cochrane6EVA HAMBACHAFP via Getty Images_inflation printing money

Economics

La fin d'une illusion économique

Apr 15, 2022 John H. Cochrane

STANFORD – Le retour de l'inflation marque un point de rupture. La demande a heurtée de plein fouet le mur de l'offre. Nos économies produisent maintenant autant qu'elles le peuvent. En outre, cette inflation s'enracine clairement dans des politiques budgétaires excessivement expansives. Bien que les chocs d'offre puissent faire augmenter le prix d'une marchandise par rapport à d'autres, ils ne font pas augmenter tous les prix et les salaires à la fois.

Il faudra arrêter de prendre un grand nombre de nos désirs pour des réalités : à commencer par l'idée selon laquelle les gouvernements peuvent emprunter ou imprimer autant d'argent qu'ils le souhaitent pour traiter chaque problème sans distinction. Les dépenses publiques doivent maintenant provenir de recettes fiscales actuelles ou futures crédibles, pour soutenir des emprunts non inflationnistes.

L'époque des dépenses de relance n'ayant d'autre but qu'elles-mêmes est révolue. Les gouvernements doivent commencer à dépenser avec prudence. Dépenser pour « créer des emplois » est absurde lorsqu'il y a une pénurie généralisée de main-d'œuvre.

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0 Comments on this paragraph, 22 Comments on this article

Giles Conway-Gordon Apr 27, 2022

It is sad to see John Cochrane calling, without qualification, for a return to fundamentalist, cold-turkey monetarism - what may perhaps be fairly termed palaeo-monetarism – as a remedy to offset the present rise in inflation.

Milton Friedman’s original formulation of the monetarist argument, a reaction to what he called the naïve Keynesian deficits of the 1960s, rapidly attained the status of economic orthodoxy. As Cochrane’s article confirms, the economics profession has not entirely shaken off its influence, in spite of its historical record of inducing rapid, widespread, and needless, economic destruction.

In the 1980s the explosive rise in US interest rates as Paul Volcker took steps to throttle inflation in the US economy, induced the IMF to impose similar ‘cold-turkey’ measures on the economies of many emerging countries who faced difficulties after borrowing substantially in US$. This attempt to transform them at a stroke to classic free-market capitalism, with balanced budgets and privatization and the elimination of price controls, government subsidies and social payments to the poor, led to massive increases in unemployment and poverty and a collapse in the living standards of many millions. At the time this approach was accorded the title of ‘sado-monetarism’. Encouragingly the IMF has since then seen the light and tempered its commitment to unqualified monetarist policies.

The point is not that the fundamentalist monetarist policies which John Cochrane is recommending will not successfully reduce inflation. They will, but at the cost of widespread and substantial collateral damage in the form of a recession with attendant social distress in the form of business failures and higher unemployment. The focus of the Fed and the administration (who do not face the problem of having borrowed in someone else’s currency) should rather be on maintaining monetary and fiscal conditions which bear in mind both the Fed’s formal duty to maintain employment and the desirability of controlling inflation by more intelligently aligning economic policy to the productive capacity of the US economy (see in this connection Stephanie Kelton’s recent book ‘The Deficit Myth’).
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Russell Cosgrove Apr 20, 2022

This article is full of loaded language and references to “printing money,” as though that were a horrible thing. Where do you think money comes from? Would you rather that we didn’t have any money? If we don’t “print” new money it’s amount will stay the same, forever. Can we still do with the amount of money we had in, say, 1900? Of course not. Creating new money has to be part of any growing economy. The issue is that the money should not be going to bail out banks, it should be going to providing opportunities for low income people. The trend toward inequality must be stopped or the so-called “liberal democracies “ will be become profoundly undemocratic, and will fail.
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Rafael Souza Apr 19, 2022

Professor, how does the persistent low inflation (from the 2000's till last year) fit the supply-only explanation for this period of "secular stagnation"? Hasn't the demand-side had some participation on this story as well? Thanks and best regards from a fellow student of yours '2006.
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Einar Tangen Apr 19, 2022

Neither pipelines, nor rate hikes, will solve the short and medium term shortages of food and energy. Unlike the financial collapse that took people's homes and savings, this crisis affects necessities of individual and collective life. You can't live if you don't have food, and economies can't work if they can't have energy. Starting a war, or fanning the flames of war, as we emerge from a devastating pandemic, are equally egregious.

So much for the G20, which punted, or the myth that Liberal Democratic Capitalism solves everything. The Global South and Stan's see the hypocrisy and, as usual, along with the lower middle classes and poor, will pay the price for the incompetence of their wealthier "betters".

At some point, there will need to be enough adults in the room to realize that the political, economic and environmental issues we face, require cooperation, not conflict.
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Bogdan Ianc Apr 18, 2022

Can you give some concrete examples of unleashing supply in the US and Europe?
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Theodore D'Afflisio Apr 17, 2022

Whoa! The keystone Pipeline was not built and would still be under construction had the President agreed to continue it and it would be feeding into the tar sands bringing with it all the associated environmental problems. Furthermore, the oil and gas companies had cutback on their drilling and were not making use of the tracts that had already been given to them in favor of a policy of stock buybacks and increased dividends that has been constantly pushed by the financial industry whose interest if America's energy security is somewhat south of nil . You write as if the problem were caused by the Administration when it is pretty clear that the problem has multiple causes, most of which are not under the control of the White House. Also, you language is loaded - "gone begging" is more emotionally satisfying for the conservatives rather than a realistic appraisal of what is possible and necessary. U.S. refineries have a long history with Venezuelan crude oil and the capacity to refine it. We also have taken in our share of Iranian oil before the sanctions regime cut that off. Reconsidering policies is hardly going begging.
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Theodore D'Afflisio Apr 17, 2022

This is all well and good and sensible. President Biden has noted the same point several times but neither the recalcitrant caucus of two in his own Party nor the other side of the aisle is likely to be changing their attitudes , opinions, or vote for increasing taxes. Without a tax increase somewhere in the system, this opinion seems hopelessly utopian - ideal perhaps but unrealizable.
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Alan Rhodes Apr 17, 2022

The real illusion is that higher interest rates and public debt avoidance are so powerful that they can always and everywhere override global climate change, pandemics, energy cartels and the effects of war (and everything else). To accept the illusion, one must dedicate one's faith to the omniscience of central banks and the constant superiority of economics to all other studies and all physical and biological realities, a proposition that cannot stand in the light of reason.
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Barry Rosenfeld Apr 17, 2022

The budget deficit bogeyman again. Clearly, so-called "conservatives" have had no trouble with easy money, e.g., the FED monetizing private debts and bailing out failed banks and failing businesses since 2008/9. Moreover, where were the shrieks of anxiety about the federal budget and government indebtedness when tax rates were cut by the Trumpniks?
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Trakar Shaitanaku Apr 17, 2022

I guess neolibs wouldn't be neolibs without feeling compelled to espouse their dogma as though it isn't a foundational delusion, but rather, as though it is the answer to all of life's issues. Time hasn't been kind to the Hoover Institute but Cochrane has effectively provided proof of the veracity of the GIGO maxim.
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vic lai Apr 17, 2022

One such "wishful thinking" is the recent prevalence of Modern Money Theory (MMT) in many western advanced countries.
The whole idea of MMT is based on the supposedly optimistic, rigid, but hidden assumption under Bretton Woods II ------ the sovereign fiat currencies of the most advanced countries under the sun can always and easily buy each and every good, service, or asset supplied by anyone almost anywhere in the world, and so, so long as the economy is producing under its full potential, there will be no domestic inflationary pressure even when the government keeps deficit-spending en masse for a long period of time.
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Well, given the man-made receding tide of globalization, the recent global pandemic and the accompanying supply shocks, the latest Ukrainian tragedy and its accompanying trade distortions, and hence the gradual transition from BW II to BW III of our global monetary system, the above assumption can no longer hold anymore.
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Today, we all witness the fact that there are many things even the free money of a country can never buy without significantly pushing up their prices at the same time.
A de-industrialized and hence highly financialized domestic economy — a good candidate for the application of MMT — is now shown to be de facto weaker as a whole than an industrialized and non-financialized economy that is equipped with relatively self-sufficient supply of real merchandises, food, fertilizers, commodities, and low-price energies.
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- Arun Motianey Apr 17, 2022
  
  What you have given us here in your comment is a highly idiosyncratic definition of both MMT and (especially) of the Bretton Woods II hypothesis and a rather odd view of their relationship to each other, which neither I nor most other readers would recognize, let alone agree with.
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William Sippel Apr 16, 2022

The only wishful thinking in this article is the illusion that supply chain disruptions, China replenishing its grain supplies after the Trump trade war, weather in Brazil (see IMF piece on the cause of worldwide food inflation https://blogs.imf.org/2021/06/24/four-facts-about-soaring-consumer-food-prices/
, and OPEC raising oil prices have no effect on inflation.

If it were monetary policy, why is the dollar stronger than other currencies? If it were an economy running too hot from running at capacity you would not expect to see Fed capacity utilization statistics being still below pre pandemic levels. See https://www.federalreserve.gov/releases/g17/current/default.htm

I wish Project Syndicate would have a point-counterpoint column...where someone else would comment opposite the other person. This would deter such brazen misrepresentation as in this article.
- Emil Kaneti Apr 17, 2022
  
  ""If it were monetary policy, why is the dollar stronger than other currencies?""
  
  Because everyone else is also printing money. How has the USD held up against commodities? Not so well. The USD is the worst currency in the world, except for all the others
  - William Sippel Apr 17, 2022
    
    I guess you do not understand commodities. Let me explain. There is a thing called supply. Go read the IMF paper. Go look up the behavior and pricing of OPEC+ when you talk of commodities.
    
    As for you explanation, it does not make sense either: since if all countries increase their money supply at the same time, then inflation as between them would be constant--meaning, that things purchased by any of them, like commodities, would be the same as between each country.
    
    Go read the IMF blog on commodity prices which addresses supply and demand. Quit listening to Fox News and get better informed about micro markets. (By the way, if it were commodity inflation caused by money supply, the rate would be even across all products.)
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- Arun Motianey Apr 17, 2022
  
  Well said!
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Mirek Fatyga Apr 15, 2022

as usual from the Hoover Institution, long on rhetoric, short on analysis.
- Marc Laventurier Apr 17, 2022
  
  Consistently "brazen" and tendentious. Also keep an eye on anyone associated with McKinsey.
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