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 add to inflationary pressures isn’t unique to MMT.
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.
Prof. Kelton and Warren Mosler are infinitely smarter about this stuff than I am. But, perhaps for that reason, I've got questions. Especially this one: What, exactly, would be the channels through which interest paid on Treasury debt would generate inflation? The only two I can think of are these: Interest income gets withdrawn from the Treasury debt market (as opposed to being reinvested in that market) and invested either in speculative commodity markets or speculative real estate markets, where a sudden influx of "excess" cash could be used to bid up prices. (These are the only two markets I can really think of that function like auctions where prices can be "bid up" in a way that would generate inflation in the prices of goods and services).
I'm guessing that some empirical evidence could help clarify this situation. I simply have no idea about what it would be and how you'd develop it. Is there some way to tease out from market data evidence of a significant transfer of interest income to commodities or bonds? Or is there even some anecdotal evidence -- like rich folks saying, "Heck yeah, I'm using my interest income to bid up the prices on wheat and foreclosed properties"?
I suppose I could try to figure this out for myself, but I'd almost certainly fail.
Warren refers to the Bank of Canada early in the video. In the 80s when the other Trudeau allowed the Bank of Canada to adopt monetarism, I wrote to the other Trudeau and said that raising interst rates to fight inflation was like throwing gasoline on a fire to put it out.
Since then I have pointed out that it is a massive transfer of assets (interest rates on debts and mortgages) from ordinary citizens to the well-off that Mosler says here are the ones who do not need the increase in assets.
Seems to me bond interest would be like tax breaks to the rich--maybe a bit of inflation pressure, but the income is reinvested more than spent. Certainly horribly regressive. Of course more money invested causes bubbles in real estate, stock market, startup valuations and whatever other horrible things PE firms do. :/
This talk would be more credible if the trivial task of comparing interest income channel "profit" vs. household debt interest rate "loss" had been performed.
~$30T of Treasuries (but what % maturing/rolled over per year?) vs. the 12% of the $19T of mortgage loans that are ARM, vs. credit card debt ($0.93T) vs. corporate debt (~$24T, also what % rolling over?) vs. auto loan debt ($1.5T).
Net net - not the least bit clear that the "income" from the interest rate channel is greater than the "loss" due to higher interest rates.
One trouble with most economics, including this analysis, is the tendency to look at one factor at a time. As Herb Simon and Oliver Williamson explain, that is due to limited rationality, but it still means that we don’t get the whole picture. This demand side analysis looks at one part of increased income, while ignoring that existing owners of bonds paying lower interest rates have capital losses (and the tendancy for the values of equities to fall when the Fed increases rates). But more importantly, it ignores supply side effects entirely. For example, increasing interest rates decreases the willingness for housing developers to build new housing at a time when increases in the price of housing are the most significant component of current inflation. This can’t help decrease inflation, which at the current time appears to be more supply side driven. That said, it is still important to note the correctness of Prof. Mosler’s point.
The major effect of hiking interest rates would thus be to exaggerate inequality. The purpose of government, it would seem, is to make the rich richer.
The "interest rate channel" as an influence on demand is in the realm of micro-economics. What does MMT really say about marginal propensity to consume? Demand curves and supply curves? Please enlighten me. This whole discussion of "interest rate channel seems of third-order importance to aggregate demand.
The net effect on the economy of higher interest rates will be the increased marginal consumption from higher interest rates (largely among top 1%) minus the decreased marginal consumption (the bottom 99%). The net effect is pretty obvious.
The "interest rate channel" seems to be a variant of the now-totally-discredited "wealth effect." Consider a well-understood principle of micro-economics: diminishing returns. The more wealth you have, the less the next increment of wealth --whether it's interest or asset inflation --is going to make a difference on the margin. If a rich person wants a Rolex or fancy vacation, he/she won't look at the latest financial statement on interest earned before making that decision.
On the other hand, higher interest rates will impact propensity to spend by the bottom 99%, particularly on interest-sensitive sectors like cars and homes.
One would think that if the interest rate channel was significant, there would be an increase in the prices of Rolex's (at the very least) due to higher demand. I think it's well proven that the opposite occurs: the prices of high-end asset valuations go down with higher interest rates. If the Rolex buyers are influenced by interest rates at all, they'll wait for the prices to come down, as they will in the secondary market as a lot of ponzi owners of Rolex's dump their watches in a downturn.
"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."
Well, no it wouldn't, if it paid for the shutting-off of supply, which is one major use for money (albeit a bit dated, as example, eighties-style M&A), the efforts to do so might appear as a "relative value story" in the financial markets, but does that count as "spending back into the economy."
To the contrary, when investors and businesses spend IN to the economy, it means primarily supply with "demand" as only a secondary meaning. A lot of price-lowering supply is ready-to go and just takes stimulus. But you always say this kind of thing and no doubt will bring it up this time too when I go back to finish your Substack.
How much of interest income (on treasuries) is being spent on aggregate demand? Warren Mosler, one of my heroes, says he doesn't know. "But it's not zero." C'mon Warren, that answer is too slick by half.
"Soft Currency Economics II" was a slap upside my thick skull. Mosler argued persuasively that the Fed doesn't sell treasuries to "borrow" money (a ridiculous concept when you realize the US gov't can create "out of thin air" all the money it needs to pay its bills), but rather it does so to remove excess currency from the banking system to maintain its target interest rate. Why that target interest rate isn't zero (you don't actually need a "target," just let money do its thing and we'll eventually--by virtue of sheer logic--get to a zero interest rate) is a story for another day. What makes Mosler a hero is that he was a guy embedded in the trenches of high finance and hedge funds and saw something that no one else had figured out. And he had the balls to say so.
So I, for one, would rather hear Mosler say: "I don't know how much interest income is being spent on aggregate demand, and it's a fucking scandal that I can't find that out!" People like Mosler, Kelton and Wray constitute our best bet of figuring this stuff out. They are some of the smartest people on the planet. Now if they would just be more aggressive...
If this hypothesis is correct, why didn't Volker's extraordinary interest rate hikes fuel inflation? The Fed in 1979 - 1982 pushed Fed Funds rates up roughly 1300 bps in mere months. Inflation rapidly declined thereafter. This analysis seems to assume that interest rates on existing debt will rise with the Fed funds rate but that's not true except for TIPS. Most outstanding Treasury debt has a fixed coupon; the interest payment does not change. Only new issuance will have higher rates. Sure, people will get more interest on new issues but they are already paying much higher prices for goods & services. Inflation-adjusted spending will be little changed.
Today's inflation accelerated well before the first Fed Funds increase. If keeping interest rates low helps control inflation, there would be no reason to contemplate a 5% effective Fed Funds rate now. This hypothesis appears to totally without merit.
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.
Prof. Kelton and Warren Mosler are infinitely smarter about this stuff than I am. But, perhaps for that reason, I've got questions. Especially this one: What, exactly, would be the channels through which interest paid on Treasury debt would generate inflation? The only two I can think of are these: Interest income gets withdrawn from the Treasury debt market (as opposed to being reinvested in that market) and invested either in speculative commodity markets or speculative real estate markets, where a sudden influx of "excess" cash could be used to bid up prices. (These are the only two markets I can really think of that function like auctions where prices can be "bid up" in a way that would generate inflation in the prices of goods and services).
I'm guessing that some empirical evidence could help clarify this situation. I simply have no idea about what it would be and how you'd develop it. Is there some way to tease out from market data evidence of a significant transfer of interest income to commodities or bonds? Or is there even some anecdotal evidence -- like rich folks saying, "Heck yeah, I'm using my interest income to bid up the prices on wheat and foreclosed properties"?
I suppose I could try to figure this out for myself, but I'd almost certainly fail.
Warren refers to the Bank of Canada early in the video. In the 80s when the other Trudeau allowed the Bank of Canada to adopt monetarism, I wrote to the other Trudeau and said that raising interst rates to fight inflation was like throwing gasoline on a fire to put it out.
Since then I have pointed out that it is a massive transfer of assets (interest rates on debts and mortgages) from ordinary citizens to the well-off that Mosler says here are the ones who do not need the increase in assets.
That’s a cool looking area chart but a %YoY would highlight where the growth was
Just eyeballing, it looks like “Other” has doubled while the rest have remained constant
Who exactly is included in “Other” then?
Seems to me bond interest would be like tax breaks to the rich--maybe a bit of inflation pressure, but the income is reinvested more than spent. Certainly horribly regressive. Of course more money invested causes bubbles in real estate, stock market, startup valuations and whatever other horrible things PE firms do. :/
This talk would be more credible if the trivial task of comparing interest income channel "profit" vs. household debt interest rate "loss" had been performed.
~$30T of Treasuries (but what % maturing/rolled over per year?) vs. the 12% of the $19T of mortgage loans that are ARM, vs. credit card debt ($0.93T) vs. corporate debt (~$24T, also what % rolling over?) vs. auto loan debt ($1.5T).
Net net - not the least bit clear that the "income" from the interest rate channel is greater than the "loss" due to higher interest rates.
Thanks. It is an interesting perspective.
One trouble with most economics, including this analysis, is the tendency to look at one factor at a time. As Herb Simon and Oliver Williamson explain, that is due to limited rationality, but it still means that we don’t get the whole picture. This demand side analysis looks at one part of increased income, while ignoring that existing owners of bonds paying lower interest rates have capital losses (and the tendancy for the values of equities to fall when the Fed increases rates). But more importantly, it ignores supply side effects entirely. For example, increasing interest rates decreases the willingness for housing developers to build new housing at a time when increases in the price of housing are the most significant component of current inflation. This can’t help decrease inflation, which at the current time appears to be more supply side driven. That said, it is still important to note the correctness of Prof. Mosler’s point.
I have no disagreement that we need new paradigms, but that doesn’t mean we don’t need to understand the complexities of the facts.
The major effect of hiking interest rates would thus be to exaggerate inequality. The purpose of government, it would seem, is to make the rich richer.
The "interest rate channel" as an influence on demand is in the realm of micro-economics. What does MMT really say about marginal propensity to consume? Demand curves and supply curves? Please enlighten me. This whole discussion of "interest rate channel seems of third-order importance to aggregate demand.
The net effect on the economy of higher interest rates will be the increased marginal consumption from higher interest rates (largely among top 1%) minus the decreased marginal consumption (the bottom 99%). The net effect is pretty obvious.
The "interest rate channel" seems to be a variant of the now-totally-discredited "wealth effect." Consider a well-understood principle of micro-economics: diminishing returns. The more wealth you have, the less the next increment of wealth --whether it's interest or asset inflation --is going to make a difference on the margin. If a rich person wants a Rolex or fancy vacation, he/she won't look at the latest financial statement on interest earned before making that decision.
On the other hand, higher interest rates will impact propensity to spend by the bottom 99%, particularly on interest-sensitive sectors like cars and homes.
One would think that if the interest rate channel was significant, there would be an increase in the prices of Rolex's (at the very least) due to higher demand. I think it's well proven that the opposite occurs: the prices of high-end asset valuations go down with higher interest rates. If the Rolex buyers are influenced by interest rates at all, they'll wait for the prices to come down, as they will in the secondary market as a lot of ponzi owners of Rolex's dump their watches in a downturn.
"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."
Well, no it wouldn't, if it paid for the shutting-off of supply, which is one major use for money (albeit a bit dated, as example, eighties-style M&A), the efforts to do so might appear as a "relative value story" in the financial markets, but does that count as "spending back into the economy."
To the contrary, when investors and businesses spend IN to the economy, it means primarily supply with "demand" as only a secondary meaning. A lot of price-lowering supply is ready-to go and just takes stimulus. But you always say this kind of thing and no doubt will bring it up this time too when I go back to finish your Substack.
How much of interest income (on treasuries) is being spent on aggregate demand? Warren Mosler, one of my heroes, says he doesn't know. "But it's not zero." C'mon Warren, that answer is too slick by half.
"Soft Currency Economics II" was a slap upside my thick skull. Mosler argued persuasively that the Fed doesn't sell treasuries to "borrow" money (a ridiculous concept when you realize the US gov't can create "out of thin air" all the money it needs to pay its bills), but rather it does so to remove excess currency from the banking system to maintain its target interest rate. Why that target interest rate isn't zero (you don't actually need a "target," just let money do its thing and we'll eventually--by virtue of sheer logic--get to a zero interest rate) is a story for another day. What makes Mosler a hero is that he was a guy embedded in the trenches of high finance and hedge funds and saw something that no one else had figured out. And he had the balls to say so.
So I, for one, would rather hear Mosler say: "I don't know how much interest income is being spent on aggregate demand, and it's a fucking scandal that I can't find that out!" People like Mosler, Kelton and Wray constitute our best bet of figuring this stuff out. They are some of the smartest people on the planet. Now if they would just be more aggressive...
If this hypothesis is correct, why didn't Volker's extraordinary interest rate hikes fuel inflation? The Fed in 1979 - 1982 pushed Fed Funds rates up roughly 1300 bps in mere months. Inflation rapidly declined thereafter. This analysis seems to assume that interest rates on existing debt will rise with the Fed funds rate but that's not true except for TIPS. Most outstanding Treasury debt has a fixed coupon; the interest payment does not change. Only new issuance will have higher rates. Sure, people will get more interest on new issues but they are already paying much higher prices for goods & services. Inflation-adjusted spending will be little changed.
Today's inflation accelerated well before the first Fed Funds increase. If keeping interest rates low helps control inflation, there would be no reason to contemplate a 5% effective Fed Funds rate now. This hypothesis appears to totally without merit.
Imagine a shopkeeper with a variable rate mortgage.
When their interest expenses go through the roof; what are they going to do?
(Spoiler alert: Increase prices => inflation)