Headline, March 07 2024/ ''' FISCAL FABLES FIRING '''



'' THE GLOBAL FOUNDER FRAMERS OF !WOW! : SOCIO ECONOMIC CHALLENGES :  In the developing world - and even in the world entire, there is this same old story '' :

Inflation, unemployment, poverty, inadequate infrastructure and gender disparities. All chronic hurdles. All have to be faced and solutions devised. Addressing these challenges requires strategic investments in human capital, infrastructure and gender equality. '' So, help us, God Almighty! ''

'' GLOBALLY : NOT WHAT YOU GET TO READ - OR WHAT YOU ARE TOLD - the true driver of ' inflation ' in any and all governments ' is this - wretched and ever increasing debt - both domestic and external - and not monetary policy.

IMAGINE IT IS LATE 2024. Inflation in the rich world has fallen from its peak but stayed stubbornly high. At around 4%, it is well above the at which most central banks are comfortable.

All Governments weighed down by vast debts, must use precious revenues to pay interests on the debt, which itself is growing because of high interest rates. The energy transition and rising state spending owing to ageing population add to the fiscal largesse. Raising taxes is politically fraught, so more money is printed.

Inflation stays high and governments' credibility worsens. Central bankers are scratching their heads, wondering how their powerful weapon - the interest rate - has failed so thoroughly.

A wonkish theory, laid out in glorious detail in a new book by John Cochrane of Stanford University's Hoover Institution, would offer a potential explanation :

'' The Fiscal Theory of Price Level '' builds a theory of inflation as ambitious as that proposed by John Maynard Keynes's '' The General Theory '' or Milton Friedman's and Anna Schwartz's '' A Monetary History ''.

Mr. Cochrane, whose own work on the subject spans four decades, spends nearly 600 pages reworking the maths of past economic models to incorporate fiscal theory, while chattily discussing how it explains past inflationary episodes.

'' Even Milton Friedman might change his mind with new facts and experience at hand,'' he speculates.

At the heart of Mr. Cochrane's theory is the idea that government debt can be valued like a firm's equity, based on the returns to its owner's pockets.

The price level will adjust - and therefore drive inflation or deflation - to ensure that the real value of the debt equals to the sum of a government's future budget surpluses, appropriately discounted.

Thus the true driver of inflation is government debt not monetary policy. Under this theory, money is valuable because it can be used to pay tax and generate surpluses. The set-up is not all that different from the gold standard, except it is tax, rather than gold, that backs money.

Mr. Cochrane is careful to note that the adjustment of the price level is not instantaneous. People can be poor judges of a government credibility when it comes to paying off debts. Just like stocks, prices are able to deviate from fundamentals.

Yet in the long run, they adjust. A government that hands out money without eventually running surpluses will not avoid inflation for ever.

History appears to offer support. Brad DeLong of the University of California, Berkeley, uses fiscal theory in his recent book, '' Slouching towards Utopia'', to explain inflation in post-first-world-war Europe.

In France hefty debt-interest payments led to an average of 20% annual inflation over seven years.

In Germany things were worse. The public lost faith in the ability of the state to pay off its debt, without inflation. Soon hyperinflation kicked in.

Mr. Cochrane also brings fiscal theory to bear on America's inflation in the 197-80s. In the mid 1970s price rises exceeded 12%. The federal Reserve lifted interest rates ; inflation dropped to 5% by 1977.

Yet Mr. Cochrane points out that inflation shot up again to more than 14% by 1980, in part because America failed to get its fiscal house in order.

Fiscal and regulatory reforms that raised expectations of future surpluses, along with another dose of monetary medicine, were needed to vanquish inflation.

To sum : '' How is fiscal theory faring today? ''

The Honour and Serving of the Latest Global Operational Research on Inflation, Times and Tides continues. The World Students Society thanks Free Exchange : The Economist.

With respectful dedication to the Leaders, the Global Founder Framers of The World Students Society - the exclusive and eternal ownership of every student in the world, and then Students, Professors and Teachers of the world.

See You all on !WOW! for Great Global Elections on wssciw.blogspot.com and Twitter X !E-WOW! - The Ecosystem 2011 :

Good Night and God Bless

SAM Daily Times - the Voice of the Voiceless


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