Last week, Fed Chair Jerome Powell said, “the disinflationary process has begun.” Many breathed a sigh of relief even as Powell told us that the process of getting all the way back down to 2 percent would likely “take quite a bit of time.” To get inflation all the way back down to target, Powell told us to expect a series of
This article and Mosler's point about rate hikes and how it's benefitting the rich via regressive stimulus is on point. There's nothing much to be said here other than to read this article and I would read it more than once. Important to understand that rate hike don't slow demand at all, but actually boost demand and add to deficit spending.
I've had occasion to discuss Mosler's treatment of the interest-income channel with both my MMT laypeople colleagues as well as with at least one of the well known MMT academics. I agree that the Fed has an overly narrow conception of the possible impact of interest-rate hikes on key macroeconomic indicators. However, Mosler's argument seems to assume a high marginal propensity to consume (MPC) on the part of recipients of federal interest payments. But we typically believe that people holding Treasuries in their portfolios are already rich and therefore have a *low* MPC. Are the people now receiving more interest on their Treasuries buying more yachts? If those bondholders are actually corporations, are they increasing their investment spending? If that increased interest income is not being spent on 'C' or 'I', then how can it put upward pressure on the general price level?
I believe MMT remains the critical foundation for democracy to thrive. My confidence continues the US will provide all required assistance to Ukraine, lead NATO, deter China, and accelerate putin’s demise knowing the resources exist. Seeing President Biden in Ukraine makes me proud. My confidence in the Administration remains high. MMT gives the
Administration the tools to rally Congress accordingly. Great day for Democracy...happy Presidents’ Day and may God bless all peoples.
Add in that the Fed is reducing its balance sheet. That means it is reducing its net interest income thus reducing what it transmits to the Treasury thus increasing the deficit. I would find it interesting for someone to analyze "What if the Fed bought all of the Treasuries?" What would that do to the deficit? (for so called 'deficit hawks').
"If a large share of the outstanding stock of government bonds is held by people with a high marginal propensity to consume (MPC) out of interest income, then it's easy to IMAGINE (emphasis added) a potent channel for the Fed's rate hikes to feed inflationary pressures. If that's not the case, then one MIGHT (emphasis added) expect a more modest or even negligible inflationary impulse from higher rates. So it's an EMPIRICAL (emphasis added) question."
First of all, kudos to Stephanie and the great Warren Mosler for sussing things out. But how is it possible that the CBO doesn't know EXACTLY (emphasis intentional) how much interest income is being spent and how much is being saved?! Is it because they don't want to know? The rich get a huge tax break and they use it to park more of their financial wealth in treasuries. And then the Fed hikes interest rates which makes the holders of these bonds even wealthier. And then what do they do? They take some of their ill-gotten gains and donate it to candidates and political "dark money" operations that will ensure that the process continues far into the future. What a world!
This is good exegesis of the creation and flows of money, but it's still a "missing of the mark" because its full of ifs, buts and maybes. It shows that theory within the current monetary paradigm still thinks you can only be pulled five ways from the middle and so accomplish little...or nothing. It's monetary "epicycles".
I'm sorry, I absolutely affirm that MMT and all of the other progressive theorists and reforms go in the right direction. To paraphrase Alan Ginsberg in his epic poem Howl!
I saw the best economic minds of my generation destroyed by the madness of Debt ONLY, starving hysterical naked,
dragging themselves through its theoretical negro streets at dawn looking for an angry reformist fix,
angelheaded hipsters burning for the ancient heavenly connection to the starry dynamo AKA a paradigm change in the machinery of neo-classical night,
who poverty and tatters and hollow-eyed and high sat up smoking in the supernatural darkness of cold-water flats floating across the tops of cities contemplating the jazz of the new concept, that applied, would enlighten and actually resolve,
who bared their brains to Heaven under the El and saw Mohammedan angels staggering on tenement roofs illuminated, but forgot that the new paradigm requires the recognition that conceptual opposition is the only route out of the current reality,
who passed through universities with radiant cool eyes hallucinating Arkansas and Blake-light tragedy among the scholars of the current paradigm,
*****************
Stephanie, Steve, Warren, Michael and Ellen, I'm with you in Debt ONLY
where 6000 years of acculturated slavery forces us onto "all fours" and prohibits us from "standing in the light of the required new reality,
I'm with you in Debt Only,
where we wake up electrified out of the coma by our cogniting on the fact that the effect of every historical paradigm change has always been the expression of an aspect of the natural philosophical concept of grace...like Gifting.
Yes, thanks for all of that work bring this detail and analysis is your post! Good stuff! The one point that I didn't see mentioned that increasing interest rates have on inflation is the added costs to capital. If the owners of capital, see increased cost they will pass those cost on to consumers if it does place risk of losing market share. Any way and every way you look at it's a giant boondoggle. The fed knows what they're doing here, it's just a HUG backdoor wealth transfer to be followed by more hysteria over the "US DEBT CRISIS!" Powell said in his testimony to the US Senate that he was big fan of Adolph Volcker, signaling to 'Richard Shelby' (Republican Alabama), don't worry I'll slap them workers down and stuff the coffers of your donners.
SK says: "the lion’s share of the problem—i.e. pandemic-related supply-side disruptions—substantially abated in the second half of 2022."
Stiglitz and others say the lion's share of the problem is the above plus the effects of the Ukraine sanctions (food, energy, etc.) which only accelerated in 2022.
RE: marginal propensity to consume with higher interest rates:
Most of the financial assets of the bottom 90% are tied up in pension funds, IRAs, etc. So those exalted souls whose discretionary income increases meaningfully with interest rates are confined to the top 10% wealth class (probably more like the top 1%).
My goodness, how many of these folks say to themselves, "Oh boy--I made a coupla extra mil in interest last quarter, I'm going to buy another Rolex?"
If these folks want another Rolex, they go and buy another Rolex. Interest rate income (or expectations) do not influence decisions within this class. My guess is these folks may tend to spend more or less depending on changes in their net worth. Here, interest rate increases probably depresses net worth primarily due to declines in asset valuations. Even the top 80%-90% might cut back on consumption, knowing their net worth is dropping (e.g. from declining home prices), a sort of "reverse wealth effect."
So, when the Fed hikes interest rates, I think the Fed is pretty confident it won't have much inflationary impact. I think this is largely correct.
Incidentally, analysis revealed that the "wealth effect" on consumption was tiny and possibly statistically insignificant. The same is probably true for the "interest rate effect" on consumption.
This means that the rich won't be of much help to mitigate the ravages of higher interest rates during times of inflation (from a supposed "interest rate effect") or of higher asset prices when interest rates go down. This class understands that paper wealth is, well, just numbers on quarterly reports, and best left alone.
The problem is, the rich are different from you and me.
Thank you, so interesting! While the “basic income” for those that have money might make them more likely to consume, today’s higher risk free rate has raised the bar for business financing because investors are making more from treasuries, which makes them more risk averse / discerning of where they put their money. This is causing businesses to cut costs and lay off workers, especially lately in the tech sector. I worry this dynamic and business failures as a result of not being able to raise capital is where a recession will come from.
"As a result, the government is putting a ton of extra cash into the hands of bondholders who may turn around and spend some of that windfall. And that additional spending can potentially sustain inflationary headwinds."
Interest paying US securities total ~$24.3T face value, Google assures me. Those bonds will have some current market value, in that same enormous ballpark.
If interest rates are increased above the average rate of those outstanding bonds then the market value of the existing bonds will decrease, as there now exist more attractive alternatives - ie. those freshly issued bonds.
Existing bond holders cannot contribute to the expansion as implied, because their potential liquidity and buying power has decreased.
The only fiscal expansion that can result from the rate increase must be limited to the relative increase on interest payments on any new bonds alone. And that value, the principal being a mere fraction of $24.3T, is surely miniscule compared to the depreciated value of the "old spending" bonds.
In conclusion, while there may be some minor counter-breeze to a rate increase, the prevailing wind is surely hurricane force in comparison.
This article and Mosler's point about rate hikes and how it's benefitting the rich via regressive stimulus is on point. There's nothing much to be said here other than to read this article and I would read it more than once. Important to understand that rate hike don't slow demand at all, but actually boost demand and add to deficit spending.
Excellent argument. The Fed is a one-trick pony; rate hikes are its only tool. It seems determined to use that tool whether it works or not!
I've had occasion to discuss Mosler's treatment of the interest-income channel with both my MMT laypeople colleagues as well as with at least one of the well known MMT academics. I agree that the Fed has an overly narrow conception of the possible impact of interest-rate hikes on key macroeconomic indicators. However, Mosler's argument seems to assume a high marginal propensity to consume (MPC) on the part of recipients of federal interest payments. But we typically believe that people holding Treasuries in their portfolios are already rich and therefore have a *low* MPC. Are the people now receiving more interest on their Treasuries buying more yachts? If those bondholders are actually corporations, are they increasing their investment spending? If that increased interest income is not being spent on 'C' or 'I', then how can it put upward pressure on the general price level?
Thank you Dr. K. You make way too much sense as you unveil macroeconomics to the masses. The Lens rocks!
I believe MMT remains the critical foundation for democracy to thrive. My confidence continues the US will provide all required assistance to Ukraine, lead NATO, deter China, and accelerate putin’s demise knowing the resources exist. Seeing President Biden in Ukraine makes me proud. My confidence in the Administration remains high. MMT gives the
Administration the tools to rally Congress accordingly. Great day for Democracy...happy Presidents’ Day and may God bless all peoples.
Add in that the Fed is reducing its balance sheet. That means it is reducing its net interest income thus reducing what it transmits to the Treasury thus increasing the deficit. I would find it interesting for someone to analyze "What if the Fed bought all of the Treasuries?" What would that do to the deficit? (for so called 'deficit hawks').
"If a large share of the outstanding stock of government bonds is held by people with a high marginal propensity to consume (MPC) out of interest income, then it's easy to IMAGINE (emphasis added) a potent channel for the Fed's rate hikes to feed inflationary pressures. If that's not the case, then one MIGHT (emphasis added) expect a more modest or even negligible inflationary impulse from higher rates. So it's an EMPIRICAL (emphasis added) question."
First of all, kudos to Stephanie and the great Warren Mosler for sussing things out. But how is it possible that the CBO doesn't know EXACTLY (emphasis intentional) how much interest income is being spent and how much is being saved?! Is it because they don't want to know? The rich get a huge tax break and they use it to park more of their financial wealth in treasuries. And then the Fed hikes interest rates which makes the holders of these bonds even wealthier. And then what do they do? They take some of their ill-gotten gains and donate it to candidates and political "dark money" operations that will ensure that the process continues far into the future. What a world!
This is good exegesis of the creation and flows of money, but it's still a "missing of the mark" because its full of ifs, buts and maybes. It shows that theory within the current monetary paradigm still thinks you can only be pulled five ways from the middle and so accomplish little...or nothing. It's monetary "epicycles".
I'm sorry, I absolutely affirm that MMT and all of the other progressive theorists and reforms go in the right direction. To paraphrase Alan Ginsberg in his epic poem Howl!
I saw the best economic minds of my generation destroyed by the madness of Debt ONLY, starving hysterical naked,
dragging themselves through its theoretical negro streets at dawn looking for an angry reformist fix,
angelheaded hipsters burning for the ancient heavenly connection to the starry dynamo AKA a paradigm change in the machinery of neo-classical night,
who poverty and tatters and hollow-eyed and high sat up smoking in the supernatural darkness of cold-water flats floating across the tops of cities contemplating the jazz of the new concept, that applied, would enlighten and actually resolve,
who bared their brains to Heaven under the El and saw Mohammedan angels staggering on tenement roofs illuminated, but forgot that the new paradigm requires the recognition that conceptual opposition is the only route out of the current reality,
who passed through universities with radiant cool eyes hallucinating Arkansas and Blake-light tragedy among the scholars of the current paradigm,
*****************
Stephanie, Steve, Warren, Michael and Ellen, I'm with you in Debt ONLY
where 6000 years of acculturated slavery forces us onto "all fours" and prohibits us from "standing in the light of the required new reality,
I'm with you in Debt Only,
where we wake up electrified out of the coma by our cogniting on the fact that the effect of every historical paradigm change has always been the expression of an aspect of the natural philosophical concept of grace...like Gifting.
So Stephanie, If Biden succeeds in reducing the deficit significantly, what do you think the consequences would be? Would it slow the economy? Worse?
Yes, thanks for all of that work bring this detail and analysis is your post! Good stuff! The one point that I didn't see mentioned that increasing interest rates have on inflation is the added costs to capital. If the owners of capital, see increased cost they will pass those cost on to consumers if it does place risk of losing market share. Any way and every way you look at it's a giant boondoggle. The fed knows what they're doing here, it's just a HUG backdoor wealth transfer to be followed by more hysteria over the "US DEBT CRISIS!" Powell said in his testimony to the US Senate that he was big fan of Adolph Volcker, signaling to 'Richard Shelby' (Republican Alabama), don't worry I'll slap them workers down and stuff the coffers of your donners.
SK says: "the lion’s share of the problem—i.e. pandemic-related supply-side disruptions—substantially abated in the second half of 2022."
Stiglitz and others say the lion's share of the problem is the above plus the effects of the Ukraine sanctions (food, energy, etc.) which only accelerated in 2022.
RE: marginal propensity to consume with higher interest rates:
Most of the financial assets of the bottom 90% are tied up in pension funds, IRAs, etc. So those exalted souls whose discretionary income increases meaningfully with interest rates are confined to the top 10% wealth class (probably more like the top 1%).
My goodness, how many of these folks say to themselves, "Oh boy--I made a coupla extra mil in interest last quarter, I'm going to buy another Rolex?"
If these folks want another Rolex, they go and buy another Rolex. Interest rate income (or expectations) do not influence decisions within this class. My guess is these folks may tend to spend more or less depending on changes in their net worth. Here, interest rate increases probably depresses net worth primarily due to declines in asset valuations. Even the top 80%-90% might cut back on consumption, knowing their net worth is dropping (e.g. from declining home prices), a sort of "reverse wealth effect."
So, when the Fed hikes interest rates, I think the Fed is pretty confident it won't have much inflationary impact. I think this is largely correct.
Incidentally, analysis revealed that the "wealth effect" on consumption was tiny and possibly statistically insignificant. The same is probably true for the "interest rate effect" on consumption.
This means that the rich won't be of much help to mitigate the ravages of higher interest rates during times of inflation (from a supposed "interest rate effect") or of higher asset prices when interest rates go down. This class understands that paper wealth is, well, just numbers on quarterly reports, and best left alone.
The problem is, the rich are different from you and me.
Thank you, so interesting! While the “basic income” for those that have money might make them more likely to consume, today’s higher risk free rate has raised the bar for business financing because investors are making more from treasuries, which makes them more risk averse / discerning of where they put their money. This is causing businesses to cut costs and lay off workers, especially lately in the tech sector. I worry this dynamic and business failures as a result of not being able to raise capital is where a recession will come from.
I'd like to discuss this statement more:
"As a result, the government is putting a ton of extra cash into the hands of bondholders who may turn around and spend some of that windfall. And that additional spending can potentially sustain inflationary headwinds."
Interest paying US securities total ~$24.3T face value, Google assures me. Those bonds will have some current market value, in that same enormous ballpark.
If interest rates are increased above the average rate of those outstanding bonds then the market value of the existing bonds will decrease, as there now exist more attractive alternatives - ie. those freshly issued bonds.
Existing bond holders cannot contribute to the expansion as implied, because their potential liquidity and buying power has decreased.
The only fiscal expansion that can result from the rate increase must be limited to the relative increase on interest payments on any new bonds alone. And that value, the principal being a mere fraction of $24.3T, is surely miniscule compared to the depreciated value of the "old spending" bonds.
In conclusion, while there may be some minor counter-breeze to a rate increase, the prevailing wind is surely hurricane force in comparison.
What am I missing?