For those not aware, Stephanie Kelton writes a regular Substack column called The Lens.I think there is a paywall.
In the latest edition she notes:
At the macro level, the federal government is a net payer of interest, which means that the Fed's rate hikes work like expansionary fiscal policy in the sense that they translate into hundreds of billions of dollars in additional spending by the federal government.
She is right of course. In her customary way she then analyses what this means from an MMT perspective, noting along the way that:
As a reader of The Lens, you might be wondering, “Why do you care about the budgetary impacts? That seems inconsistent with MMT.” And you're right! I'm not writing this because I'm interested in the fiscal impacts of the rate hikes, per se. I have concerns with the distributional implications of the rate hikes, and I'm always concerned with inflation risk.
Again, Stephanie is right. These are the issues of concern.
Hiking interest rates boosts government spending. The money goes to the people with lowest spending multipliers but who are also likely to be price indifferent, and who will as a result willingly boost the price of big ticket items. Meanwhile, those on low incomes suffer austerity and the inflationary consequences.
Interest rate rises are welfare for the best off in more ways than one.
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This is all true. Interest paid in gilts is no different than payments for state pensions or Universal Credit in the sense that they all add money (reserves) into the system.
One can also observe that State Pensions are broadly stable/predictable over the economic cycle; Universal Credit has a damping effect on the cycle – ie. payments pick up as the economy falters and unemployment rises – which is a good thing.
Interest payments are the opposite – rising rates are a response to a need to drain money from the economy… but these higher rates are actually adding money to the economy.
It is clear that the impact of higher rates in terms of boosting the economy is trivial compared with the negative effect of higher interest payments for borrowers but it does raise serious distributional issues. Owners of gilts are getting rising income at the time when everyone else is being squeezed. Of course, it is not just about gilts, it is also about interest payable on reserves to the clearing banks – clearing banks that are reporting substantially higher profits due to higher rates (that are not ‘passed on’ to depositors).
However, we should not let setting interest rates be held hostage to distributional issues. Set interest rates according to policy objectives and use tax policy to deal with redistribution. The first step here would be equalizing tax on savings income with income from wages.
Much to agree with – especially the last point
I was shouting at the news about this this week when the banks were announcing their profits.
The media pretend the mechanism of raising rates is just some technocratic lever being pulled to dampen spending. But the money goes somewhere! It goes to the bloody bankers!
So much of the discourse in the UK is presented uncritically as neutral and technocratic by the media when it is deeply political and done by people who are well aware of the class implications.
The wealthy own assets.. property equity and bonds. All of these fall significantly when interest rates rise. So getting slightly more on deposits or lending is irrelevant in the face of falls in asset prices.
Don’t talk BS
The FTSE is at record highs
As are house prices
Bonds are down, I admit. But give them time
Don’t call again with nonsense of this sort
I am not sure I agree with this assertion.
Interest rate rises generally decrease asset values and create “income” which is generally taxed at a higher rate than “capital gain” (especially when those gains can often be deferred). Neither of these outcomes are ideal for the “best off”.
The only people who might want that interest rate rises are those who keep significant amounts of cash on deposit, which is more of an activity of the “better off” than the “best off”.
Stephanie Kelton kindly publishes a regular email to which one can subscribe without being required to contribute financially but in order to access further content one can choose to donate money.
Agreed.
And interests rate hikes for me at least are just a means of ensuring that those issuers of credit on existing lower rates don’t get left out – ah, bless.
It just ensures that credit issuers get their noses into the inflation gravy train.
It’s a con.
Robert Reich- another ‘robust’ blogger, backs you up.
His summary – the wealthy used to pay higher taxes to the government. Now the government pays the wealthy interest on their loans to finance a swelling debt that’s been caused largely by lower taxes on the wealthy.
and the whole article
https://www.theguardian.com/commentisfree/2023/feb/01/republicans-arent-going-to-tell-americans-the-real-cause-of-our-314tn-debt
He is right