a small country, that's able to supply and rearm itself at a much lower cost than you are and can probably hold out their positions for longer than you can before you explode your deficit. >> Well, that's that's tough. And and we're seeing this occur in in a variety of ways with this war with Iran. They they can take a lot of punishment. Uh, as I said, the old Muhammad Ali Rope a do strategy. They take a pounding and and wait for the the big the big giant to become exhausted and then they land a knockout blow and and and they clearly can do this with the straight of Hormuz is very significant. And if you add the Red Sea to it, uh you you got you got two out of the eight choke holes in the in the world under the control of what? Ba basically Iran. >> Yeah. >> And and we know by the way that now this is in in the press. We know it's not only oil, it's fertilizer, it's aluminum, it's sulfur, it's all all kinds of key things. very large segments proportions of the world trade on on sea anyway is it goes through the the straight of hormones >> Brett crude is now at 110 briefly spiked to 126 overnight at the highest level since 2022 uh meanwhile the GDP advance uh first quarter GDP advanced uh estimate came out today from the BEA and it is at a pretty healthy 2% %. Are you surprised that higher oil has not put their economy into a recession just yet? >> Oh, yeah. There's always a lag between these prices and and and and the that's one thing. By the way, 2% is not that great. That's not that's not a that's not a great number. I mean, the yearly year-over-year last year was just 2.1%. So, it's not even as as hot as the yearly average for last year. It's about the same. And and and by the way, forget the AI. You do you see the AI hype coming in this? The AI people said it was going to be five or 6%. >> So So let's let's let's get into the oil price thing a little bit because what happens >> in the short run, you have to remember that oil prices don't destroy much demand. There's not very much demand destruction as prices go up because the price elasticity in the short run is very low. It's about 0.1% 0.1. That that means if you have a 10% increase in the price of oil, you only get a get a 1% decrease in the quantity of oil demanded. So it doesn't things don't adjust very fast. So I'm not surprised that the price of oil increasing hasn't had much of an effect. So far, I mean, I I I think since the first ceasefire, the price of oil, it's now over 60% increase. It it that it was it was about 60% the few days ago, and that means that you can only expect kind of a 6% drop in demand in the short run. In the long run, it's a little higher. The elasticity is about 0.3. So you get with a 60% price increase, you'd have about an 18% reduction in quantity demanded. So what's what's going on? Basically, we're we're drawing down our inventories. So So nothing has happened much. The quantity demanded hasn't changed that much. Factories haven't shut down or anything due to the fact that they're running out of oil because we're using the inventory is drawing that down. Now, when the inventories come to an end, maybe the price is going to really go up. There'll be a lot of factories that shut down. >> So, so the longer this continues, this this shows you the stupidity of the American blockade in the straight. By the way, if you if you have a tight blockade and it continues, pretty soon you're going to run out of oil in the inventories and the price will spike again. Let me remind our the viewers that on the program we had at March 28th, the David Lynn show, I said that we would have a spike in the price of oil at the end of April. Well, you said at the start of the show, the date today is April 30th. It spiked just exactly like I said it was going to spike. >> And and and by the way, we we've had of course a lot going on. And in addition to the spiking of the oil price, we had the announcement of the United Arab Emirates that they were going to leave OPEC the 1st of May. And and that's a big deal. Something that I anticipated because I I was an advisor to the Financial Advisory Council. I was a member, not an adviser. I was a member of the UAE's financial advisory council from 2008 until 2014. and and I of course talked a lot about my optimum produ pumping model depletion model for insitu resources like oil and and of course they they they learned their lesson looked at the model understood the model and the the model shows you that if you think the real price of oil is going to go down you start pumping more Today you have a take the money and run kind of move. So that that for the last couple years the UAE has been arguing that they want to increase in their production quota with OPEC but they haven't been given that. So that that's had them sore. Then we had the war with Iran and and the war with Iran does another thing that works into my optimum pumping model and that is if if you don't think you're going to have the oil in the future to pump what do you do? You increase a discount rate that you're discounting that future potential oil production those oil revenues out in the future. you discount that at a much higher rate, meaning that those potential revenues aren't worth very much in present value terms. And and you tilt your pumping. You accelerate your current pumping. And and that's what they that's what their thinking is with regard to the war in Iran. It's changed everything. This is a blowback from the war because they they know now that the Iranians will be able to shut the straight. And if they shut the straight, that's a problem for for the UAE. They won't be able to ship out most of their oil. So, so it's like having an expropriation of their oil fields if that happens. The other thing that could happen, of course, they have drones and other weapons, ballistic missiles, and they they could clearly destroy the uh oil production capacity in the UAE. And now, and now the UA knows this. So you plug in a higher discount rate to the model and what happens? The future value of oil that you're producing in present value terms is lower than it would otherwise be and you start producing more today. So So to do that you got to get out of OPEC. If you're an OPEC you can't you can't produce more today because you're bond quota. >> Yeah. And does that apply to other OPEC members? In other words, do they have similar >> incentives? They they they they all know the pumping model. I I g introduced this to the Kuwaitis when I was on the international board of the National Bank of Kuwait. So they they they understand this. >> So why does OPEC anyway OPEC is basically kind of a dead letter anyway? But but but at any rate, it's in the news. It's a big deal now. And and and there will be a a realignment of of of that cartel. There's no question about that. >> Do do you think other OPEC members will follow suit and leave like the UAE did? >> Hard to tell. >> Okay. But if they do, I'm not saying they will, but if they do, what happens to global oil? >> If if they do though, if they if they do, the Gulf States have a big incentive to produce more now than later. If they're if they're using my model for optimum pumping rates or depletion rates for insitu resources, they they would all be increasing their discount rate and and that means oil produced in the future isn't worth as much in present value terms. So if that's the case, you take the money and run. You get out of there. So So what it means is lower oil prices at at some point. Not not right now, by the way. Not right now. Right. Right now, you want to be long because there'll be more spikes as the straight remains shut. Th this this increase pumping is a theoretical idea. If the straight is closed, you're not going to increase pumping. Where are you going to put it? You're out of storage capacity already. You can't put it any place. You have to shut down. >> Okay. Uh, professor, let's return to the US economy. This is what drone Powell had to say about AI and data centers and growth overall. Speaking of data centers, take a listen. This is what happened. Um, this was what he said yesterday at the FOMC meeting. >> How would you describe the economy outside of the misbehaving inflation? I mean, um, it's still awfully resilient given all of the blows. >> I don't know that you can be awfully resilient. So it's actually quite resilient I would say cuz it's a positive thing if I can if I can have that amendment. Yeah, that the you know growth is really solid across our economy. Some of that is um that consumer spending is hanging in pretty well. The the most recent data are good and some of it is just the apparently insatiable demand for data centers all over the United States. So a lot of uh business investment going into building data centers and every reason to think that that continues. So you've got an economy that's growing at 2% or better. PDFP which is private domestic final purch purchases that which is really a better signal of of uh of a momentum in the economy actually higher than that. So that's you know that's a positive thing. >> Do you agree with that assessment overall? >> Yeah, I I I it but it but it isn't very hot and and it tells us nothing about where it's going by the way. >> Yeah. the he he reported the current status is as accurately reported by the chairman and and and I would say instead of his positive spin on the thing, I would say it's a a very lackluster. It it's it's it's not hot, not cold. It's it's it's right in there. It's it's about where the yearly average was last year for the United States. So nothing has changed very much from what was going on last year, which which wasn't all that great. I mean, remember the first year of Trump's presidency, the the the GDP declined. >> Okay, >> the rate of growth in GDP was lower in 2025 than it was in 2024. The rate of productivity increase was lower in 2025 than in 2024. So So we're we're losing steam. We're not we're not gaining, we're we're losing or let's say treading the water. We're we're >> we're not sinking. We're keeping our nose above water and that's that's about all. >> Okay. You've rejected the notion that the oil price shock has caused higher CPI prints in the last uh print. So, let's talk about Kevin Worsh and what he may do. Now, Kevin Walsh is a monitorrist. This is an article from Forbes. Let me share this with you. Worsh has expressed admiration for the intellectual tradition known as monitoriism especially its emphasis on rules-based policy. However, implementing a monitor's polic uh sorry implementing monitor's principles in the modern financial system poses serious challenges. Central banks do not directly control broad money because financial institutions are central players in monetary creation. I'll let you comment on that. More broadly, what do you think he's going to do with the money supply? This is the bank balance uh central bank balance sheet. We talked about this last time. It's on the rise and uh I'm guessing if Kevin Walsh is a monitorist, he might look at this a little more closely than the current uh Fed chair and perhaps reign in what people are calling now QE light. What do you think? >> Well, uh the uh who who was the author of the Forbes article, may I ask? >> Uh let me find that for you. Um, James Bugal. >> I I I I don't know who he is, but but in any case, uh, let's let's get back to the wash. Uh, it it you you can control the growth rate in the money supply because he he said one thing. He said banks are the biggest contributor to the money supply. That's true. About 80% of broad money is produced by commercial banks. We've talked about this over and over again. A and and it can be controlled very easily by changing reserve requirements uh changing bank regulations and all this is laid out which you have to put up on your screen at some point. The book Matt Sukuri and I wrote that's that's almost a year old. It was issued May 6th n 2025. So, we're coming up on a one-year anniversary, and all of this is laid out how to do it >> from the monitorrist point of view, what should be changed, and and in and the Fed. And of course, Borch is aware of this. So, I hope he adopts everything in our book, including he wants to shrink the balance sheet. We've got that laid out in the book, making money work. and Suki and I last week had a op-ed in the Wall Street Journal specifically laying out how you can shrink the balance sheet easily. So all all of these things can be done. The author of the Forbes article clearly hasn't read the book. So it's it's really a road map in a in a way. Let let us assume Worsh is a monitorist for a minute. Okay, >> let's just assume just assume he is. Then then then the book lays out a very clear and very detailed scholarly road map for how he should proceed what what changes what what changes should be made at the Fed and and how he should be proceeding. So that's one aspect of war wash. The the other aspect that that we pretty clearly know if you if if you know how to listen to him and and read his record and so forth, he he does want to let's say reform the especially the research department at the Fed. He he wants to overhaul that and get get new new people in there if necessary and and have a new way of thinking about things because if you're a monitorist that's completely different than what they're doing at the Fed right now. They they are not monitorous. They don't look at the money supply. They reject it. They're data dependent. They're just looking at in data coming out every day. this data, that data, and then with their finger in the wind, they have and using kind of an ad hoc approach to setting monetary policy instead of having it in stone and regularized with the quantity theory of money. They that's the way they do it. I think I think Wars basically wants to change that now. How he will do that I I don't I don't know. and and and for to some extent he's got really a big job ahead of him because the research staff of the Fed system they have over 750 economist and and the the number of the ratio of Democrats to Republicans is is over 50 to1. So they're almost all Democrats. Now if you're a Democrat, what what economist has a target on his back? Milton Freriedman, the dean of monitoriism. So, so, so you get the picture. >> No, sorry. Sorry. Can you please explain to us how how did monitoriism become partisan? >> Well, monitoriism becomes part of it if it's a partisan thing because the dean of the dean of monitoriism, modern monitoriism is Milton Freriedman, Nobel laurate, professor at University of Chicago. Everybody knows who Freriedman is. And and just think about Joe Biden be when he was elected that one of the first things he said was Milton Freriedman isn't going to run the show anymore. That's what Biden said when he was elected. So it's a big deal with the Democrats. They don't they don't like Freriedman. They they don't like anything about Freriedman. He was a free market economist, a monitorist, a free trader. They they don't like any of those things. So, so in that sense it's partisan and and it is relevant if you look at the political affiliation of the research staff at the Fed. That's also all I'm saying. >> So, let's suppose next administration will be Democrat and they asked the central bank to increase the money supply because maybe raising taxes on the rich isn't working. They need more money supply for income redistribution. Let's just >> they wouldn't because they they I just said they they they they don't look at the money supply. They're not monikerous. These things have political overtones. Not directly. I I'm I I'm I'm not arguing, by the way, that every everyone on the research staff who's affiliated with the Democratic Part Democrat, is a registered Democrat, would reject monitoriism. I'm I'm not saying that. I'm just saying that's the tendency of of the Democratic party and and the tendency is is is very clear when you look at who the dean of monitoriism is, Milton Freriedman. And who what economist is the enemy number one of the Democrats? It's Milton Freriedman. There's no question about it. And if you want proof, just Google the quote that I gave you by Joe Biden when he indicated that Milton Freriedman isn't going to be running the show anymore because I'm I'm elected and I'm a Democrat and I don't believe in anything Freriedman was was touting. So if if if you watch these things carefully, you you know what's going on. Plus the fact forgetting about partisan, you know, about monitoriism and what model of whether you're post Keynesian like the research staff is or whether you're monitorist like I am or like Wash is. Forget all of that. Just look at the look at the ratio of Democrats to Republicans. You got 50 to one. There's 50 Democrats on the research staff for every one Republican. So naturally, the the, you know, if you have a Republican president who's an activist and wants to influence things at the Fed, they they would they'd want that ratio to be changed a little bit. Plus the fact there's another factor. Most of the most of the Republicans are old-timers and they're about ready to retire. So, so, so you've got that if if you if you actually look at the younger demographic, the ratio of Democrats to Republicans would be way higher than 50 to1. >> Well, let's sum it up for investors. If you're looking ahead, which asset classes would be most at risk of a price correction? In other words, maybe you're sleeping like a baby, but some other people shouldn't be. Who would those people be? >> Oh, you want to be you want to be tilting. you want to be pivoting away from high-tech and and I I think and into hard commodities because we're we're entering a super cycle with the commodities. We're talking about the oil price going up but you know if you if you look at things I look at ferro venadium since December it's up 90% malibdum up 25%. Lithium carbonate up 39%. Lithium hydroxide up 49%. Lithium spotamine up 52%. Tanelum up 133%. Nobium up 28%. Aluminum up 22%. Tin up 21%. Steel up 16% and and on and on you go. So we're entering a super cycle. And one reason for that goes back to our original conversation and that is we're rearming. We're restocking the munitions. It's look at Germany. They're they're rearming. Everybody's increasing the proportion of GDP, the proportion of GDP they're spending on defense. Well, defense requires arms and arms require raw materials and that means commodities. So you want to go with, you know, you you want to go with halo, heavy assets, low obsolescence. That's the category you want to be in. So you want to be long commodities and and and and of course that won't be a linear thing with the prices just going up up up. You have spikes. A super cycle and commodities always has spikes associated with it. So the general drift will be going up spike and then it come down and then go up spike and then come down. So so that that would be my advice. I I'm maybe the reason I'm sleeping easy easily is I've made the pivot a long time ago. >> How does oil lift the tide of all boats meaning commodities? How does oil cause a commodity super cycle? Well, it it c in in the sense that most commodity indexes are heavily weighted in oil. >> I see. I see. Does this >> If you look if you look at the Bloomberg index, the Bloomberg commodity index, uh, which I can't remember exactly the waiting right now that we're speaking off the top of my head, but it it's very heavily skewed to oil. >> Okay. So, so in the commodity in the commodity basket, if you want a basket of commodities that are traded, not not things not things like lithium and venadium that there's there's no futures market or anything. All the things that you have in the futures market, just Google a thing, look at the Bloomberg thing and see what the weight of oil is. It'll be a big chunk of the thing. >> Okay. Uh, finally, professor, I'd like to bring to your attention this chart. Gold versus the US tang yield. uh it's reestablished its inverse relationship um somewhat. It's not perfect, but more or less when yields go up, gold goes down. Now, if you're if you're want to believe that the bond vigilantes are going to take control and sell bonds and the yields are going to go up, does that mean bad news for gold going forward? Well, it it it takes a little steam out of the gold bull run, but I think the gold bull run, a secular bull market will peak out. As I've said on your show before, between in fact, I announced it first on your show. >> Yes. >> 6 6,000 is the first thing I said. And then I I revised that when when gold really started taking off where that blue line is almost going vertical. When when that happened, I said, "Well, God, may maybe maybe I better put a range on the thing. Six to 7,000." And I that's still where I'm at. Six to 7,000. And it it's consolidating now, you know, little between 45 where where are we at today? 46 something changed. It's consolidating and it's pulled back a little bit, but it it'll take off again. Thank you very much, professor, for your update. Uh, let's follow your work. Tell us where we can follow you for now. And, uh, tell us about one of your more recent books that we can check out in the meantime. >> Okay. So, um, first you can follow me on X where I've got, you know, 846,000 followers and change. So, at Steve_Hanky, that's one thing. If people want to write me and get me on my weekly distribution, they send me an email hankyjhu.edu. And and if they want to really understand macroeconomics, the macro picture, there are two books that I've written recently. One's on capital theory I wrote with Leland Jerger that's called capital interest and waiting. So that's capital theory. Now the monetary theory, I wrote that book with Matt Sukurki, making money work. If you put both of those together, capital theory, macroeconomics is just capital theory and monetary theory in my in my view. If you put those two books together, that's it. >> Okay, good. We'll put the links down below. And uh please do follow Professor Hanky and check out some of his work in the links there. And do consider writing to us, email me or Professor Hanky if you have any questions for our next interview in a couple weeks. Professor Hank is a regular on the program and we welcome any guest questions. Thank you again, Professor Hanky. See you next time. >> Well, thank you, David. Great to see you. >> Great to see you as always. Have a great afternoon and thank you for watching. Don't forget to like, subscribe,