MMT sees interest rate changes as unnecessary. When they are changed they are changed for political distributional purposes, not for economic stability purposes, as Bill Mitchell explains
Of course, the interest rate increases are unnecessary – just ask the Bank of Japan which has held to its low rates since this supply-side inflationary episode started and also seen the fiscal authorities hand out cash to households and firms to get them through the cost-of-living crisis.
I wonder why none of the journalists out there are inclined to ask the RBA governor to compare his record with that of the Bank of Japan’s record?
Then Bill moves onto the theory behind the MMT view
I note that there is discussions out on the Internet about the split between Warren’s current position on monetary policy and inflation and the view held by the so-called MMT academics (which must include yours truly).
The point is that there is no single – applies in all situations – MMT rule on this.
In general, MMT economists note that monetary policy that relies on interest rate adjustments is uncertain in impact because, in part, it relies on distributional consequences whose net outcomes are ambiguous.
Creditors gain, borrowers lose.
How does that net out?
Not sure.
We also point to the likelihood that interest rate increases will have inflationary impacts via the impact on business costs and landlord borrowing costs.
But, there is some nuance that has to be applied when considering temporality – that is, the impacts over time.
The crude version of the ‘split’ is that Warren believes the interest rate increases are in actual fact expansionary because they are prompting a fiscal policy expansion via the interest payments on the outstanding debt.
In our discussions in Kyoto, I outlined my position (the ‘academic’ position) like this.
- No-one really knows whether the winners from the interest rate rises will spend more than the losers cut back spending.
The evidence is that wealth effects on consumption spending are relatively low when compared to the income effects.
But there are many complications – such as saving buffers etc – that make it hard to be definitive.
- In the immediate period after the interest rate rises, the spending responses from debtors is likely to be restrained because they have capacity to absorb the squeeze by adjusting their wealth portfolios (run down savings etc).
And, at that temporal period, the interest rate rises are likely to be inflationary as businesses pass on their increased borrowing costs in the form of higher prices, and, as noted above, landlords pass on their higher mortgage servicing costs as higher rents, which, in turn, feed into the CPI figure.
- But in the medium- to longer term, if interest rate rises move past some threshold, the impact is to slow spending and increase unemployment.
Eventually, those who benefit from the interest rate increases, who typically have a lower marginal propensity to consume (how much they spend out of every extra $ received), run out of things to buy and pocket the bonuses.
And eventually, the spending cuts from the debtors, particularly lower income mortgage holders, begins to dominate.
The Australian data clearly demonstrates this temporal effect.
The problem is that when a nation reaches this point, given the delays in data publication etc, the damage is already done.
So in trying to understand these different accounts we have to appreciate several things, which includes:
The level of household debt – the higher the debt, the more the negative impacts of the interest rate rises will be on spending.
The proportion of population that has mortgage debt – the higher the proportion the more likely it is that the medium- to longer-term effects will become dominant.
Crucially, the proportion of mortgage debt that is fixed rate compared to variable rate.
This last consideration is important in understanding why we might consider the dynamics of interest rate rises in the US (which is the basis of Warren’s conjectures) to be different to elsewhere.
We have to remember that in the US long term fixed rate mortgages dominate. In the UK shorter term fixed rate mortgages dominate. However in Australia variable rate mortgages are still the norm. That changes the dynamics, as Bill explains:
If you consider those differences, then we can see why the conduct of the Federal Reserve Bank at present is not likely to generate recession.
The debt levels in the US are relatively high by historical standards, the outstanding mortgages are mostly fixed rate over long durations and held by those further up the income distribution, which means that the rising interest rates are less likely to cause major spending cutbacks from mortgage holders.
Then the higher incomes that the wealth holders gain from the Federal Reserve rate hikes dominate.
But consider Australia […] where the vast majority of mortgages are variable rate and more likely to be held by low-income families, then the rising mortgage payments will squeeze disposable income and ultimately a bust occurs.
Bill concludes:
So there is no ‘split’ within the MMT ranks on this issue.
The difference in outlook in the present situation relates to the different circumstances that can arise across nations.
One always has to be careful when appraising a situation not to apply a ‘one-size-fits-all’ analysis.
The world is complex and the nuances are important.
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