University of Chicago’s John Cochrane has a new NBER paper out that is sure to generate some debate. He outlines the following scenario of how the U.S. could conceivably go from the current state of affairs to a situation of high inflation:

Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty.

Lower growth is the single most important negative influence on the Federal budget. Then, the government may have to make good on its many credit guarantees. A wave of sovereign (Greece), semi-sovreign (California) and private (pension funds, mortgages) bailouts may pave the way. A failure to resolve entitlement programs that everyone sees lead to unsustainable deficits will not help.

When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow — and likely a “stagflation” not inflation associated with a boom. The interest rate rise and inflation can come long before the worst of the deficits and any monetization materialize. As with all forward-looking economics, no obvious piece of news will trigger these events. Officials may rail at “markets” and “speculators.” Economists and the Fed may scratch their heads at the sudden “loss of anchoring” or “Phillips curve shift.”

Not being a macro guy, I will allow others more capable than myself to evaluate his claims; I’ll simply pass along the gated and ungated versions, step aside, and wait hopefully for an elucidating debate.

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