PodcastWTFinanceSteve Hanke

The Bond Market is Hitting its Breaking Point! Steve Hanke

Hanke links U.S. debt-service risks, persistent inflation, and bond-market pressure to money-supply growth and higher yields. He expects inflation to remain around 3% to 4%, sees a good chance of a 25-basis-point Fed hike at the next meeting, and argues that roughly 6% annual broad-money growth would align with a 2% inflation target. He also discusses China’s strategic gains, Europe’s winter gas exposure, Japan’s weak money growth, and Venezuela’s prolonged path to restoring oil output.

Fixed IncomeGovernment DebtInflationInterest RatesMonetary PolicyGeopolitical Risk

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Key Takeaways

Hanke describes a monetary-transmission chain in which faster money-supply growth eventually lifts inflation, nominal GDP, and asset prices, while also pushing bond yields higher and bond prices lower; he emphasizes that these effects can take months or years to appear. He links the roughly 90% monetization of the February 2020 U.S. deficit to record money-supply growth.

Hanke argues that the U.S. faces a self-reinforcing debt-service problem: with total debt above $40 trillion, higher bond yields increase financing costs and widen the deficit, while about 35% of personal income-tax revenue already goes toward debt service. Because the 10-year Treasury anchors mortgage, credit-card, and other borrowing costs, he says suppressing long-term yields through Treasury purchases would carry broader financing implications and could require issuing more short-term bills.

Hanke expects U.S. inflation to remain roughly 3% to 4%, above the Fed’s 2% target but below COVID-era extremes, because monetary-policy effects occur with long lags. He advocates approximately 6% annual broad-money growth as consistent with 2% inflation and criticizes the Fed for not currently incorporating a monetary aggregate into its models.

GEO-POLITICS

China’s Strategic Gains — Hanke argues that developments in the Middle East have benefited China geopolitically and strategically, with countries pivoting toward China and BRICS and away from the United States. He says China’s international image has improved while the U.S. image has worsened.

“China looks like it's in better shape than most people think…”—

ECONOMY

Deficit Monetization — Hanke says the Federal Reserve monetized roughly 90% of the U.S. deficit in February 2020. He describes this as functioning like quantitative easing and driving money-supply growth to a record high.

“And when the Fed does that, it's it's like Q quantitative easing. The money supply goes up…”—

Debt-Service Loop — Hanke argues that high bond yields can create a self-reinforcing U.S. debt problem. With total debt above $40 trillion, higher yields raise government financing costs and further increase the deficit. He says about 35% of personal income-tax revenue goes toward debt service.

“Huge increase in financing cost for the government budget and with that of course that that actually increases the deficit…”—

Treasury Yield Spillover — Hanke says the U.S. 10-year Treasury is a key interest rate because mortgage rates, credit-card rates, and other borrowing costs are tied to it.

“I've been very negative on bonds for a long time, staying staying away from long bonds because as these yields go up, for example, like the 10-year bond is the…”—

MARKETS

Money and Bond Prices — Hanke describes a three-step process: faster money-supply growth leads, with a lag, to higher inflation, then higher bond yields and lower bond prices. He says slowing or contracting money growth would have the opposite effect.

“That's always the case. It's a it's a three-step process really. Big change in the money supply step one. Step step two with a lag you will get more inflation…”—

Money-Supply Effects — Hanke says accelerating money supply tends to lift nominal GDP, asset prices, real growth, and inflation, while weak money growth tends to restrain them. He emphasizes that these effects can take months or years to appear.

“If the money supply is accelerating rapidly, you know, nominal GDP is going to be going up, asset prices are going to go up, real growth's going to go up…”—

Introduction

Anthony Faties introduces the podcast and welcomes Professor Steve Hanke back to discuss rapidly changing economic and financial conditions.

Overview of economy and markets

Hanke attributes bond-market weakness, inflation risks, fiscal deficits, and strong nominal growth to rapid broad-money expansion above his 6% target.

Yields out of control

Hanke says persistent money growth, inflation expectations, fiscal borrowing, and debt-service costs are pushing Treasury yields higher and pressuring the bond market.

Inflation

Hanke expects inflation to remain elevated around 3% to 4% because earlier money-supply growth is still working through the economy with long lags.

Kevin Warsh

Hanke contrasts Kevin Warsh’s attention to money growth with former Fed leadership’s dismissal of monetary aggregates as relevant to economic activity.

What should FED Change?

Hanke says Warsh should adopt the quantity theory of money and target broad-money growth near 6% to support the Fed’s 2% inflation objective.

Interest rates

Hanke distinguishes monetary policy from interest-rate changes but expects the Fed to raise the federal funds rate by 25 basis points at its next meeting.

Scott Bessents buyback

Hanke explains that deficit financing through bond sales or taxation affects the money supply and argues that fiscal and monetary policy ultimately return to monetary dynamics.

Global overview

Hanke says strong employment and economic activity reflect accelerating money growth, AI investment, data-center construction, and credit demand despite sectoral disruptions.

China deleveraging

Hanke criticizes Scott Bessent’s Treasury buybacks and yield-curve-control approach, arguing that shifting issuance toward short-term bills creates additional financing pressures.

Japan

Hanke describes Europe and the United Kingdom as economically weak, warns that insufficient European gas inventories could create serious winter risks, and sees China gaining strategically.

Venezuela

Hanke says China remains economically constrained by deleveraging and subtarget money growth, while Japan struggles with anemic monetary expansion and weak nominal growth.

One message to takeaway?

Hanke advocates dollarization and faster oil-sector investment for Venezuela, but says restoring production will take years before concluding that money supply is the key economic signal.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

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