Thomas Coleman, an economics professor at the University of Chicago, discusses a novel theory of money and inflation, inequality, and risk management with the CFA Institute Research Foundation’s Larry Siegel.

The “money” referred to in monetary economics is a thing of the past, says Tom, because nobody has any “money” (cash, checking accounts, savings accounts). They have marketable assets instead. So monetarism is outdated as a theory of inflation. Instead, Tom argues inflation is better explained by the Fiscal Theory of the Price Level (FTPL), which relates the price level to the value of government-issued securities (bonds and cash) as determined by the cash flows backing them. These cash flows are taxes minus government spending.

The FTPL explains the low inflation of 2008 and high inflation of 2022 better than any other theory.

Coleman also discusses inequality. While conventional measures of inequality look at taxable incomes, he takes a broader view, including transfer payments and other items not reported on tax returns as income. When you do this, inequality – while still worse than in the 1980s – is less severe than it appears. In fact, households in the bottom half of the income distribution face a tax rate that is negative!

Tom concludes with thoughts on risk, a topic on which he has written two excellent books.