To understand the flabbiness of today’s “inflation” argument, it’s useful to perhaps get back to the basics. Imagine someone (a child, a wife, a thief) stealing $50 from you. This person is $50 richer with commensurate demand, but you’re $50 poorer.

In the “fiscal theory” of inflation espoused by Hoover Institution senior fellow John Cochrane, we can be thieved of money without losing any. Free lunch for everyone! Cochrane’s why behind CPI measures of “inflation” was and still is that “A one-time $5 trillion fiscal blowout causes a one-time rise in the level of prices.” No, that can’t be. Demand is demand. If it’s not redistributed, it’s still demand. Paraphrasing John Stuart Mill, no act of saving ever subtracts from demand always and everywhere born of production.

Cochrane’s modeling presumes in Keynesian fashion that government can place demand in one set of pockets without shrinking demand elsewhere. That’s an impossibility. All demand begins with supply, so for government to redistribute the power to buy things is for government to shrink that power among those taken from. Sorry, but there’s always an other despite what economists tell you. For governments to spend, a taxable someone or a borrowable against someone must produce first. And they must have reduced spending power.

Cochrane then tacks to a mish-mash of wordiness about how the Fed, “by raising interest rates,” “lowers current inflation but at the cost of more persistent inflation.” It’s funny how this didn’t work in the 1970s. Back then, the Fed aggressively raised rates as the dollar continued to weaken. Real inflation. Ronald Reagan ran on reviving the dollar with a commodity rule, and as his polling improved so did the value of the dollar. This is crucial simply because the dollar’s exchange value has never been part of the Fed’s policy portfolio. Never. Presidents get the dollar they want, at which point this notion that the Fed targets the dollar with its rate machinations is not just untrue, it wouldn’t matter even if it were. What the Fed allegedly takes is made up for by global capital flows. The only closed economy is the world economy. The Fed can’t shrink credit.

Inflation is currency devaluation, period. Except that during the Biden (and no, I’m not defending Joe Biden) years, there’s been no notable decline in the dollar versus gold, the euro, the pound, the yen, the yuan, or name your currency. About this, Cochrane is quiet.

Instead, he seems stuck on this notion that deficits cause inflation. Except that Japan and the U.S. since 1980 run roughshod over his theory. As U.S. debt soared to over $31 trillion from $900 billion in 1980, CPI and Treasury yields plummeted. Same in Japan as it ran up staggering debt. If gold is your flavor, U.S. and Japanese debt soared in the ‘80s and ‘90s as the price of gold in the dollar and yen fell. Cochrane fears a future inflationary breakout assuming “Washington wants to borrow, say, $10 trillion more for bailouts, stimulus, transfers, and perhaps a real war,” which is Cochrane’s way of saying that markets are not only stupid (someone’s got to buy this debt!), but that the most powerful force in investing (compound interest) is utterly meaningless. Basically, Cochrane believes buyers of debt buy it knowing that they’ll be fleeced.

More realistically, the higher prices of modern times were explained in the opening pages of The Wealth of Nations. Work divided leads to massive surges of productivity, the more hands the more production and the lower the cost of production. Then we had lockdowns that impaired sophisticated, globalized production of everything. That prices are higher today is a statement of the obvious. The only problem is that command-and-control is not inflation.