Dropping Money from Helicopters: Economist John Cochrane on Inflation

Recorded on January 23, 2023.
John Cochrane is the Rose-Marie and Jack Anderson Senior Fellow in Economics at the Hoover Institution and the author of a new book, The Fiscal Theory of the Price Level. In this wide-ranging conversation, Cochrane discusses the root causes of inflation, what we can (and can’t) do about it, the economists who influenced his thinking, and how his father inspired him to become an academic.
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[@Stuart.McGregor]

The best part is at 1:16. If you’re using the Maxwell equations as a foundation, you have the tools to understand the problem. Once you figure out that in a fiat world, currency = debt, the model fits like a glove. Economists should understand physics before they’re let loose on finance.

[@bobbinsthethird]

We need more crossover episodes of Uncommon Knowledge. John Cochrane and Stephen Kotkin on the Soviet economy, and the Chinese Economy

[@frederickiithegreat4903]

KZbin is the greatest information platform EVER

[@fanfeck2844]

Absolutely! It’s full of a lot of crap too 😂😂

[@magellan500]

Given all the new information and theory I picked up, this is the best hour and 15 minute lecture on economics I’ve ever heard.

[@joannamoore4477]

Great to see John getting his own interview ❤

[@tau3457]

John is my pick of the goodfellows. He bridges gaps, calls out nonsense, and champions basic values. It has been an absolute pleasure to follow along.

[@jimschroeder9815]

This is about as good as it gets when discussing the paradoxes that exist in the world of economics and finance. Great discussion, John is a gifted speaker of the complex.

[@karenabel6218]

Excellent interview. Prof, Cochranes' intelligence plus his personality and vitality, plus Robinsons interview style create an informed and intelligent interview. Thank you Hoover Institute.

[@lockelamora8099]

Get this man on the Council of Economic Advisers.

[@ccreasman]

I’m listening closely…and I still don’t understand. 😂 I’m actually not a dumb person, but my goodness, this is either so revolutionary or so brilliant that I can’t really keep up. Going to listen a second time at some point just in hopes to get it. I have long believed that Hayek was right, Keynes was wrong, and we made poor choices in 2008 (worse ones in 2020) in giving money away. But what the heck do I know? Clearly nothing. Thanks for at least letting a dummy like me listen in.

[@jj4cpw]

Agree, I don't understand. Among other confusions caused by his argument, Cochrane makes one wonder why the Federal Government would bother selling Treasuries to anyone other than the Fed since, no matter how much U.S. debt the Fed holds, it's all good. But then he goes on to say that inflation is caused by the fear that the Government will be unable to repay what it owes. But why would the Fed care since, after all, they could just continue to refinance that debt. Moreover, I guess the fact that the dollar is the world's reserve currency is irrelevant to how far above our means we can live by borrowing, borrowing, borrowing.

[@thewealthofnations4827]

Milton Friedman breaks it down in his television series Free to Choose. I highly recommend.

[@rupertneverton3887]

Yeah this stuff got a little esoteric at times but basically, as I understand it, John is arguing that the "full faith and credit" of the US government is sufficient to prevent inflation because it results in people wanting to keep assets based in US dollars, like bonds. This ties inflationary forces (money) up in financial products which might otherwise ravage consumer products if people were to dump bonds/stocks/savings in favor of real goods. Personally, I think John is wrong, if only partially. The US economy and variety of financial products is quite massive and thus flexible, but there is no free lunch. At the end of the day, more money supply means more inflation. The US economy can absorb more than most, but that's because we're the biggest. Even if everyone had 100% faith in the US government, inflation WILL catch up if you print enough money.

[@TheMRmakeSHIThappen]

I listen to Peters interviews multiple times. The people he has on know their information on a whole different level than most. I'm trying to learn and understand what they're talking about, not just hear it to be able to repeat it

[@NathansHVAC]

It is mind blowing. Basically it is this. The rich lower prices with free money because they build more factories, export jobs to the third world. And can't possibly spend that much money at Walmart. The working class spend all that free money at Walmart and raise prices. Therefore, free money is only allowed to flow to the rich. This is done with housing and equities fine art any any other thing only the rich can afford.

[@soniasoares7768]

Excellent video as always. I love this channel. Thanks a million for all the uncommon knowledge you Mr. Robinson for bringing to us. Thanks to all the brilliant professors and scholars guests.

[@dianedean4170]

Thank you very much, Peter, for your great interviews. You are intelligent, considerate and a great listener. Thanks to John for all his contributions to educating us about economic practices and policies. I look forward to listening to the Hoover institution podcasts. Stay well and enjoy your day 🙂

[@devuanshugupta1172]

thx... hoover for uploading same..... thx.. john for all your work....

[@youdodat2]

Finally, at 58 minutes in, he mentions supply.

[@chrisdragon3384]

Peter get Thomas Sowell on the phone, lets see what he has to say about this.

[@grainsalt9662]

Dr. Sowell would say what he has in the past when looking at minimum wage and sugarcane in the field before and after the hurricane 🌀. He believed theory IS testable and that is what led to his colleagues to 'say' this kid has stumbled into something that will ruin us all!

[@Zorin_Industries]

Finally...Finally! Finally...There is a 2nd Uncommon Knowledge Interview with John H Cochrane about one of the most interesting topics of macroeconomics there is...inflation.

[@ajbjr123]

i'd like to hear mr cochrane explain why japan doesn't have inflation.

[@yoso585]

Probably that trust in the governments ability to pay its debt still remains par with its history. If that trust diminishes, therefore inflation. Pretty much his premise on the whole issue.

[@jcgoogle1808]

I suspect the answer would be much like his answer for why we didn't have any significant inflation under a decade of QE and ZIRP in the US. I don't think Japan has helicoptered a significant amount of money on the demand side.

[@rueben335]

Brilliantly presented arguments by John.

[@kilgortrout3432]

Over the many years at the Hoover Institute, Peter Robinson has proved to be one of the most intelligent men on the planet.

[@christianleblanc2842]

Never a dull moment with John.

[@lostat400]

Great analysis and insights. Debt is like stock in the Government.

[@Lizardo451]

The problem is not enough production.

[@ayethegreat4997]

Woooooowwwwwwwwwwwwww!! Excellent item Peter. Thanks !!! This is what we have been waiting for!!! ❤❤❤❤❤❤❤❤❤ Love John. He is so smart and acerbic - it’s a joy to hear him

[@dasglasperlenspiel10]

Another GREAT interview! I have learned more from this interview than I thought I would ever understand about economics. Uncommon Knowledge, and Good Fellows, are the best programs on the internet, at least that I have ever found. thank you very much!!!

[@JieSuCabc]

Thanks both of you👍

[@misiekkania]

Great interview. What I've learned is that I need to buy this book and need to trust Jonh's Cochrane :)

[@HerrschmannNachmann]

do it - but make yourself some thought about: "who are these guys whose expectations are relevant? Is it really the little man sitting at the kitchen table reading the newspaper?" ... ... and who knows: maybe, these guys are just happy with the state of the system and are not interested in doing things that would lead to a change - so they let it (or: "have to let it"...).

[@davidlittle6621]

This is a great show. Thanks for getting such interesting guests!

[@pq2667]

As always, Superb! Thank you gentlemen.

[@manuvns]

After watching this video i got a dream last night that inflation went so high that restaurants changed menu prices display to stock ticker style display , and price of a slice of cheesecake will swing from $24-$99 during lunch and people will buy and sell/invest in slice of cheesecake instead of eating it .

[@janesmith506]

I learned a great deal from this interview. I also have to love an economist who appreciates Reagan! Finally, Mr Cochran articulated that he shares my kind of intelligence, which is not the kind that carries everything one has learned "ready when needed," but instead constantly synthesizes new data to adjust one's theories. Thank you!

[@SuperOldpaint]

Great conversation. Time for an episode with H.R. McMaster talking Ukraine, U.S.Geostrategy, and current problems facing our military.

[@ProWhitaker]

Thanks for the video, very interesting, and enjoyed the longer episode

[@magellan500]

It’s great seeing John get his own interview. I just finished watching it for the third time, as some of his ideas were unfamiliar to me. But I think I understand now and I’d like to say this is the best presentation on a new economic idea I’ve ever heard.

[@orangetuono38]

What a gift. Cochrane breaks down the impact of monetary transaction rate on our economy.

[@rianmonnahan]

And so... I see John Cochrane from yet another angle. I have pondered over his learned articles on soaring for many years, sometimes trying (successfully or not) to reproduce his calculations and findings. I am not going to do the same with the maths in his latest ouvrage. But I may read it in hopes that it as entertaining and Nassim Taleb's works. Many thanks to the two of your a very interesting hour and almost 20 minutes. And so... the world is awash with cash and has been for some time, yet no inflation. The world is also awash with debt and has been for some time, yet no inflation until now. Why? Well, the inflation rate (if I may be so bold as to resume Dr. Cochrane) is a function of the credence the public has in the government's willingness and ability to make good on its debt and, perhaps, on the servicing of said debt. And here we are with members Congress who are using the debt ceiling as a political wedge to extract concessions.

[@Gorbyrev]

Fascinating, many thanks as ever.

[@jwadaow]

Look forward to reading it.

[@manvmachable]

I do not understand economics but this man makes its sounds so wonderful.

[@andrewlm5677]

Great show

[@edreeves121]

Had time to listen to it . Excellent discussion.

[@PatrickFerryCoach]

You two rock still don't understand but will go through again for a second shot at it!

[@brucevilla]

Thanks for Uploading.

[@abubakarahmadu4476]

Long term growth and fundamental values are key points to take away from an excellent intellectual discourse such as this. Brilliant; very informative and insightful. Great video.

[@gerardkiff2026]

Great interview. Thanks Peter !

[@mudbath25]

This is so good!

[@kyleor7]

At 16:40 my brain hurt a little less and I started following along.

[@m.o.6402]

Thank you for this interview

[@alexbuckley4378]

The government is issuing bonds that are not backed and they don't know the quantity of bonds in circulation?

[@kknudsen4907]

Yup. 🤦

[@dracorpgroup]

>The real question is why would a two (2%) increase in the CPI be considered a target, an acceptable target. This is because it is an acceptable devaluation of the dollar and this is because of the link between taxation and the deficits. The government and treasury cannot correct "inflation" by using its only tool, interest rates. We cannot spend our way out of the current financial situation. >Inflation is caused by the constant* deficits since the nationally televised speech by the then President Richard M. Nixon in August of 1971 where he noted that the dollar link to gold would be terminated. This was done to deal with the debt hangover from the Viet Nam war and the Apollo moon program.. Since then these deficits have caused the dollar to be devalued to the point where a little house that cost $10,000.00 in 1971 today would cost $300,000.00, roughly. >What we call inflation, that is the increases in prices, is the reaction to deficits in that today it takes roughly thirty times the number of dollars to buy that house or anything else, or in other words, thirty times using these devalued dollars. >Raising interest rates will not correct that reality. It is the deficits and these deficits are caused because the government chooses to borrow money instead of having taxes support its spending. Further, it will never curtail its spending enough. Taxation versus deficits is the issue. Interest rates are a distraction from the real issue. *NOTE: the only surpluses occurred during the time of President Bill Clinton but this was because he raided the social security funding. These funds are now "unfunded liabilities". This means that these funds are supported by current taxes only, nothing else.

[@CE-yi6yr]

John Cochran is a national treasure 👍🏻

[@davidkershaw9776]

John said that when the Federal Reserve buys treasuries or mortgage-backed securities from a bank, that just increases the banks reserves at the Fed so it's not inflationary. However, if the bank's reserves at the fed exceed the bank's reserve requirement they are free to take that money out of their reserve account and lend it to people or businesses. To the extent they do this, increasing the fed's balance sheet is inflationary. The Fed can counter this by paying a high enough interest rate on reserve accounts that the bank won't want to lend it out to businesses or people because they won't earn as much on their money. Thus, the interest rate on reserve accounts is another lever The Fed uses to control inflation. A question for John: How has this played out since 2008 when the Fed started paying interest on reserve accounts and does it help explain why inflation stayed low until recently and then jumped up.

[@benjamindover4337]

Good discussion gentlemen

[@TheOreotube]

Exactly. Sounds like the antithesis, or ultimate critique, of MMT. Question: how do you operationalize this in terms of current inflation or long-term borrowing capacity? How much debt is too much get?

[@houstongalloway6380]

What is a Bond? I've never really understood what they are.

[@xxxxxx4439]

Listened to GS podcast - inflation is an global phenomenon today, keen to understand how we should I think about inflation drivers in other economies given the absence of government support in a form of onetime payment. Thanks

[@lanceroy6324]

Never bought a book based off a youtube video. Today that changed. If there was a $10 abridged version I would be willing to buy a bunch of these and drop them off at a slam poetry meet up.

[@pgetti6]

Great interview.

[@themoonman-4]

Bravo Gentlemen!

[@philopapos]

Excellent!

[@dm-rj2zg]

I dunno about this, haven't got my hands on the book yet but it seems like he's leaning real heavy into the "M2 is whatever people want it to be" which I think is an overestimation of the extent to which that is true. Peter also even said "your argument about expectations is circular" and he was just like "yeah, well what can you do"

[@janetpoludniak1938]

Excellent.

[@sonyjoseph5426]

Deficits don't matter as long as you are the world reserve currency ... tell that to Zimbabwe" that deficits don't matter"😊

[@garythomas4936]

The joke is: "You ask nine economists a question, you get ten answers..."

[@beaujo]

I would like to hear more about how this theory relates to bitcoin vs printing money

[@dakperera4444]

this was lovely =)

[@johnmarshall9575]

An interesting proposal, I wonder if it holds for nations that don't have the currency of reserve (i.e the UK) I guess I'll have to read the book to find out.

[@richardparker7836]

Don't the Brits have the Pound?

[@rauldavila8632]

Milton Freeman kept it simple because it is. Supply and demand

[@richardparker7836]

Questions Unanswered: 1) Why is the inflation post 2021? He explained the pre 2021 era. But never circled back. 2) What is the debt ceiling limit? Why not print forever? Question was asked but not answered. 3) I forget my 3rd..

[@lawrenceralph7481]

This is well known by everyone. When it became apparent that the COVID pause to the economy was much less than planned, the excess money with no increase in output chased prices higher. The risks of stimulus were well understood and knowingly taken by both the Fed and Congress. This has been well understood since Keynes.

[@steverose6991]

Brilliant video, thank you.

[@Guti3737]

Not sure about this theory. Seems like Milton Friedmans theory repackaged.

[@tedwalford7615]

Expanded; with a broader definition of--recognition of--what is money.

[@nickvoutsas5144]

John has outlined how important future productivity determines net present value of an economy. As long as the future value discounted back to the net present value exceeds results in a positive rate of return then the economy will grow.

[@originalintent6916]

First. And I love this channel!

[@BobSmith-fx9sz]

Fitch's AA+ downgrade would impact US treasuries with an inflationary effect on the economy according to this theory?

[@ChairmanWang]

Wonderful

[@hollywoodlibertarian4227]

Our money is being created everywhere!!!

[@williamhoffer9277]

You made a reality good point about the lack of meaningful education!

[@leafhappy]

bringing it back to supply and demand is what's up

[@cristiannichiforexplains]

This guy convolutes realities packaging them in complex mathematical models :))))

[@branchingoutnurseries4403]

I think his premise is wrong. my IOU does not create new money, it's a debtor's note saying You are OWED by me, but that note itself is not money.

[@notlimey]

I understood some of this

[@trimetrodon]

When the government creates money out of nothing, and when it LOANS that money into the economy, WHO is ultimately securing those loans? If the answer is the taxpayer, isn’t an “independent Fed” a COSMIC example of TAXATION without representation?

[@chdinh]

Peter, you never allowed him to finish his answer like you promised

[@Adad-ki5dh]

From what I have been told there is no authoritative theory on inflation yet these neo classical economists go on as if the quantity theory i.e inflation is too much money chasing too few goods because of lax monetary policy. Money is neutral in the long run it only affects prices any rise in employment or output is just temporary the price will catch up Not to mention Friedman's recasting of the quantity theory. There are post Keynesian who hold equally salient views that money is non neutral, inflation is largely due to increase in commodity prices leading to mark ups and rise in wages because there are no buffer stocks of grain, petroleum, the need to finance investment is what drives demand for money and govt to keep the system intact always make reserves available to banks, govt cannot therefore control the velocity of money as Friedman insisted except by direct constraints on lending. There are other diverse versions modern monetary theory, Austrians, yet all we are fed is the neo classical in news, talk shows, what have you. We must have tolerance for different ideas economics is not "science" it affects us all when govt pursue deflationary policy to reduce inflation on the assumption wages are flexible. We are still affected by the massive inequality in most parts of the world from the misguided regan-thatcher path. It's all ideology masquerading as science which implies "truth".

[@crack6236]

Splendid

[@iancormie9916]

For once, I can say that I di not understand or agree. Keynes said that governments should save funds for a rainy day which economists of the last 20 plus years have conveniently forgotten. Milton Freedman also said that when government spending exceeds a certain percentage of the economy societies die.

[@thomassenbart]

No reduction in money supply in Germany after WWI? A completely new currency was issued, the Rentenmark.

[@bitgirl]

That's not money, that's just currency.

[@Shultz4334]

The broad-based Standard & U.S. consumer confidence has sunk to record lows, thanks mainly to inflation. Retail spending, home-building, and manufacturing output all declined and those who drive the U.S. economy, are starting to cut back on discretionary purchases, such as appliances and services. Regardless of our market conditions, however, we should continue to promote savings and smart investments. How can I profit from the present market turbulence? I'm still debating whether to sell my $125,000 ETF/Growth Stock portfolio.

[@groupflix]

I think that his IOU example is lacking a mention of the other side of the transaction. What is the quo? To a novice like me, this sounds like just another version of the broken window fallacy. Can anyone explain this transaction more completely? Moreover, as far as I know, the only entity that can create currency in the United States is the Federal Reserve. It seems to me, albeit maybe naively, that he is describing a counterfeit currency. Please only adult responses if you care to reply.

[@jjomalley8986]

Today's lesson was great, but the pioods of time werenot expansive enough. Pre Civil WWar was a time of plenty, and the monopolies dictated the development of this country in ways we will never know! Great works with great wealth and technology we never knew. The great cities were more like Europe and Quantum design was pevalent in the grids. This was amazing with supposedly horse power and then seemed to disappear or just mostly hidden by building on top of older cities and just now being explored once again.

[@holliday.]

How's 0% reserve holding up

[@benruby5269]

Funny how big jumps in inflation coincide with huge increases in the money supply. Seems to me that the biggest part of inflation comes from a reduction in the purchasing power of our money which mainly comes from an increase in the money supply.

[@kknudsen4907]

I put a ? Up the minute he said Chicago economics.

[@michaelnichol8115]

Simply the best: Mick the Hick

[@escapefelicity2913]

Guys like him are about to be sadder & wiser.

[@exchequerguy4037]

The only way government can solve inflation is to first tie its hands via the gold standard. That is because government is institutionally incapable of balancing trade-offs. And if it actively tries to stop price spirals, it might succeed, but at the price of losing something more valuable.

[@jcgoogle1808]

The way to stop inlfation is to take the democrat boot off the fossil fuel supply chain and stop the insane fiscally irresponsible deficit spending (exponentiall expansion of M1) directly to consumers to buy votes.

[@trimetrodon]

Isn’t the term “debt limit” a laughable oxymoron? The while system depends on keeping every entity and person, with the fewest exceptions, up to their nostrils in debt?

[@tadeuszczernia5422]

Chicago style economics? Sounds terryfing.

[@willliam1420]

Money is Govt debt ONLY Because Money has become a fiat currency. When money is BACKED by Gold, it is not actually debt. Trust is necessary in both scenarios.