Last weekend, I wrote about Warren Mosler’s argument that the Fed’s rate hikes could be undermining its effort to bring down inflation. While Mosler is a leading proponent of Modern Monetary Theory (MMT), the notion that “monetary tightening” (conventionally defined as central banks raising interest rates) might cause inflation to run hotter isn’t unique to MMT.
Mosler emphasizes the “interest-income channel,” but it’s not the only possible pathway from higher rates ==> higher inflation.And while mainstream economists like Paul Krugman and Olivier Blanchard acknowledge the interest-income channel, they don’t assign it much potency. Mosler does. He points to the fact that that the rate hikes are feeding hundreds of billions of dollars of additional income to bondholders. To get a sense of the numbers we’re talking about, here’s a passage from last week's post:
Compared with its May 2022 estimate, CBO now estimates that over the next 5 years, the federal government will pay out an additional $644 billion in net interest. This isn’t what will be paid out in total over that period. That’s a whopping $3.879 trillion! The $644 billion is the additional amount of net interest CBO thinks the government will end up spending over the next 5 years, mostly because of the Federal Reserve’s aggressive rate hikes.
And here’s a chart from Apollo’s chief economist, Torsten Slok, who just yesterday observed that interest payments on US Treasuries have doubled from around $1B per day before the pandemic to about $2B now.
Mosler points to the stock of US Treasuries held by the public, which as of last week stood at $24.62 trillion. “Debt held by the public” is composed of Treasury Bills, Notes, Bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Domestic Series, Foreign Series, State and Local Government Series (SLGS), United States Savings Securities, and a portion of Government Account Series (GAS) securities.
To be clear, the Fed’s rate hikes aren’t pushing additional interest income into the hands of everyone who holds a portion of the outstanding $24.62T. But the rate hikes are pushing additional interest income into some hands, and that has the potential to push up inflation. Westwood Capital’s Dan Alpert recently showed how investors capture a financial windfall simply by rolling over short-term Treasuries in an era of rising interest rates.
For Mosler’s interest-income channel to drive up prices at the macro level, a substantial amount of that interest income would need to flow into the hands of people who turn around and spend it back into the economy. Here’s how the entire $31.4T is (as of January 2023) held.
So the question is, where—specifically—is the additional interest income going, and how much of it is being spent in ways that support aggregate demand in the United States? Mosler admits that he doesn’t know, but he says “It’s not zero.”
If you’re interested, Warren talked about all of this at length in a recent interview.
Enjoy the rest of your weekend.
studying macro textbooks, I was told that low interest rates via QE would lead to runaway inflation and QT via high interest rates would lead inflation lower. Glad I came across Warren Mosler to show those out there how backwards this sounds. Yet, economists who still think high rates bring down inflation will tell you to give the rate hikes more time to work.
Stephanie, somehow you and other MMT theorists have got to get the attention our federal financial decision-makers. I know you're doing a lot, and informing us common citizens is good, but we can't do anything to turn this thing around: We have no power. Our representatives don't listen to us; besides, mine are Matt Gaetz, Rick Scott, Marco Rubio, and Governor Ron DeSantis, all of whom want to destroy government, not fix it.
I keep hoping that you'll get a platform in the NYTimes, WaPo, or even the Wall Street Journal, although they are all big businesses owned by billionaires, not the pals of working people. We're using the wrong macroeconomic model to fix our financial problems; until that stops, things will only worsen, and digging out of that hole will be that much harder.
With the insights of MMT, we have the latest and best charts to navigate out of these troubled waters, but if no one in the Commanding Heights uses them, they're worthless, like a cure for cancer that no medical professional will take advantage of.
I've even thought of large newspaper ads to get the MMT word out.