John Cochrane, Senior Fellow at The Hoover Institution at Stanford University, discusses the most important issues facing our economy, what determines inflation and asset prices, and the outlook for a recession.
*This video was recorded on April 24, 2023
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0:00 – Intro
1:15 – The “Grumpy Economist”
2:00 – Fiscal Theory of the Price Level
5:25 – Government debt and inflation
9:15 – Why is debt so high?
13:15 – Price control policies
18:30 – Is inflation still a concern?
21:00 – How healthy is our economy?
23:10 – Inflation target
25:45 – What makes a recession?
28:15 – Long-run growth
29:13 – Improving living standards
31:00 – How to fix the economy?
32:43 – John Cochrane
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The Cause of Inflation Is Not What You Think It Is | Stanford’s John Cochrane
Inflation has been a perennial concern for policymakers, economists, and everyday citizens. We often attribute rising prices to factors like excessive government spending, loose monetary policy, or supply chain disruptions. However, according to Stanford economist John Cochrane, the cause of inflation might not be what we typically believe it to be.
Cochrane argues that inflation is primarily driven by changes in people’s expectations of future prices. When individuals anticipate higher prices in the future, they adjust their behavior accordingly, which leads to a self-fulfilling prophecy of increasing inflation. This is known as the “expectations-driven view” of inflation.
Traditionally, economists have held the view that inflation is primarily driven by changes in the money supply. They argue that when central banks increase the money supply, there is more money available in the economy to chase after the same amount of goods and services, leading to rising prices. This is known as the “monetary view” of inflation.
However, Cochrane posits that changes in the money supply do not directly cause inflation, but rather, affect inflation through their impact on individual expectations. He contends that people do not rush out to spend all the extra money they receive from central banks immediately. Instead, they adjust their behavior based on what they anticipate prices will be in the future.
Cochrane’s argument is supported by historical evidence. In the 1970s, the United States experienced both high inflation and a severe recession, known as stagflation. According to the monetary view, this should have been impossible as inflation and recessions are traditionally seen as opposing forces. However, Cochrane explains that inflation increased during the 1970s because people began to expect higher prices due to government policies and oil shocks. This shift in expectations resulted in an upward spiral of inflation.
Furthermore, Cochrane highlights that changes in the money supply do not always lead to inflation. In recent years, central banks around the world have engaged in large-scale money printing, yet inflation has remained relatively low. This can be attributed to the fact that individuals did not anticipate higher future prices, so their behavior did not change to fuel inflation.
If Cochrane’s expectations-driven view of inflation holds true, it has significant implications for economic policy. It suggests that policymakers should focus more on managing public expectations rather than simply controlling the money supply. Successfully anchoring people’s inflation expectations can help prevent harmful spirals of inflation, even in the face of large monetary injections.
Cochrane’s perspective challenges conventional wisdom about the causes of inflation. By emphasizing the role of expectations, he provides a fresh and insightful perspective on one of the most pressing economic issues of our time. While further research and debate are needed to fully understand the dynamics of inflation, policymakers and economists should seriously consider Cochrane’s perspectives in their efforts to shape effective and efficient economic policies.
Is inflation still a concern for you? Let us know in the comments. Don't forget to subscribe!
The Fiscal Theory Of The Price Level: https://www.amazon.com/Fiscal-Theory-Price-Level/dp/0691242240
Website: https://www.johnhcochrane.com/
"The Grumpy Economist" Blog: https://johnhcochrane.blogspot.com/
Twitter (@JohnHCochrane): https://twitter.com/JohnHCochrane
It started the day Biden shut down US energy and slapped on hundreds of regulations on U.S. companies… and started printing money immediately and giving it away to other countries, UN (250B to COVAX), NATO (???) and infrastructure in EU, and BILLIONS to Ukraine. That was the first 3 months!
Quite an Austrian view of inflation, which is a compliment! Well done!
Love to see Jim Rickards and the professor battle it out.
What a great interview! This channel provides great value!!!
Bitcoin pump!!
The digital market price is currently experiencing a decline while bond yields are on the rise. However, there seems to be skepticism amongst investors regarding the Federal Reserve's plan to continue increasing interest rates until inflation is stabilised. As for myself, I find myself at a crossroads, uncertain whether to liquidate my $150,000 stock portfolio. I'm seeking advice on the best strategy to capitalised on this current bear market.
The digital market price is currently experiencing a decline while bond yields are on the rise. However, there seems to be skepticism amongst investors regarding the Federal Reserve's plan to continue increasing interest rates until inflation is stabilised. As for myself, I find myself at a crossroads, uncertain whether to liquidate my $150,000 stock portfolio. I'm seeking advice on the best strategy to capitalised on this current bear market.
thank you david , how about you team up with Michelle and become the best financial show on the internet?
Nobody can become financially successful overnight. They put in background work but we tend to see the finished part. Fear is a dangerous component hindering us from taking bold steps we need in other to reach our goals. you have to contend with inflation, recession, decisions from the Feds and all. I was able to increase my portfolio by $289k in months. You have to seek for help in the right places.
Probably best, most credentialed and neutral economists ever hosted on your show David. We want more John Cochrane, no profit motive agenda, no book to sell, no gold or bitcoin to peddle, just pure economics.
Why so many ass smooching comments? Are they being paid or they don't really know what the guy is saying
I don't really agree on the standard of living statements. In the 80's and 90' people could actually afford to buy a house. People live longer because they are on life support for the last 20 years
I’m quite sure the incomes of Stanford professors have kept pace with inflation. All those student loans taken out by the student bodies over the decades have assured salaries keep pace with inflation. Private schools are private until govt funding enters the equation for student tuitions … other than that , considering Silicon Valley is SO wealthy … why did Silicon Valley Bank need 300b taxpayer money to keep depositors whole? there’s is a lot of weight on the scale for ensuring the economy stays well in commi cali . Would be interested if he had an account at SVB.
No real growth because of bloated government…
Gas prices in my area $3.89 all the way to premium gas at $4.24. Food price are 50 cents to a dollar everytime i shop at my local Wal-mart. Electric bills are beyond over price. Pa shut down the last coal plant. For a wood burning plant.. And you and this guy expects me to believe things are getting better. Child please.
Lowering interest rates so people can leverage their souls doesn't equal better standard of living. You could argue it true in China and third world countries but certainly not in the west. Asking people to vote responsibly is like asking a Donkey to recite pi to 20 decimal places. It's not happening. This system is ending in spectacularly horrible fashion.
If it doesn’t fit, he must’ve acquit!
Inflation will be slowing down from now.
How about to “inflate the debt away?”
Hanke & Greenwood did forecast inflation very accurately, a year in advance!
This man doesn’t have a clear argument.
How will TGA affect FED’s decisions?
How would you describe a bond vigilante?
Most people don’t know or care about government debt!
The GOVERNMENT prints money?
John is better than most “economists” … but David you know what causes inflation -money supply growth above the goods and services created. All deficits are inflated away these days. Their never was -NEVER -AN INFLATION WITHOUT GROWING MONEY SUPPLY ABOVE ITS MEAN RATES
He says, "If you are forecasting as an investor the number one thing you need to recognize is the uncertainty about it, that nobody really knows, and it is dependent so much on what kind of political and other events hit us. BUT I worry about ongoing inflation." And he gets bonus points for having real art on his wall. Take it from the man.
He says long term the biggest issue is growth and I know how 'growth' 'improves' peoples lives but isn't the growth/consumption model sort of broken? Maybe better to say it seems broken to me. What about income inequality and ordinary people having reasonable access to things like community and meaningful work. From an investor perspective looking for growth makes sense but where did all this costly uncertainty come from. Might the instability in the markets by related to political and societal instability? Maybe not.
Great guest. I'm about 20 minutes in and am enjoying how knowledgeable people have such different perspectives (approach, language) to markets depending on their place in life. As someone who follows 'markets' it's helpful to hear these different perspectives. I'd love to hear this guy talk about how income inequality affects markets. Thanks for making these.