Macro Musings with David Beckworth 03 - John Cochrane on Finance, the Fiscal Theory of the Price Level, and Blogging
Apr 25, 2016
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Business Cycles Are Risk-Premium Cycles
- Business cycles reflect shifts in risk premia and willingness to take risk, not just changes in interest rate levels.
- Recessions raise risk aversion, boosting demand for government debt and lowering inflation under fiscal theory.
Low Inflation Hides Sovereign Vulnerability
- Low global inflation likely reflects a strong demand for safe nominal government debt (a discount-rate effect), not broad confidence in future surpluses.
- That creates vulnerability: short-term, highly rolled-over debt can reverse quickly and trigger inflation spikes.
Where Money Flows When Sovereign Debt Loses Value
- If holders lose faith in sovereign debt, they shift into real assets like stocks and housing, driving asset-price inflation.
- That reallocation raises goods and services prices as people spend perceived wealth gains.