Video presentation by John Cochrane, primarily on the risks in our current fiscal and monetary policy. Very much in the spirit of “Have a nice day.”
Video presentation by John Cochrane, primarily on the risks in our current fiscal and monetary policy. Very much in the spirit of “Have a nice day.”
Great link. Good talk. I agree with almost everything Cochrane said. There is tons of stuff to worry about. To quote the Dalai Lama:
So I will have a great day, today!
So I really enjoyed Mr. Cochrane’s talk, and I learned a lot. But I have some questions.
1) Mr. Cochrane argues that because IOER and interest on short term debt have converged, therefore the money supply no longer matters. The difference between money and t-bills is likened to that between red and green M&Ms.
But this can’t be the whole truth. I can’t take a t-bill and use it to pay for coffee at Starbucks. For that I need money. That’s true for all consumption, and consumption is the biggest part of the economy. So the money supply has to be important–there is a difference between t-bills and money.
I can certainly see that measuring the money supply is now more complicated. The venerable M2 measure seems way out of date. But just because it’s hard to measure doesn’t make it unimportant.
Please tell me why I’m wrong.
2) Mr. Cochrane claimed (as I understand it) that inflation will happen when the public loses faith in the gov’t’s ability to pay its debts. But isn’t that likely to be deflationary? After all, deleveraging–whether by paying off loans or by bankruptcy–shrinks the money supply, along with the availability of outstanding t-bills. So I think the result of a large loss of confidence would be deflation and depression–not inflation.
OK, I’m less confident about that prediction, but I don’t understand why inflation is the inevitable outcome of a loss of confidence.
3) Mr. Cochrane’s wonderful equation is inflation = inflation expectations + pressure. He never comments on the pressure term, but I assume that refers to things like demographics, new technology, changes in consumer sentiment, etc., i.e., items not under Fed/gov’t control. Does he not mention it because he thinks those effects are trivial? Or just because he doesn’t have time to talk about them?
So I don’t know the relative weights between expectations and pressure, but I’ll suggest that 50/50 is a pretty good place to start. Obviously it’s variable depending on circumstances. In our current circumstances, I think pressure is “high” and it trends deflationary.
So I guess I remain a deflationista, though with not as much confidence as before listening to Mr. Cochrane. I will say that is data on how bond yields do not predict inflation is pretty discouraging.