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Last weekend, I he wrote on Warren Mosler’s argument that the Fed’s rate hikes could be undermining its effort to reduce inflation. Although Mosler is a leading proponent of Modern Monetary Theory (MMT), the notion that “monetary tightening” (conventionally defined as central banks raising interest rates) could cause inflation to heat up it is not exclusive to MMT.

Mosler emphasizes the “interest income channel”, but it is not the only possible path from higher rates ==> higher inflation.

And while mainstream economists like Paul Krugman and Olivier Blanchard recognize the interest income channel, they don’t assign much power to it. Mosler does it. He points to the fact that rate hikes are fueling hundreds of billions of dollars additional income to bondholders. To give you an idea of ​​the numbers we’re talking about, here’s a passage last week’s post:

Compared to its May 2022 estimate, CBO now estimates that over the next 5 years, the federal government will pay a additional 644 billion dollars in net interest. This is not what will be paid in total during this period. That’s a whopping $3.879 trillion! The $644 billion is the additional amount of net interest that CBO believes the government will end up spending over the next 5 years, largely because of the Federal Reserve’s aggressive rate hikes.

And here’s a chart from Apollo chief economist Torsten Slok, who noted yesterday that interest payments on US Treasuries have doubled from about $1 billion a day before the pandemic to about $2 billion now.

Mosler points to the stock of US Treasuries held by the public, which last week stood at $24.62 trillion. “Debt held by the public” consists of Treasury bills, bonds, bonds, inflation-protected securities (TIPS), floating-rate bonds (FRNs), domestic series, foreign series, state and local series (SLGS), United States Savings securities and a portion of the Government Account Series (GAS) securities.

To be clear, the Fed is not pushing for rate hikes additional interest income in the hands of everyone which has a portion of the outstanding $24.62 thousand. But the rate goes up they are drive additional interest income some hands, and this has the potential to increase inflation. Westwood Capital Dan Alpert recently shown how investors capture a financial windfall by simply flipping short-term Treasuries in an era of rising interest rates.

For Mosler’s interest income channel to raise prices at the macro level, a substantial amount of that interest income would have to flow into the hands of people who turn around and spend it back into the economy. Here’s how the full $31.4 million (as of January 2023) holds up.

So the question is, where exactly is the additional interest income going, and how much of it is being spent in a way that supports aggregate demand in the United States? Mosler admits he doesn’t know, but he 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.