Inflation or Deflation?

That was the title of a talk this evening by UCGSB Booth School prof John Cochrane.  “I don’t make forecasts,” he said, “but I can offer scenarios.”  He actually offered only one scenario, which is basically one of inflation.  We are all aware of the huge and growing federal debt, but it’s much smaller relative to GDP than it was in 1945.  So how have the feds paid off big debts?  Thru growth.

But we’re not growing, and future growth will be difficult if taxes are increased.  And it seems the bailout pattern is continuing, so who knows how high the debt might go? So inflation seems more likely than the opposite.  Cochrane pointed out that inflation is based on what people anticipate rather than actual events, and noted that Japan continues to experience little inflation despite a large debt.

Of course, he apparently didn’t consider the possibility that taxes might be raised on things not produced by people.


(1) He acknowledged that the Phillips Curve, the alleged inflation-unemployment tradeoff, isn’t supported by actual data over the past several decades, and showed a couple of charts illustrating this.

(2) Why he isn’t making a forecast: “I’m an economist; I don’t know anything about political will.”

(3) “Every economist I know [apparently including himself] is buying TIPS [Treasury Inflation-Protected Securities].” If that turns out to have been a smart strategy, I guess we should assume that economists are able to advise themselves better than they can the rest of us.

(4) Reportedly, the talk will be posted somewhere, probably around here, in a few days.