Reserve Bank of India has contributed to India’s resilience and stability: Steve Hanke

Top economist praises India's central bank for handling its monetary policies better than the central banks of other developed countries; he expresses concern about the US money supply contracting at an unprecedented rate, which could spark a recession

Veteran economist Steve H. Hanke is a professor of applied economics and founder and co-director of the Institute for Applied Economics at The Johns Hopkins University in Baltimore. He has been an advisor to several world leaders, such as Ronald Reagan, Suharto of Indonesia, and the Presidents of Bulgaria. In a wide-ranging interview with ET Edge Insights, Hanke discusses the American economy, recession, India’s central bank, bitcoin, and what it takes to become a successful economist.

Edited excerpts of the interview

Q: You are a world-renowned economist and applied economics professor at a prestigious institution. What do you think is the most important quality that an economist needs to have?
I believe you must have a good understanding of basic economic ideas, a solid foundation in economic history, and proficiency in mathematics and statistics. These are narrow things. Now, expanding the scope, I believe that most competent economists have expertise in markets. They have worked in the industry or participated in trading, so they understand how markets function.

Then there’s tacit knowledge, which Michael Polanyi developed. Tacit knowledge is the kind of knowledge that you don’t really learn from books. It differs from codified formal knowledge. It’s kind of like having a sixth sense, or what we call “Street Smarts” in the US. You just have a gut feeling about how things work and so on.

And I believe that to be innovative in any effort, whether in economics or another discipline, you need a combination of three factors. You must be interested in the topic, no matter what it is, and you have to be able to do the work. Also, be extremely disciplined.

Q: Now if you must put your Sherlock Holmes hat and predict, how long do you think will central banks continue to increase interest rates? And despite knowing inflation is high, is it a viable option to hike interest rates when a recession is looming?
Let’s talk about the United States for a minute. In February 2020, when the pandemic broke out, the Federal Reserve began overstimulating the economy during the first two years. Three-month annualised growth in the money supply reached an all-time high of 77% in May 2020, due to the Federal Reserve’s economic stimulus. That had never happened before, or at least not since World War II. The huge increase in money supply led to a surge in the stock market, boom in the economy and then we had a substantial inflation of over 9% by mid-2022. To combat inflation, the Federal Reserve tightened its policies, and the money supply began to decline. In fact, M2’s three-month annualised growth rate had plummeted to a shocking -5.4 percent. With the typical lag of six to eighteen months after a drop in the money supply, a recession is looming.

So that’s what I believe will happen in the United States, and most countries, who follow whatever the US does. Hence, both the Bank of England and the European Central Bank are expressing identical sentiments. I don’t think the Reserve Bank of India follows orders from Washington DC as closely as they do in London and Frankfurt, which is a good thing.

Q: Since you brought up India’s central bank, I am curious to hear your thoughts on the country’s economy and how do you rate it?
Using the COVID-19 period as an example, I would characterise India as surprisingly resilient. In addition, the performance of the Reserve Bank of India (RBI) has been exemplary. I never give these central banks a particularly high grade, but in this case, I would say that the Reserve Bank has contributed to the resilience and stability.

Let’s put it this way: the Federal Reserve, the Bank of England, and the European Central Bank have made catastrophic blunders. The Indian Reserve Bank has not made any catastrophic errors, which in the current scenario is not remarkable, but acceptable.

Q: How do you feel about dollarization? Is it a beneficial economic stability for failing economies? Can you briefly summarise the benefits and drawbacks of dollarization?
I have been involved as an advisor and architect of two dollarization plans, one in Montenegro in 1999. Montenegro was part of Yugoslavia at that time and the currency circulating was the Yugoslav dinar, which was a hyper inflating currency and so we made the German mark legal tender and of course immediately the German Mark drove out the bad money, the Yugoslav dinar, and so we, as I say, dollarized, we used foreign currency, replaced the local currency that that’s what is dollarization.

Then the next time I had an opportunity to do that, I was advisor to the finance minister in Ecuador and the Sucre was a local currency. It had depreciated tremendously leading to big inflation and huge instability. We replaced the Sucre in 2001 with the dollar and that worked very well.

So, what you do is get rid of a weak currency and replace it with a good one, despite the fact that many claim you lose the power to fine-tune the economy and make adjustments. The trouble, however, is that the fine-tuning is handled so poorly that it destabilises these nations and causes the current scenario to be chaotic.

With a currency board system, you keep your local currency, but it is issued by a currency board and has a set exchange rate with an anchor currency. Are obliged to be 100% of the domestic currency’s value, therefore the domestic currency is essentially a copy of the anchor currency. So, I believe they should do same in Sri Lanka. Thus, we need fewer central banks in these rising market nations.

Q: In a tweet in 2020 you had said that bitcoin is a speculative asset. So what is it about Bitcoin that Steve Hanke doesn’t like?
It is not founded on anything, there’s nothing backing it up, and it is not redeemable. For anything to be successful automatically, including cryptocurrencies, it must be structured like a currency board. In other words, a crypto may be issued, but it would have to be backed 100 percent by, say, the US dollar, and it would trade at a set exchange rate rather than a floating one.

So, if you had one crypto, it would be worth $1.00, and you knew it was as good as the US dollar because it was backed by 100% reserves and audited and so on. Now some of these stable currencies claim to be backed by something, but we can’t even see the books, we don’t know what the accounts are, and they’re all crashing one after the other. About this, I believe that, with few exceptions, the most of these are Ponzi schemes and scams, and the majority will fail.

Q: What does Steve Hanke do in his spare time?
First of all, I do not have much free time. I am an old-school individual who works seven days a week and values work over leisure time. I spend my mornings at home in my study. In the afternoon, I walk fifteen minutes from my home to my office at Johns Hopkins University. I meet with my research assistants. I have approximately thirty research assistants, so I must keep them organised. In addition, I meet with students and teach classes.

My wife and I share a part-time residence in Paris, which affords us more free time because I spend a great deal of time conversing with her.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

Scroll to Top