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Inflation and Debt - Term Paper Example

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This paper discusses the work ‘Inflation and Debt’ by John Cochrane in the context of key questions relating to the concept of fiscal inflation, the reasons for worry relating to the impact of fiscal inflation to the present economy, how the Fed perceives or misperceives general inflations…
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Inflation and Debt
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Inflation and Debt

Download file to see previous pages... Cochrane basically talks about how budget deficits and large amounts of debt results in inflationary threats, or that those lead to heightened risks of what Cochrane describes as the “run on the dollar”. The gist is that deficits in the future impact current inflation rates upwards, and Cochrane asserts that the Federal Reserve is powerless to deal with this reality. The Fed view of inflation is basically anchored on Keynesian concepts, and Cochrane further asserts that this, together with monetarist inflation concepts, is incapable of dealing with the inflationary threats that deficits bring to the table. Cochrane notes that the fiscal situation is dire in several respects, chief among them is that the culture of entitlement that lies at the core of American society ensures that the deficits in the future will continue to be large, as the expenditures to fund the “entitlements” alongside other expenditures are poised to dwarf government revenues. This is a recipe for sustained deficits that need in turn to be funded either by debt or by printing more money. In the event that the public sees printing money as an inevitability, then the consequences include the greater likelihood of that “run on the dollar” (Cochrane).
II. Fiscal Inflation
Fiscal inflation in gist is simply inflation caused by fiscal policy, as when the government spends more money than it has, leading to borrowing, and to the printing of money to fund the deficits. Fiscal inflation can be seen as the flipside of large government spending leading to deficits in the budget, and the literature finds support in the assertion that the inflationary effects of large amounts of debt and of budget deficits are beyond the control of the Fed, which operates under the assumption that there can be no lasting inflationary pressures from activities that do not introduce liquidity to the market via the printing of new money (Cochrane; Ferguson). Debt and deficits, according to the view of the Fed, is not similar to printing fresh money, and does not have the same inflationary effect as the latter. This contrary view is borne out by the thinking that as long as there is no new money printed, and where the government has the power to issue debt to finance deficits in the budget, then there is no threat of inflation. This notwithstanding the established correlation between increased government spending and the reduction in taxation to induce economic growth as ...Download file to see next pagesRead More
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