High Interest Rates Stoking Inflation?

Economists are now blaming the fact that the wealthy are getting more interest income from their fixed income assets and spending that extra income, stoking inflation.

https://thehill.com/business/4612114-could-interest-rate-hikes-be-keeping-inflation-high/

{{ Inflation began a rapid descent in the middle of 2022 but has remained above 3 percent for nearly a year, ticking up to 3.5 percent in March. Some experts are now questioning the logic behind rate hikes and asking if they may even be stimulating the economy toward further growth rather than slowing it down.

For that to work, the extra money made in the form of interest income from higher rates would need to be making its way back into the economy through consumer spending, thereby adding more fuel to price increases.

Investors and wealth managers say they’re seeing the signs.

“It’s people who have piles of cash that are generating more cash faster than they can spend it,” Ritholtz Wealth Management CEO Josh Brown said on CNBC last week. }}

Forty years of trickle down economics has turned conservative economic theory on its head. {{ LOL }}

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Makes sense. If the risk free return is over 5%, what is the worry over inflation at 3.5%?

If valid, than an increase in rates will likely only make that disparity worse.

Sure seems like a clear sign that fiscal tightening is needed and not more monetary tightening. Fat chance that happening any time soon.

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Doesn’t make sense. 5.2% in a treasury bill is about 3.6% after taxes, so it barely keeps up with inflation.

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Not if you’re spending it on a tax-deductible item like a Four Seasons or Fairmont-branded luxury assisted living facility. {{ LOL }}

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Erdogan always knew.

Someone should tell him that his superior views on this topic have finally been vindicated, before more damage is done by ignorant central bankers:

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Psst! Don’t you know it’s an election year!

What is 120% debt to GDP anyway - might be unsustainable for inferior nations, but this is the US. And someone keeps buying that debt, even if the Fed isn’t.

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Good news that. I notice the Fed balance sheet debt has decreased some 18% from the post-pandemic high. Slow progress, but progress.

DB2

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Man, your tax rates suck. :stuck_out_tongue: My effective rate would give me a yield over 4%.

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LOL. The discussion was about “the wealthy”, they’re almost always in a higher marginal tax bracket than 24%.

Unless all their income is from treasury bills, this wouldn’t be true. And since they are “the wealthy”, it’ll never be true because at the margin, they are still paying income taxes on every marginal dollar that they receive in interest. Not to mention that those things aren’t tax deductible from dollar one anyway, only the portion that is attributable to medical expenses, and only the amount over 7.5% of AGI is deductible. So again, it mostly wouldn’t apply to “the wealthy”.

Only if they are doing something wrong. The truly wealthy don’t often pay the highest effective rate.

One such example:
How Much Bill Gates Pays in Property Taxes on His Many Homes.

Relevant snip:

his annual federal income tax rate was 18.4%

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Marginal rates are different than average rates. Furthermore, marginal rates on interest income (“ordinary” income) are different than marginal rates on capital gains income. It doesn’t take much to be in the 32% (or 35% or 37%) marginal brackets for ordinary income. Pretty much any “wealthy” person with a lot of treasury bill interest would be there.

Finally, Bill Gates is not a typical wealthy person anyway. That’s because his plan is to give away almost all his wealth over his remaining years. So he (along with a few others like Warren Buffett) gives away* very large sums each year which offsets the vast majority of his/their income.

* They give away the money each year by a simple transfer of money (or shares) from their personally owned accounts to their foundation owned accounts.

The debt instruments in particular US treasury paper underpin our economic growth.

US corporations are upping profit margins. That will increase competition in the long run. We are running from capitalizing our corporations into a more competitive economy.

Demand-side economics is not expedient. The consequential concepts are global.

Supply-side economics is expedient. The consequences are not a benefit to our country.