13 What type of inflation process does John Cochrane warn could happen? Explain the role that inflation expectations would play if the outbreak of inflation were to ‘happen with little warning’. Inflation Should Be Feared The US Federal Reserve is trying as hard as it can to spur growth, and to create some inflation, but it must be careful.

Inflation remains a danger because US debt is skyrocketing, with no visible plan to pay it back. For the moment, foreigners are buying that debt. But they are buying out of fear that their governments are worse. They are short-term investors, waiting out the storm, not long-term investors confident that the US will pay back its debts. If their fear passes, or they decide some other haven is safer, watch out. Inflation will come with a vengeance. It’s not happening yet: interest rates are low now. But so were mortgage-backed security rates and Greek government debt rates just a few years ago. But if it happens, it will happen with little warning, the Federal Reserve will be powerless to stop it, and it will bring stagnation rather than prosperity.