Fiscal Theory of Inflation

Welcome to our limited edition crypto series. In this episode, we welcome back Professor John Cochrane, who was a guest on the Rational Reminder series, to talk everything money. Professor Cochrane has immense experience on the topic and is a Senior Fellow at the Hoover Institution at Stanford, as well as Stanford Institute for Economic Policy Research. He is also a Research Associate of the National Bureau of Economic Research, an adjunct scholar at the Cato Institute, and was a professor of finance at the University of Chicago Booth School of Business. He is also the author of several books and writes a popular blog called The Grumpy Economist. In this episode, we take a deep dive into the concept of money. We learn what numeraire is, how a numeraire is defined, and explore some of the intricacies of money. We also discuss and unpack the differences between fiscal theory and monetary theory, along with other ideas regarding the value of money. We then delve into how all this relates to cryptocurrencies, what future he sees for crypto, and much more. Tuning into this episode, listeners will challenge their thinking about the economy and how economic relations work.

Key Points From This Episode:

• Professor John Cochrane explains to us the short version of fiscal theory. [0:04:35]
• Find out the definition of numeraire and how it is determined within an economy. [0:05:21]
• Learn whether government backing is required to define a numeraire. [0:07:05]
• What Professor John Cochrane thinks is the primary function of money. [0:08:55]
• Whether money needs to be a medium of exchange that stores value. [0:09:45]
• He explains why money is valuable according to fiscal theory. [0:11:22]
• The role of taxes in adding to the value of money according to fiscal theory. [0:12:59]
• How fiscal theory’s explanation for why money is valuable differs from the monetarist explanation. [0:13:33]
• Find out whether the term ‘fiat’ is still a good adjective to describe money in a fiscal world. [0:17:24]
• We learn if ‘fiat’ is an appropriate term to describe money according to the monetarist view. [0:19:10]
• What the government debt valuation equations suggest about the stability of the price level. [0:20:21]
• An outline of what happens when discount rates become volatile. [0:23:29]
• Ways in which sticky prices affect the stability of the price level. [0:27:24]
• Whether the supply of money is still a useful perspective today. [0:31:01]
• Why monetarism theory has gained so much traction. [0:33:51]
• He unpacks the purpose of monetarism theory. [0:35:21]
• How fiscal and monetary actions set expected and unexpected inflation regarding fiscal theory. [0:37:10]
• The level of fiscal and monetary coordination required for price stability. [0:39:58]
• Whether the level of coordination needed is realistic considering the independence of the central bank. [0:42:10]
• Ways in which monetary policy debt sales and fiscal policy debt sales differ. [0:45:02]
• What effect the size of the central bank's balance sheet has on the price level. [0:49:52]
• Repercussions of inside money issued by private banks on the price level. [0:53:06]
• Statistical tests available that can be used to prove fiscal theory. [0:58:55]
• Find out why COVID-related effects on the economy lead to inflation. [1:04:17]
• Breakdown of the fiscal explanation for the US inflation of the 1970s. [1:11:24]
• Reasons why inflation targets have been successful in some countries and not in others. [1:16:14]
• A discussion about whether we have always lived in a fiscal-based economy. [1:19:24]
• Whether citizens should behave differently living in a fiscal world. [1:27:51]
• How the value of the dollar will be affected if more people buy cryptocurrencies. [1:28:49]
• Professor John Cochrane shares if he thinks anonymous digital cash is a good thing. [1:30:51]
• We discuss what the future has in store with regard to fiscal theory. [1:39:31]