Inflation Surge + Yen Carry Collapse: Economist’s Dire Warning For Market Bubble Pop | Steve Hanke

Summary

Steve Hanke warns that US monetary and fiscal policy are turning looser on four fronts — Fed rate cuts, the end of QT, the April 2026 removal of the supplemental liquidity ratio, and deficit monetization through T-bill issuance — which he expects to accelerate M2 growth toward roughly 10% and push inflation toward roughly 5%, well above the Fed's 2% target. He also explains the Japanese yen carry trade, arguing that the yen-funded dollar carry has been fuel for a US equity market that is in a bubble, and that yen appreciation driven by Bank of Japan rate hikes could trigger a carry unwinding that pops the bubble and pulls capital out of the US. He attributes the recent US bond selloff to loose-money and inflation fears rather than Japan, and advises investors to rebalance rather than exit markets.

• Hanke calls the September PCE report a 'nothing burger'; inflation is stuck above the Fed's 2% target and he doubts the 'inflation genie' goes back in the bottle.
• Four loosening factors: a December Fed cut (with cuts in 2026), the end of QT, the April 2026 supplemental liquidity ratio removal (~$2.5T of extra bank lending capacity), and deficit monetization via T-bills bought by money market funds.
• Commercial-bank-produced money is growing at 6.8%, above his 6% 'golden growth rate,' and may reach ~10%, which would imply inflation near 5%; money-supply lags are normally 12-24 months but could be shorter now.
• The biggest yen carry trade is borrowing at ~2% in Japan to invest at ~4%+ in the US; Japanese excess savings have flowed into US markets and the market is short the yen.
• If the yen appreciates (Bank of Japan hikes; 160 on USD/JPY flagged as a key level), the carry unwinds, the yen strengthens further, and capital exits the US — a potential 'bubble popper.'
• Hanke says the US equity market is in a bubble by every bubble detector, but the timing of deflation is unknowable; loosening could pump it up while a carry unwind could take air out.
• He advises portfolio rebalancing (a drifted 60/40 is now closer to 85/15) rather than getting in or out of the market.
• He attributes the recent US bond selloff to fears of a loose-money Fed chair (Hassett) and inflation, not to Japan.