Asset Prices and Inflation

We've seen a lot from the more right-leaning economists over the last few years about how asset prices increases are inflation, because increases in the price of assets represent increases in the price of future consumption. I've been thinking about this, and I think they've got it backwards.

Money is a claim on the future production of society. If the government prints money and mails it to people, those people feel richer, because they can consume more. The money is a claim on future productive capacity of the society, and when more money is printed, the price of the money declines in terms of real goods declines. The claim is debased.

Government bonds, if one thinks about it, are the same way. A government bond is a claim upon the productive resources of society. When the bond price declines in terms of real goods (which is usually the same as it declining in terms of money, since bond prices are so much more volatile than consumer prices), the claim is debased. This is like inflation.

Typically, we think of central banks controlling inflation with the interest rate, which is the price you will be paid to delay consumption if you are holding assets. If you are holding money, however, rather than being paid, you must pay the inflation rate to delay consumption.

Rising interest rates, which depress bond prices, are therefore essentially equivalent to inflation. To this way of looking at it, when the Fed raises rates, it is simply channeling inflation into debasing bond prices rather than money.

This is a new idea, at least to me. I'll have to explore it further.