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.
I insist nothing. MMT was known at the highest levels of the economic profession as recently as the 40s. Between then and now a mountain of lies was built with political intent and deceminated to us. Call it what you will but don’t deny the truth.
What's your evidence that MMT was known at the highest levels of the economic profession in the 1940s? (I believe you, but I'd like to see who they were exactly. John Kenneth Galbraith? Keynes himself?) Thanks for responding!
Right. Serious inflation tends to always come from somewhere else than $ supply, it's almost always a cost-push, a real degradation of the productivity of a unit hour of labour (or whatever anchors prices). Such as a war? Pandemic? War reparations? Farming collapse? (Yes, to all those.) The increase in $ supply then follows, as an effect, not a cause. The high nominal rates support the higher price level (regressive, via trickle-down it must be said), and the real interest rate (inflation adjusted rate) is usually not very high. The better way to support a decline in production/supply is to boost lower wages by employing people in non-bullsh*t jobs.
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.
Treasury interest is paid, largely, to financial firms and banks. That means, at least, greater profit. Those extra income profits are distributed by, say, share buyback. Since share buybacks are from people who are selling shares so they can spend it on something else, and they end up getting more for their shares than they otherwise would, you have more money in circulation than there otherwise would be (plus an alternative buyer with money who was outbid by firm buying back who now has to buy something else).
Unless that is offset completely by dynamic increases in taxation from transaction taxes, then you have more money chasing the same amount of output.
It may matter with the type of financial institution receiving the interest. In my country, Canada, my pensions all increased their monthly payout to me and many of my friends giving us the ability to spend on goods and services. These are defined benefit pensions received by many ordinary -- maybe not so ordinary -- citizens. For example, the mandated universal Canada Pension Plan (CPP) receives huge amounts of payroll transfers every two weeks and while I am not sure of how those funds get managed, I would imagine they are invested in bonds bearing interest until the money managers of CPP can make decisions about investing those revenues in the private sector.
Now as a landlord I can increase the rent paid by tenants thus limiting their income by higher rent, and increasing my income. The higher rent then contributes to the higher rental costs that are part of the inflation spiral. My floating mortgage interest rate increases causing a higher transfer to the banksters and thus their shareholders. Those deposits to the banksters also lead to higher interest payments on the bonds they hold with the central bank as required offsets to maintain their equity in the black. If any of those institutions increase their pay to their employees because of inflation, then that group of employees have more money to spend back into the economy -- they will spend it on higher rents, mortgage costs and maybe food and energy (if there is anything left over after they have made their higher payments to the rentier class).
All of this complexity seems to be a cost factor and thus an input to higher prices one way or the other. Are we calling these improved costs associated with improved features and hence higher prices inflation? You pay more but allegedly get more. And add in the local government tax and fee costs (not federal because they are not paid for by taxes) to product manufacturers and delivery to suppliers or merchants. I know that the so-called basket of goods of the CPI is supposed to take these differences into account but can they?
That leads to another hypothesis -- namely not all price increases are inflationary. Any new vehicle you buy today is infinitely more complex and costly than the original Model T. Even more complex than the vehicles I owned manufactured in the 50s and purchased by me as used vehicles in the 60s. A simple and obvious example is mandated seatbelts and other safety/environmental features but also the computer systems. So you get more today/pay more for basically a product that does the same thing -- namely move people and goods from one place to another. Only now I cannot repair or service it the way I could my 50s vehicles. I need to pay more for my vehicles to be serviced than I used to pay when I could do it myself.
And then there is another example in computers. The first PC computer I bought cost me over $2000 in 1986 and had few capabilities. I can purchase a PC now for $500-1000 (presumably with money said to be worth much less than in 1986) with exponentially greater capabilities. Yet they are both more complex yet less costly in many ways thus challenging the complexity as inflationary thesis. And then that leads to another question which is the value of money itself. I believe that is a mistake because it is so easily created and destroyed so it is best thought of as a measure of value as opposed to a storage of value (except temporarily to allow assets and liabilities to be transferred about -- settling units of account). This also has implications for the concept of money supply and its growth as a factor in conventional notions of inflation.
I could go on but have decided to stop here because my head is starting to hurt! Lol
Here's one that seems to be overlooked, which I heard from L. Randall Wray. The CPI (and other measures) include housing as a component, with owned home cost being an imputed rent. This means even if you own your home, they imagine that your cost is if you were paying rent, making everyone appear as subject to the same market pressures.
What does this mean for inflation? The Fed raises interest rates, which affect costs of mortgages and construction, which push up the cost of buying a house. The cost of buying increases the CPI because housing is a component. Now maybe you can see the positive feedback loop that the Fed (and most economists) are totally blind to.
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.
"Other" would be individuals who have enough "spare cash" to invest. They want to reduce the effect of inflation on their money during it's "store of wealth" phase.
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.
Yes, but that doesn't mean we necessarily need more complex analysis. What we really need is to identify the key applied concept, that is, the current monetary and financial paradigm, and then using the signatures of all historical paradigm changes discover the new paradigm concept and its applications.
I'm not here to slam anybody's valid research and stated reforms, only to promote a pattern change, ney a mega-paradigm change in this case, because, being an entire pattern change, it will include all of the goals of those reforms that align with the new concept.
Completely agree. Studying and identifying the complexities helps to focus on the current problematic operant concept like MMT and the other reformers I've refered to here have done.
But the irony is the key to perceiving paradigms is simplicity as paradigms, like wisdom insights, are single concepts that are deep simplicities.
So we have Modern MONETARY Theory. We have Steve Keen saying its all about "money, debt and banking" We have UBI. We have Public Banking. That's why I have said the current paradigm is Debt as in burden to repay ONLY. The word ONLY designates the paradigm as a monopoly concept.
We know from history that past new paradigms have always been in complete conceptual opposition to the current one. That's why Direct and Reciprocal Monetary Gifting is the new concept. We also know that they invert current problematic temporal universe realities and destroy orthodoxies surrounding the current paradigm. That's why a 50% Discount/Rebate policy at retail sale is the breakthrough exact applied expression of the new concept because it changes the temporal universe reality of erosive inflation into beneficial price and asset deflation, and destroys the orthodoxy of the quantity theory of money.
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.
You were lied to. Everyone who studied Economics was lied to. ☹️
Well, not lied to, probably just misinformed. Economics was, and still is, a work in progress, no?
Well that’s the nice way of looking at it 🫠
You mean that you insist that macroeconomists of the recent past knew the truths of their subject, but purposely distorted them when teaching them?
My view is that they were ignorant, not evil.
I insist nothing. MMT was known at the highest levels of the economic profession as recently as the 40s. Between then and now a mountain of lies was built with political intent and deceminated to us. Call it what you will but don’t deny the truth.
What's your evidence that MMT was known at the highest levels of the economic profession in the 1940s? (I believe you, but I'd like to see who they were exactly. John Kenneth Galbraith? Keynes himself?) Thanks for responding!
Right. Serious inflation tends to always come from somewhere else than $ supply, it's almost always a cost-push, a real degradation of the productivity of a unit hour of labour (or whatever anchors prices). Such as a war? Pandemic? War reparations? Farming collapse? (Yes, to all those.) The increase in $ supply then follows, as an effect, not a cause. The high nominal rates support the higher price level (regressive, via trickle-down it must be said), and the real interest rate (inflation adjusted rate) is usually not very high. The better way to support a decline in production/supply is to boost lower wages by employing people in non-bullsh*t jobs.
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.
Treasury interest is paid, largely, to financial firms and banks. That means, at least, greater profit. Those extra income profits are distributed by, say, share buyback. Since share buybacks are from people who are selling shares so they can spend it on something else, and they end up getting more for their shares than they otherwise would, you have more money in circulation than there otherwise would be (plus an alternative buyer with money who was outbid by firm buying back who now has to buy something else).
Unless that is offset completely by dynamic increases in taxation from transaction taxes, then you have more money chasing the same amount of output.
It may matter with the type of financial institution receiving the interest. In my country, Canada, my pensions all increased their monthly payout to me and many of my friends giving us the ability to spend on goods and services. These are defined benefit pensions received by many ordinary -- maybe not so ordinary -- citizens. For example, the mandated universal Canada Pension Plan (CPP) receives huge amounts of payroll transfers every two weeks and while I am not sure of how those funds get managed, I would imagine they are invested in bonds bearing interest until the money managers of CPP can make decisions about investing those revenues in the private sector.
Now as a landlord I can increase the rent paid by tenants thus limiting their income by higher rent, and increasing my income. The higher rent then contributes to the higher rental costs that are part of the inflation spiral. My floating mortgage interest rate increases causing a higher transfer to the banksters and thus their shareholders. Those deposits to the banksters also lead to higher interest payments on the bonds they hold with the central bank as required offsets to maintain their equity in the black. If any of those institutions increase their pay to their employees because of inflation, then that group of employees have more money to spend back into the economy -- they will spend it on higher rents, mortgage costs and maybe food and energy (if there is anything left over after they have made their higher payments to the rentier class).
All of this complexity seems to be a cost factor and thus an input to higher prices one way or the other. Are we calling these improved costs associated with improved features and hence higher prices inflation? You pay more but allegedly get more. And add in the local government tax and fee costs (not federal because they are not paid for by taxes) to product manufacturers and delivery to suppliers or merchants. I know that the so-called basket of goods of the CPI is supposed to take these differences into account but can they?
That leads to another hypothesis -- namely not all price increases are inflationary. Any new vehicle you buy today is infinitely more complex and costly than the original Model T. Even more complex than the vehicles I owned manufactured in the 50s and purchased by me as used vehicles in the 60s. A simple and obvious example is mandated seatbelts and other safety/environmental features but also the computer systems. So you get more today/pay more for basically a product that does the same thing -- namely move people and goods from one place to another. Only now I cannot repair or service it the way I could my 50s vehicles. I need to pay more for my vehicles to be serviced than I used to pay when I could do it myself.
And then there is another example in computers. The first PC computer I bought cost me over $2000 in 1986 and had few capabilities. I can purchase a PC now for $500-1000 (presumably with money said to be worth much less than in 1986) with exponentially greater capabilities. Yet they are both more complex yet less costly in many ways thus challenging the complexity as inflationary thesis. And then that leads to another question which is the value of money itself. I believe that is a mistake because it is so easily created and destroyed so it is best thought of as a measure of value as opposed to a storage of value (except temporarily to allow assets and liabilities to be transferred about -- settling units of account). This also has implications for the concept of money supply and its growth as a factor in conventional notions of inflation.
I could go on but have decided to stop here because my head is starting to hurt! Lol
Here's one that seems to be overlooked, which I heard from L. Randall Wray. The CPI (and other measures) include housing as a component, with owned home cost being an imputed rent. This means even if you own your home, they imagine that your cost is if you were paying rent, making everyone appear as subject to the same market pressures.
What does this mean for inflation? The Fed raises interest rates, which affect costs of mortgages and construction, which push up the cost of buying a house. The cost of buying increases the CPI because housing is a component. Now maybe you can see the positive feedback loop that the Fed (and most economists) are totally blind to.
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?
"Other" would be individuals who have enough "spare cash" to invest. They want to reduce the effect of inflation on their money during it's "store of wealth" phase.
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.
Yes, but that doesn't mean we necessarily need more complex analysis. What we really need is to identify the key applied concept, that is, the current monetary and financial paradigm, and then using the signatures of all historical paradigm changes discover the new paradigm concept and its applications.
I'm not here to slam anybody's valid research and stated reforms, only to promote a pattern change, ney a mega-paradigm change in this case, because, being an entire pattern change, it will include all of the goals of those reforms that align with the new concept.
By the way, I'm in Phoenix myself.
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.
Completely agree. Studying and identifying the complexities helps to focus on the current problematic operant concept like MMT and the other reformers I've refered to here have done.
But the irony is the key to perceiving paradigms is simplicity as paradigms, like wisdom insights, are single concepts that are deep simplicities.
So we have Modern MONETARY Theory. We have Steve Keen saying its all about "money, debt and banking" We have UBI. We have Public Banking. That's why I have said the current paradigm is Debt as in burden to repay ONLY. The word ONLY designates the paradigm as a monopoly concept.
We know from history that past new paradigms have always been in complete conceptual opposition to the current one. That's why Direct and Reciprocal Monetary Gifting is the new concept. We also know that they invert current problematic temporal universe realities and destroy orthodoxies surrounding the current paradigm. That's why a 50% Discount/Rebate policy at retail sale is the breakthrough exact applied expression of the new concept because it changes the temporal universe reality of erosive inflation into beneficial price and asset deflation, and destroys the orthodoxy of the quantity theory of money.
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)