War With Iran This Week? Will Markets Implode? Economist Answers | Steve Hanke

Key Concepts

• Straight of Hormuz: A vital choke point for global oil supply, its partial closure by Iran serves as a geopolitical warning.
• Iran Nuclear Deal: Ongoing negotiations between the US and Iran, complicated by Israeli demands and Iranian red lines.
• Dollarization/De-dollarization: The use of the US dollar in international trade and the attempts by some nations to reduce reliance on it.
• Hanky’s Golden Growth Rate: Professor Hanky’s model suggesting a 6% growth rate for M2 money supply is consistent with a 2% inflation target.
• M2 Money Supply: A measure of the money supply that includes cash, checking deposits, and easily convertible near money.
• Supplemental Liquidity Ratio (SLR): A regulatory requirement for banks to hold a certain amount of liquid assets. Loosening this ratio effectively expands the money supply.
• Bank Regulation as Monetary Policy: The idea that changes in bank regulations have a significant impact on the money supply and, consequently, on inflation.

Geopolitical Tensions & Iran

The discussion began with the partial closure of the Strait of Hormuz by Iran, a strategically important waterway for global oil transport. While the market reaction was muted, Professor Hanky characterized this as a “warning shot” – a demonstration of Iran’s capability to disrupt oil flow if challenged. Historically, Iran has enacted similar partial closures since 1979. A full closure, however, would likely drive oil prices to $120 a barrel, effectively cutting off oil supply from Saudi Arabia, UAE, Kuwait, and Qatar. The US Navy’s potential response, including clearing a path through sunken tankers, remains uncertain.

Negotiations regarding the Iran nuclear deal are ongoing in Geneva, but are heavily influenced by Israeli demands. Israel seeks complete dismantling of Iran’s nuclear program and defanging of its ballistic missile program – essentially demanding Iran’s surrender. Iran, however, has its own red lines and is unlikely to concede to these demands. The presence of a significant US naval force in the region is partially attributed to the installation of sophisticated Chinese radar facilities in Iran, capable of detecting stealth bombers at distances of 600-700 kilometers, creating a deterrent to military intervention. Trump’s shifting stance on regime change in Iran, from opposing it to now advocating for it, further complicates the situation.

Russia & the US Dollar

A leaked Kremlin memo suggested a potential return to US dollar settlements for energy trade, a reversal of Russia’s previous de-dollarization efforts. However, Professor Hanky dismissed this report as likely inaccurate, citing lack of confirmation from reliable sources in Moscow. Further evidence supporting this skepticism came from the Moscow Stock Exchange allowing dollar-ruble transactions, but only as non-deliverable instruments, meaning actual currency exchange doesn’t occur.

The discussion then shifted to the broader question of the dollar’s dominance. Professor Hanky maintains the dollar remains “king” and is difficult to displace as the primary international currency, citing historical precedent. While the Chinese Yuan is emerging as a competitor, it is currently challenging the Euro, not the dollar, due to China’s capital controls. Removing these controls is identified as the key requirement for the Yuan to become a significant international currency.

US Economic Outlook: Inflation & Labor Market

The latest inflation rate came in at 2.4%, slightly below expectations. Professor Hanky attributes this to the money supply (M2) growing at a rate below his “golden growth rate” of 6% since April 2022. However, he cautions against assuming the Fed will achieve its 2% inflation target, as the money supply is now accelerating.

Regarding the labor market, Fed Governor Waller’s observation of zero private sector job growth in 2025 contrasts with initial reports. Professor Hanky emphasizes the importance of “looking under the hood” at labor market data, suggesting the situation is weaker than reported. He believes the Fed prioritizes the labor market when making monetary policy decisions. He also pointed out that the loosening of the Supplemental Liquidity Ratio (SLR) and the potential easing of other regulations will effectively loosen monetary policy, potentially leading to increased inflation. He reiterated his view that bank regulations are a crucial component of monetary policy, often overlooked. He also noted that the 2008 financial crisis was not caused by commercial banks, but by other financial institutions.

Notable Quotes

• “The US isn’t an independent operator. They’re just… echoing what what the Israelis tell them to do, what Prime Minister Netanyahu tells them to do.” – Steve Hanky, on the US position in the Iran nuclear negotiations.
• “Hanky’s 95% rule: 95% of what you read in the press is either wrong or irrelevant.” – Steve Hanky, emphasizing the need for critical evaluation of news sources.
• “Bank regulations are monetary policy.” – Steve Hanky, highlighting the significant impact of banking regulations on the money supply and inflation.

Technical Terms

• DXY (Dollar Index): A measure of the value of the US dollar relative to a basket of six major currencies.
• M2 Money Supply: A broad measure of the money supply, including cash, checking deposits, and savings accounts.
• Supplemental Liquidity Ratio (SLR): A regulatory requirement for banks to hold a certain amount of liquid assets to cover potential losses.
• Non-Deliverable Instrument: A financial contract where the profit or loss is settled in a different currency than the one traded, without actual physical exchange of the currencies.
• Hanky’s Golden Growth Rate: Professor Hanky’s model suggesting a 6% growth rate for M2 money supply is consistent with a 2% inflation target.

Logical Connections

The discussion flowed logically from geopolitical events (Iran, Russia) to their potential economic consequences (oil prices, dollar dominance) and finally to the US economic outlook (inflation, labor market). Professor Hanky consistently linked monetary policy, bank regulations, and the money supply to inflation, providing a cohesive framework for understanding economic trends. The conversation also highlighted the interconnectedness of global events and the influence of political factors on economic outcomes.

Data & Statistics

• Oil Price Prediction (Full Hormuz Closure): $120 per barrel.
• Iran Inflation Rate (Hanky’s Measurement): 79.1% (as of the recording date).
• Iranian Rial Depreciation (Year-over-Year): 43%.
• Russia’s Foreign Exchange Reserves: $833 billion (as of February 1st).
• US M2 Money Supply Growth (Six-Month Annualized): Above 6%.
• Hanky’s Golden Growth Rate for M2: 6%.
• US Inflation Rate (January): 2.4%.
• US Job Growth (January): 130,000 new payrolls.

Synthesis/Conclusion

The conversation with Professor Hanky provided a nuanced perspective on current geopolitical and economic challenges. He cautioned against overreacting to short-term events, emphasizing the importance of long-term trends and underlying monetary forces. He remains skeptical of narratives surrounding Russia’s potential return to the dollar and believes the dollar’s dominance is secure for the foreseeable future. His analysis suggests that inflation is likely to remain above the Fed’s 2% target, driven by accelerating money supply growth and loosening bank regulations. The key takeaway is the importance of understanding the interplay between monetary policy, bank regulation, and global events to accurately assess the economic outlook.