Fiscal Theory of the Price Level

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1. verdvermFeb 2025
   re: financial market books, this one is new and highly regarded

   "The Fiscal Theory of the Price Level" by John H. Cochrane

   https://press.princeton.edu/books/hardcover/9780691242248/th...

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2. legitsterFeb 2023
   I encourage people interested in this topic to read up on the Fiscal Theory of the Price Level. I flippantly refer to it as "MMT without the magic". But it really did a good job of explaining our current situation.

   When you have a long-term fixed rate mortgage, only some of the value is paid off by principal payments. The rest is being paid off naturally by inflation. Imagine paying off a mortgage made in 2003 dollars with dollars you made in 2023. The payment is the same, but only a pittance of the same value.

   The theory goes that inflation is not completely a result of monetary policy - there is also a market adjustment of the dollar to the amount of government debt issued. To oversimplify, government debt will be paid back - if not through taxes, then through inflation.

   The implication is that MMT gets it partially right - worrying about debt to GDP is somewhat irrelevant. And if it can issue debt at less than the rate of inflation, the government can get free money! But we are clearly well past that point.

   The silver lining is that default is not really a risk here (maybe a political one) - inflation will cap out whenever the value of the money "catches up" with the debt level. (That said, if we continue to add to the debt, that means inflation will never stop).

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3. guerrillaJun 2022
   > “The current inflation episode is just the kind of event that the fiscal theory of the price level can easily describe. It’s simple. The US government printed up about $3 trillion of money and sent people checks. It borrowed an additional $2 trillion of money and sent people more checks.” — John H. Cochrane, Senior Fellow, Hoover Institution, Stanford University

   What is this? It's not like inflation was in the market for an explanation. It's already pretty well understood. We literally have a giant gaping deficit in supply for three very obvious reasons, 1. the pandemic ramp down-up, 2. the war which took out a very large part of energy, grain and other essential commodities, 3. tight labor market ("Great Resignation" anyone?). If anything, this situation vindicates MMT and other theories because over decade of free money and varying debt had no impact yet inflation started as soon as we got a perfect storm of pandemic, war and tight labor market. It sure took a lot to cause a crisis if QE and the pandemic alone weren't enough, we had to add a war and a labor market so tight that it allowed for a renaissance in unions and the Great Resignation.

   > That’s actually a little more troublesome because there was a big deficit. And that one did not send inflation up. Everything’s hard to read in real time, but we can at least point to a couple of things. First, that was an economy with depressed demand. Whether extra aggregate demand spills into inflation depends on how the economy is doing. So, in 2008, there was arguably room to stoke aggregate demand to increase output.

   Hmm gee, it's almost like it's an independent variable and your hypothesis was falsified over a very long period of time. Also they ignored every other country? There's a huge variety in debt-to-GDB ratios globally[1], yet somehow everyone is experiencing the exact same rates of inflation... almost as if it was for some common material reasons.

   1. https://worldeconomics.com/Debt/

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