The September PCE data released by the U.S. Department of Commerce on December 5, 2025, became a key turning point: the U.S. core PCE annual rate was 2.8%, slightly lower than the previous value, but still significantly higher than the Federal Reserve's 2% target. At the same time, the yield on Japanese 10-year government bonds rose to its highest level since 2007 (having already broken through 1.5% in December and continuing to approach 2%), and the yield on U.S. 10-year Treasury bonds surged by 60 basis points in a single day, resulting in a rare synchronized sell-off in global bond markets. The market generally attributes this to a "reversal of the yen carry trade," but Steve Hanke, a professor of applied economics at Johns Hopkins University and a leading figure in monetarism, offers a completely different explanation: the real risk lies not in Japan, but in the impending "reflation" and "excessive easing" in the United States itself. I. The US Money Supply Has Quietly Surpassed the "Golden Growth Rate," and Reflation Signals Have Been Severely Underestimated. Hank has long used the "Golden Growth Rate" rule: if the M2 annual rate remains stable at 6%, then under the conditions of 2% potential real growth in the US + 2% growth in money demand, a stable inflation of 2% can be achieved. Below 6% carries the risk of deflation, and above 6% carries the risk of inflation. The latest data (end of November 2025) shows: The year-on-year growth rate of US M2 has rebounded to 4.5% (Federal Reserve website), seemingly still within a safe zone; However, the portion of M2 created by commercial banks (broad money driven by bank credit) has reached 6.8%~7.1% (Hank's team calculations), significantly exceeding the 6% warning line; In April 2024, the Federal Reserve completely removed the additional capital constraint on banks imposed by the Supplemental Leverage Ratio (SLR), and it is estimated that commercial banks will release an additional $2.3 to $2.8 trillion in lending capacity starting in the second quarter of 2026; Starting in December 2025, the Federal Reserve officially stopped QT (quantitative tightening), ceasing monthly balance sheet reduction and instead adopting a neutral or even slightly expanding balance sheet; In fiscal year 2025, the federal deficit/GDP ratio will remain at 6.2% to 6.5%, with approximately 45% of the deficit financed through the issuance of Treasury bills with maturities of less than one year. These short-term Treasury bonds are heavily absorbed by money market funds, directly pushing up M2. Hank publicly admitted for the first time: "For the past two years, I've been saying 'inflation won't pick up again unless M2 breaks through 6% again,' but now I've changed my mind—the money created by banks has already broken through, and overall M2 is accelerating. We are at a turning point." He roughly calculated that if M2 growth reaches 10% year-on-year in 2026 (which Hank considers highly probable), after deducting 2% real growth + 2% growth in money demand, the remaining 6% corresponds to a conservative estimate of 5% CPI inflation; if not conservative, it could return to 6-7%. This perfectly matches the experience of the 2021-2022 M2 peak of 26.7%, which corresponded to 9.1% inflation (26.7% ÷ 2.7 ≈ 9.9%). More importantly, since 2025, the lead-lag relationship between M2 and CPI has shortened significantly from the typical 12-24 months to 6-9 months, even showing a "synchronous" characteristic. This means that once monetary policy accelerates, inflation may appear at an extremely rapid pace. Secondly, the Federal Reserve remains "blind," and under political pressure, it is more inclined to loosen monetary policy. Hank sharply criticizes: The Federal Reserve claims to be "data-dependent," but it ignores the most crucial variable for inflation—the money supply M. They focus on PCE, CPI, unemployment rate, and manufacturing PMI, but turn a blind eye to the core monetarist formula MV=PY. The market has already priced in a 25bp rate cut at the FOMC meeting on December 10-11, 2025, with a 94% probability. The median expectation for a rate cut in 2026 is 75-100bp. If Kevin Hassett, Trump's nominee, does indeed succeed Powell as Fed Chair in the second quarter of 2026 (the market probability has rapidly risen from 30% in November to 60%), the market will see him as "Trump's man," favoring a significant rate cut and a weak dollar policy. This, combined with the surge in bank lending, the cessation of QT, and deficit monetization, will create a "quadruple easing resonance," which Hank calls "the perfect reflation formula." III. The Truth About Yen Carry-on Transactions: Not the Main Cause of the Current Bond Sell-off, but Possibly the Trigger for the 2026 US Stock Market Bubble. The prevailing market narrative: Japanese 10-year government bond yield rises to an 18-year high → yen appreciates → carry-on transaction unwinding → global risk asset sell-off. Hank believes this logic is severely exaggerated: The recent surge in the 10-year US Treasury yield from 3.8% to over 4.6%-4.8% in December was primarily driven not by Japan, but by the US's own reflation expectations coupled with the "fear of loose monetary policy" following Hassett's rise to power. While the yield on the 10-year Japanese yen (JGB) has reached a new high since 2007, its absolute level is only 1.5-1.8%, still far lower than that of the United States, and the interest rate spread remains above 300 basis points. The current yen exchange rate is still in the 152-155 range, far from the extreme weakness seen in August 2024 when it approached 160, and there has been no systemic liquidation of carried trades. What truly worries Hank is the "reverse scenario": if the Federal Reserve is forced to pause or even resume interest rate hikes in 2026 due to reflation, and US interest rates rise again, while Japan stops raising interest rates because inflation is under control, the yen will appreciate rapidly by 10-15% (back to 130-135), at which point a true "stampede" of liquidation will occur in carried trades. According to long-term research by Hank and Tim Lee (authors of *The Rise of Carry*), Japan's private sector savings rate has consistently been as high as 8-10% of GDP. While the public sector deficit is large, the overall current account still maintains a surplus of 4-5%, making Japan the world's largest and most persistent capital exporter. As long as the yen does not appreciate significantly, carryover transactions will continue to "infuse" capital into the US asset bubble. However, once the yen appreciates, triggering a reversal in carryover transactions, a large amount of Japanese capital will withdraw from high-yield assets such as US stocks, US bonds, and the Mexican peso, and flow back to Japan. This is a repeat of the 8-12% plunge in global stock markets during the "yen flash appreciation" in August 2024, except that the valuation of US stocks in 2026 will be even higher (the forward P/E ratio of the S&P 500 has reached 24.5 times, and the Hank bubble model shows a bubble degree of 90th percentile), making it more damaging. IV. The Most Probable Macroeconomic Scenario for 2026-2027 – Hank's Latest Assessment (Hank's latest assessment) First half of 2026: Fed continues to cut rates + SLR is cancelled + deficit monetization → M2 accelerates to 8-11% → Inflation rises again to 4-6% → Long-term US Treasury yields rise instead of falling (reflation trade); Second half of 2026-2027: Fed forced to pause rate cuts or even resume rate hikes → US-Japan interest rate differential widens again → Yen appreciates rapidly by 10-20% → Large-scale reversal of carry trades → The US stock market bubble has burst, and the S&P 500 may correct by 25-40%. Global impact: Emerging market currencies (Mexican peso, Turkish lira, Indian rupee) have all plummeted; commodities initially rose and then collapsed; gold initially fell and then rose. V. Investment Response Advice – Selected Words from Hank's Original Statements
Do not try to predict when the bubble will burst, but you must admit that we are in a bubble;
Immediately rebalance your portfolio, returning to the pre-pandemic stock-bond ratio (e.g., from 85/15 back to 60/40 or 50/50);
Conclusion
December 2025 was not the starting point for the "yen carrying trade triggering a global crisis," but rather the starting point for the "turnaround in US monetary policy from tightening to excessive easing." The real risk lies in 2026-2027: the US will first experience inflation, then be forced to abruptly halt it; Japan will first raise interest rates, then stop as inflation comes under control; the yen will ultimately appreciate significantly, trade reversal will occur, and the US stock market bubble will burst. This is a belated textbook case of monetarism—when central banks no longer focus on the total money supply but only on employment and short-term prices, inflation and asset bubbles will eventually spiral out of control. Professor Hank's final words are worth remembering for all investors: "The Federal Reserve can ignore the money supply, but the money supply will not ignore the Federal Reserve. History repeats itself, only in different ways; this time it may be a combination of 'loosening first, then tightening + yen appreciation.'"
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