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Prof. Steve Hanke: Five Drivers For a Commodity Bull Market

Tom welcomes Professor of Applied Economics Steve Hanke to the show. He discusses learning the intricacies of the commodity markets at a young age and over his career.

Gold tends to have a fairly steady interest, particularly since the closing of the gold window in 1971. Gold in one way or another will always be a part of the international financial system.

The economics profession considers 50% inflation and up as the textbook definition of hyperinflation. There have been sixty-two such hyperinflations throughout history. They always occur when fiscal deficits become very large, and governments involved can’t finance those deficits through taxes or bonds. Governments end up running the proverbial printing press. Recent hyperinflations include Yugoslavia in 1994 where they reached 313 million percent per month. The former Soviet states had problems with not having tax systems or access to international markets. The last hyperinflation occurred in Venezuela.

He discusses how the 2008 hyperinflation in Zimbabwe ended up completely collapsing, and the local population switched to the dollar.

We are currently in an era of money printing, and we’ve had a forty-one percent increase in the money supply. Even now we’re still increasing the money supply at nearly ten percent when we should be around six.

Steve explains the five different factors that are affecting commodity prices. These coupled together are creating a perfect cocktail for a new supercycle in commodities.

He discusses the impacts of the Fed’s policies and why much of the Fed’s current problems are with the excessive liquidity held by commercial banks. This liquidity makes it difficult for the Fed to contract the money supply any time soon. The Fed and government are the main reasons for inflation although the media is currently blaming everything else including Putin.

Japan and Switzerland have very low inflation currently and this suggests their money supply isn’t growing. Growth in the money supply is always the cause of inflation.

Steve discusses his sentiment indicator which measures the global opinion of gold. It’s based on a computer analysis of news articles and can change quite rapidly.

He explains his 95% rule which states that 95% of the information in the press is wrong or irrelevant.

Time Stamp References:
0:00 – Introduction
0:48 – Background
5:13 – Attitudes & Gold
7:45 – Hyperinflations
14:56 – Dollar & Inflation
17:30 – Excess Money Supply
23:38 – Five Commodity Drivers
28:08 – Fed Policy & Rates
35:42 – Energy & Money Supply
40:08 – Fed & Flation Fears
42:52 – Milton Friedman
44:32 – Fiscal Constraints
49:50 – Gold & Inflation
55:35 – Gold Sentiment Indicator
1:11:35 – Solutions & Simplicity

Talking Points From This Episode

  • His background and early interest in commodity markets.
  • Defining hyperinflation and its primary causes.
  • Five factors that are creating the next commodity supercycle.
  • His sentiment indicator for gold and how it works.

Guest Links:

Steve H. Hanke is a Professor of Applied Economics and Founder & Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore.

He is a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute in Washington, D.C., a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing, a Special Counselor to the Center for Financial Stability in New York, a contributing editor at Central Banking in London, and a regular contributor to the Wall Street Journal’s Opinion pages. Prof. Hanke is also a member of the Charter Council of the Society of Economic Measurement and of Euromoney Country Risk’s Experts Panel.

In the past, Prof. Hanke taught economics at the Colorado School of Mines and the University of California, Berkeley. He served as a Member of the Governor’s Council of Economic Advisers in Maryland in 1976-77, as a Senior Economist on President Reagan’s Council of Economic Advisers in 1981-82, and as a Senior Advisor to the Joint Economic Committee of the U.S. Congress in 1984-88. Prof. Hanke served as a State Counselor to both the Republic of Lithuania from 1994 to 96 and the Republic of Montenegro from 1999 to 2003. He was also an Advisor to the Presidents of Bulgaria from 1997- to 2002, Venezuela from 1995-96, and Indonesia in 1998.

He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro.

Prof. Hanke has also held senior appointments in the governments of many other countries, including Albania, Kazakhstan, the United Arab Emirates, and Yugoslavia.

Prof. Hanke has been awarded honorary doctorate degrees by the Bulgarian Academy of Sciences, the Universität Liechtenstein, the Universidad San Francisco de Quito, the Free University of Tbilisi, Istanbul Kültür University, Varna Free University, and the D.A. Tsenov Academy of Economics in recognition of his scholarship on exchange-rate regimes.

Prof. Hanke and his wife, Liliane, reside in Baltimore and Paris.

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