7 ms·

The Fiscal Theory of the Price Level and Inflation Episodes

30 points by Bostonian 4y ago

SubiculumCode 4y ago
Almost all significant periods of inflation came with supply shock/disruptions, not fiscal stimulus in isolation.
guerrilla 4y ago
> “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/ https://worldeconomics.com/Debt/
- p33p 4y ago
  The tone of your comment is intentionally antagonistic, but I agree with the underlying concept. I think we can see inflation as a direct result of excess globalism, especially lean supply chains, and changes in underlying customer demand, i.e., the basket of products consumers are wanting was different than pre-pandemic. All of these are supply side problems, but it seems to reason that at least part of the pent up demand is a result of new consumer cash. I'd argue it's a political scapegoat though.
  - drewcoo 4y ago
    Tone policing is arbitrary and without its own oversight. Defund tone police!
- junofan 4y ago
  You’re ignoring asset price inflation. China is not experiencing the same rate of inflation.
  - vkou 4y ago
    Asset price inflation was happening for over a decade, yet never made it's way into the cost of butter, until wages for butterchurners and milkmaids and the price of gas started growing.
    - lumost 4y ago
      Alternately, asset price inflation didn’t matter until it priced everyone out of housing, commercial real estate, retirement, and any other asset accumulation. This inflation episode coincides with millennials nearing the end of the typical income growth phase of their careers without substantial asset buying power. Eventually people will simply drop out of the race, or demand vastly higher wages to compensate.
      - vkou 4y ago
        > retirement, and any other asset accumulation. Asset inflation doesn't matter in that, as long as the assets don't later deflate. > or demand vastly higher wages to compensate. People can demand all they want, but won't get them until there's a labour shortage. Which is what actually caused wages to grow.
ttul 4y ago
It seems obvious to me that giant fiscal stimulus was a factor in today’s inflation to the extent that it gave households extra cash to spend once the pandemic restrictions eased up. All that spending hit physical goods at first, and now services. Because politicians are loath to take away the punch bowl just when things are getting good, central banks usually have to do so via interest rates and money supply. And because politicians are unlikely to increase taxes or reduce spending to mop up the extra cash, it’s likely that sustained, harsh monetary policy will be required. This policy will put the economy into recession for a time, will reset asset values, and will lead to higher unemployment. And central banks will inevitably overshoot, because it’s nigh impossible to predict the path of the macroeconomy with much accuracy.
sega_sai 4y ago
It reads a bit like a text from people who were predicting rain everyday for last 10 years, and now when it finally rained they say "you see, we were right all this time". Unless this people catalogue their specific predictions over time, and list their success rate, these articles will continue being adverts rather than demonstration what their doing is science as opposed to astrology.
- ajross 4y ago
  Amen. I mean, is it really so hard to view the existence of a global pandemic and related supply shock, historically large stimulus and relief packages enacted everywhere, and a subsequent petroleum supply crisis due to a (deeply weird) war entered by a major producer as... ...a big, whopping outlier in the data set? I mean, really? Who anywhere genuinely believes that the economic events of 2020-22 could be reliably predicted from first principles?
  - Bostonian 4y ago
    The price level depends on the money supply and the amount of goods available. It was predictable that giving people more spending power when production was lower would case inflation.
    - ajross 4y ago
      Then why did it take two years? Supplies were low and savings rates were high in 2020, too. Yet inflation didn't start growing until well after the omicron wave had subsided. Why? Nothing happened economically in January of 2022 that should have triggered anything notable economically. There was no new relief package. No change in supply chains (though the Shanghai shutdown was about to happen). Yet... inflation started to spike then. It's not hard to guess at an answer: the covid recovery led to a loosening of purse strings that were kept tight during lockdowns out of general social anxiety. Makes enough sense to me. But it's still a special-case answer to a special case thing. First principles economics, in fact, would have done extremely badly.
drewcoo 4y ago
> 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. Great. What was the faceless government's motivation? Because clearly it wasn't the government that profited. But the people who did profit seem to own them some government. Let's blame the government instead! That's worked since Reagan, right?
- ajross 4y ago
  > What was the faceless government's motivation? Keeping people from starving and employers from closing during a global pandemic where most of them couldn't work.
  - towaway15463 4y ago
    To be fair, the government created that problem too
    - vkou 4y ago
      In order to deal with the bigger problem of the mass death and an overwhelmed medical system in a pre-vaccine world.
      - seibelj 4y ago
        It appears that places without lockdowns (Florida, Sweden) did as good or far better than places with severe lockdowns (California, New York). So I still don’t see the evidence despite all the spittle from supposed scientists who know such things.
        ajross 4y ago
        > (Florida, Sweden) did as good or far better than places with severe lockdowns (California, New York) That's just wildly wrong, FWIW. Per capita covid fatalities are 50% higher in Florida than California[1]. Sweden is even more of an outlier, fully three times more (per capita) Swedes are dead from covid than Norwegians. [1] And only matches NY if you try to cook books by including the initial wave of fatalities from the initial outbreak that were contracted before lockdown.
woleium 4y ago
Someone at a party once said to me that the witchdoctors, sooth sayers and mystics who used to consult with the courts and kings of yore have not gone away, they just rebranded as economists.
- seibelj 4y ago
  And if your version of quackery differs from the preferred “mainstream” mysticism, you are labeled a heretic
- Izkata 4y ago
  Back in highschool, about midway through the semester, my economics teacher was like "Yeah, no one really knows what they're doing, and here's evidence", and showed us a recording he had of two economics experts on TV using the exact same evidence to argue for opposite outcomes.
- imtringued 4y ago
  When you consider that there are two sides of economics, i.e. abundance and scarcity, we have been playing on the scarcity side thinking that is the only way to play the game. When people haven't even played half the game it should be pretty obvious that we end up looking like idiots with our rube goldberg machines that have a hard time explaining reality.
BenoitEssiambre 4y ago
The FTPL seems to put a lot of focus on the government debt aspect of monetary policy (not unlike MMT, which however draws different prescriptions). I think more mainstream Keynesian/Monetarist theories don't deny that government debt is an important part of monetary policy, they just add that there are other things that play important roles too such as private debt, banks, supply shocks, money velocity etc. In the long arcs of monetary policy, government debt might play an outsize role along the lines of what the FTPL predicts but in the shorter term, because businesses and people often move faster than governments when it comes to borrowing and spending decisions, there remains important monetary policy work to be done to smooth out the potentially costly monetary transients. In times when governments are acting somewhat responsibly and not spending too much beyond their means, FTPL might be much less relevant and there would still be monetary policy concerns stemming from fluctuations in the private movement of money or from other supply or demand shocks.
ProjectArcturis 4y ago
This theory predicted inflation should have soared back in 2009 when QE began. The fact that it took 13 years and additional crises (pandemic, Ukr war) for inflation to surface is pretty good disproof of the theory.
- alangibson 4y ago
  Inflation hawks are always eventually proven right because that just repeat 'inflation is right around the corner' until it finally shows up, no matter how long it takes.
- choeger 4y ago
  But it did, for certain assets at least. I think part of the reason for the last decade of unorthodox inflation is that demand is not as flexible as theory would require it to be (people stop buying ever more consumer goods when they get x% more money). Some areas (housing, particular services) seem to have seen quite a rapid inflation, though.
- TuringNYC 4y ago
  >> The fact that it took 13 years and additional crises (pandemic, Ukr war) for inflation to surface Anyone trying to save up for a home in the US could probably tell you inflation has been around since interest rates plummeted and then more-so since QE. It isnt an uncommon scenario that families would save more money each year to buy a home with a decent down-payment...only to have homes go up in price more than they saved.
  - Klinky 4y ago
    It's not inflation alone that is the problem with housing. It's housing being seen as an investment. People discourage new builds or high-density due to trying to preserve their existing asset value. Quick flip schemes juice the price up, for an often shoddy asset. Then hedge funds swoop in with cash, paying above market, to then flip, rent out, AirBnB or just let houses sit idle. There's a lot of bubble-like behavior still occurring in the housing market, and easy money has likely contributed, but I don't think that it all falls in line with classical inflation. It feels more like artificially constricted/restricted supply with high demand. Housing as an investment is problematic, because it disincentivizes new builds, people want to keep seeing their asset value go up, never down, and constraining supply is an easy way to do that. Renting out can also be more lucrative than selling if you have the capital. Also the ability for markets to offer housing at commodity prices seems like it would require a drastic oversupply of a very resource intensive asset. How sustainable is that really in the long run?
alangibson 4y ago
This theory is ridiculous on its face. > Inflation breaks out when there is more overall government debt than people think the government will repay by its future excess of taxes over spending. No government with a sovereign currency need default. Anyone dealing in government debt knows that.

30 points by Bostonian 4y ago

Almost all significant periods of inflation came with supply shock/disruptions, not fiscal stimulus in isolation.

> “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/ https://worldeconomics.com/Debt/

p33p 4y ago
The tone of your comment is intentionally antagonistic, but I agree with the underlying concept. I think we can see inflation as a direct result of excess globalism, especially lean supply chains, and changes in underlying customer demand, i.e., the basket of products consumers are wanting was different than pre-pandemic. All of these are supply side problems, but it seems to reason that at least part of the pent up demand is a result of new consumer cash. I'd argue it's a political scapegoat though.
- drewcoo 4y ago
  Tone policing is arbitrary and without its own oversight. Defund tone police!
junofan 4y ago
You’re ignoring asset price inflation. China is not experiencing the same rate of inflation.
- vkou 4y ago
  Asset price inflation was happening for over a decade, yet never made it's way into the cost of butter, until wages for butterchurners and milkmaids and the price of gas started growing.
  - lumost 4y ago
    Alternately, asset price inflation didn’t matter until it priced everyone out of housing, commercial real estate, retirement, and any other asset accumulation. This inflation episode coincides with millennials nearing the end of the typical income growth phase of their careers without substantial asset buying power. Eventually people will simply drop out of the race, or demand vastly higher wages to compensate.
    - vkou 4y ago
      > retirement, and any other asset accumulation. Asset inflation doesn't matter in that, as long as the assets don't later deflate. > or demand vastly higher wages to compensate. People can demand all they want, but won't get them until there's a labour shortage. Which is what actually caused wages to grow.

ttul 4y ago

It seems obvious to me that giant fiscal stimulus was a factor in today’s inflation to the extent that it gave households extra cash to spend once the pandemic restrictions eased up. All that spending hit physical goods at first, and now services. Because politicians are loath to take away the punch bowl just when things are getting good, central banks usually have to do so via interest rates and money supply. And because politicians are unlikely to increase taxes or reduce spending to mop up the extra cash, it’s likely that sustained, harsh monetary policy will be required. This policy will put the economy into recession for a time, will reset asset values, and will lead to higher unemployment. And central banks will inevitably overshoot, because it’s nigh impossible to predict the path of the macroeconomy with much accuracy.

sega_sai 4y ago

It reads a bit like a text from people who were predicting rain everyday for last 10 years, and now when it finally rained they say "you see, we were right all this time". Unless this people catalogue their specific predictions over time, and list their success rate, these articles will continue being adverts rather than demonstration what their doing is science as opposed to astrology.

ajross 4y ago
Amen. I mean, is it really so hard to view the existence of a global pandemic and related supply shock, historically large stimulus and relief packages enacted everywhere, and a subsequent petroleum supply crisis due to a (deeply weird) war entered by a major producer as... ...a big, whopping outlier in the data set? I mean, really? Who anywhere genuinely believes that the economic events of 2020-22 could be reliably predicted from first principles?
- Bostonian 4y ago
  The price level depends on the money supply and the amount of goods available. It was predictable that giving people more spending power when production was lower would case inflation.
  - ajross 4y ago
    Then why did it take two years? Supplies were low and savings rates were high in 2020, too. Yet inflation didn't start growing until well after the omicron wave had subsided. Why? Nothing happened economically in January of 2022 that should have triggered anything notable economically. There was no new relief package. No change in supply chains (though the Shanghai shutdown was about to happen). Yet... inflation started to spike then. It's not hard to guess at an answer: the covid recovery led to a loosening of purse strings that were kept tight during lockdowns out of general social anxiety. Makes enough sense to me. But it's still a special-case answer to a special case thing. First principles economics, in fact, would have done extremely badly.

drewcoo 4y ago

> 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. Great. What was the faceless government's motivation? Because clearly it wasn't the government that profited. But the people who did profit seem to own them some government. Let's blame the government instead! That's worked since Reagan, right?

ajross 4y ago
> What was the faceless government's motivation? Keeping people from starving and employers from closing during a global pandemic where most of them couldn't work.
- towaway15463 4y ago
  To be fair, the government created that problem too
  - vkou 4y ago
    In order to deal with the bigger problem of the mass death and an overwhelmed medical system in a pre-vaccine world.
    - seibelj 4y ago
      It appears that places without lockdowns (Florida, Sweden) did as good or far better than places with severe lockdowns (California, New York). So I still don’t see the evidence despite all the spittle from supposed scientists who know such things.
      - ajross 4y ago
        > (Florida, Sweden) did as good or far better than places with severe lockdowns (California, New York) That's just wildly wrong, FWIW. Per capita covid fatalities are 50% higher in Florida than California[1]. Sweden is even more of an outlier, fully three times more (per capita) Swedes are dead from covid than Norwegians. [1] And only matches NY if you try to cook books by including the initial wave of fatalities from the initial outbreak that were contracted before lockdown.

woleium 4y ago

Someone at a party once said to me that the witchdoctors, sooth sayers and mystics who used to consult with the courts and kings of yore have not gone away, they just rebranded as economists.

seibelj 4y ago
And if your version of quackery differs from the preferred “mainstream” mysticism, you are labeled a heretic
Izkata 4y ago
Back in highschool, about midway through the semester, my economics teacher was like "Yeah, no one really knows what they're doing, and here's evidence", and showed us a recording he had of two economics experts on TV using the exact same evidence to argue for opposite outcomes.
imtringued 4y ago
When you consider that there are two sides of economics, i.e. abundance and scarcity, we have been playing on the scarcity side thinking that is the only way to play the game. When people haven't even played half the game it should be pretty obvious that we end up looking like idiots with our rube goldberg machines that have a hard time explaining reality.

BenoitEssiambre 4y ago

The FTPL seems to put a lot of focus on the government debt aspect of monetary policy (not unlike MMT, which however draws different prescriptions). I think more mainstream Keynesian/Monetarist theories don't deny that government debt is an important part of monetary policy, they just add that there are other things that play important roles too such as private debt, banks, supply shocks, money velocity etc. In the long arcs of monetary policy, government debt might play an outsize role along the lines of what the FTPL predicts but in the shorter term, because businesses and people often move faster than governments when it comes to borrowing and spending decisions, there remains important monetary policy work to be done to smooth out the potentially costly monetary transients. In times when governments are acting somewhat responsibly and not spending too much beyond their means, FTPL might be much less relevant and there would still be monetary policy concerns stemming from fluctuations in the private movement of money or from other supply or demand shocks.

ProjectArcturis 4y ago

This theory predicted inflation should have soared back in 2009 when QE began. The fact that it took 13 years and additional crises (pandemic, Ukr war) for inflation to surface is pretty good disproof of the theory.

alangibson 4y ago
Inflation hawks are always eventually proven right because that just repeat 'inflation is right around the corner' until it finally shows up, no matter how long it takes.
choeger 4y ago
But it did, for certain assets at least. I think part of the reason for the last decade of unorthodox inflation is that demand is not as flexible as theory would require it to be (people stop buying ever more consumer goods when they get x% more money). Some areas (housing, particular services) seem to have seen quite a rapid inflation, though.
TuringNYC 4y ago
>> The fact that it took 13 years and additional crises (pandemic, Ukr war) for inflation to surface Anyone trying to save up for a home in the US could probably tell you inflation has been around since interest rates plummeted and then more-so since QE. It isnt an uncommon scenario that families would save more money each year to buy a home with a decent down-payment...only to have homes go up in price more than they saved.
- Klinky 4y ago
  It's not inflation alone that is the problem with housing. It's housing being seen as an investment. People discourage new builds or high-density due to trying to preserve their existing asset value. Quick flip schemes juice the price up, for an often shoddy asset. Then hedge funds swoop in with cash, paying above market, to then flip, rent out, AirBnB or just let houses sit idle. There's a lot of bubble-like behavior still occurring in the housing market, and easy money has likely contributed, but I don't think that it all falls in line with classical inflation. It feels more like artificially constricted/restricted supply with high demand. Housing as an investment is problematic, because it disincentivizes new builds, people want to keep seeing their asset value go up, never down, and constraining supply is an easy way to do that. Renting out can also be more lucrative than selling if you have the capital. Also the ability for markets to offer housing at commodity prices seems like it would require a drastic oversupply of a very resource intensive asset. How sustainable is that really in the long run?

alangibson 4y ago

This theory is ridiculous on its face. > Inflation breaks out when there is more overall government debt than people think the government will repay by its future excess of taxes over spending. No government with a sovereign currency need default. Anyone dealing in government debt knows that.