1. "Interest payments = money out from the government and into the hands of citizens and corporations (and foreign governments). Taxes = money out of the hands of citizens and corporations and into the government. Interest is a cost, taxes are revenue, and they both impact the bottom line (the fiscal surplus or deficit) the same."
This sentence sounds like MMT. Obviously MMT got politicized but the core insight (monetary & fiscal policy are two sides of the same coin) is valuable and explains the 2010s well: QE was printing money and giving it to rich people who have a high marginal propensity to save so why can't the government instead print money and give it to poor people who have a high marginal propensity to consume. The answer turned out to be that nobody minds asset price inflation, but people do mind goods price inflation.
2. "Think about it: negative rates slowly destroy the wealth of bondholders, i.e. savers, the wealthiest of us being the primary among them. At the same time, they allow the government to borrow at negative real costs to finance social programs. In this way, negative interest rates are functionally the same as a wealth tax. They are both mechanisms for redistributing wealth from the rich to the poor and middle class."
The distinction between performance-to-date and go-forward performance is such a simple distinction that gets lost in a lot of financial writing- most often in ESG debates. In 2021 you had all these articles saying "ESG portfolios have outperformed" citing performance-to-date driven by higher present values due to lower forward-looking discount rates, and obviously inverse for coal assets etc which had been crushed on a PV basis and were trading cheap on a go-forward basis. But for some reason even sophisticated financial writers like Matt Levine seem to get tripped up and confused by the distinction.
I had not thought of it before with respect to Fed policy but it's a really important distinction: low rates benefit old people who already have amassed wealth whereas high rates benefit young people who are just beginning to invest. This is the argument QE of the 2010s pulled forward a decade of investment returns and forced younger generations to start investing at much less attractive price levels.
3. "If debt to GDP were lower I think the economy would better be able to tolerate higher taxes, increased social programs, and higher inflation and interest rates. But with debt to GDP of 130%, I don’t think the economy can tolerate high interest rates for any meaningful length of time because debt service costs will compound and begin to crowd out all other spending."
In the long-run this is probably true ("meaningful length of time") and part of the logic behind why high rates should slow the economy, but in the short-run we could see the government just run higher deficits to counteract Fed policy ... I am with you that the endgame here probably has to be some kind of inflation (probably hidden) to dig out of the hole.
I need to learn more about MMT. I bought the Kelton book but haven't read it yet.
"Low rates benefit old people who already have amassed wealth whereas high rates benefit young people who are just beginning to invest. This is the argument QE of the 2010s pulled forward a decade of investment returns and forced younger generations to start investing at much less attractive price levels."
Exactly. This is why I am fond of saying that the biggest risk to most investors (still working, earning and saving) is not a market crash or even a "lost decade" but rather a perpetually expensive stock market that never affords ample opportunity to invest at attractive expected forward rates of return.
1. "Interest payments = money out from the government and into the hands of citizens and corporations (and foreign governments). Taxes = money out of the hands of citizens and corporations and into the government. Interest is a cost, taxes are revenue, and they both impact the bottom line (the fiscal surplus or deficit) the same."
This sentence sounds like MMT. Obviously MMT got politicized but the core insight (monetary & fiscal policy are two sides of the same coin) is valuable and explains the 2010s well: QE was printing money and giving it to rich people who have a high marginal propensity to save so why can't the government instead print money and give it to poor people who have a high marginal propensity to consume. The answer turned out to be that nobody minds asset price inflation, but people do mind goods price inflation.
2. "Think about it: negative rates slowly destroy the wealth of bondholders, i.e. savers, the wealthiest of us being the primary among them. At the same time, they allow the government to borrow at negative real costs to finance social programs. In this way, negative interest rates are functionally the same as a wealth tax. They are both mechanisms for redistributing wealth from the rich to the poor and middle class."
The distinction between performance-to-date and go-forward performance is such a simple distinction that gets lost in a lot of financial writing- most often in ESG debates. In 2021 you had all these articles saying "ESG portfolios have outperformed" citing performance-to-date driven by higher present values due to lower forward-looking discount rates, and obviously inverse for coal assets etc which had been crushed on a PV basis and were trading cheap on a go-forward basis. But for some reason even sophisticated financial writers like Matt Levine seem to get tripped up and confused by the distinction.
I had not thought of it before with respect to Fed policy but it's a really important distinction: low rates benefit old people who already have amassed wealth whereas high rates benefit young people who are just beginning to invest. This is the argument QE of the 2010s pulled forward a decade of investment returns and forced younger generations to start investing at much less attractive price levels.
3. "If debt to GDP were lower I think the economy would better be able to tolerate higher taxes, increased social programs, and higher inflation and interest rates. But with debt to GDP of 130%, I don’t think the economy can tolerate high interest rates for any meaningful length of time because debt service costs will compound and begin to crowd out all other spending."
In the long-run this is probably true ("meaningful length of time") and part of the logic behind why high rates should slow the economy, but in the short-run we could see the government just run higher deficits to counteract Fed policy ... I am with you that the endgame here probably has to be some kind of inflation (probably hidden) to dig out of the hole.
I need to learn more about MMT. I bought the Kelton book but haven't read it yet.
"Low rates benefit old people who already have amassed wealth whereas high rates benefit young people who are just beginning to invest. This is the argument QE of the 2010s pulled forward a decade of investment returns and forced younger generations to start investing at much less attractive price levels."
Exactly. This is why I am fond of saying that the biggest risk to most investors (still working, earning and saving) is not a market crash or even a "lost decade" but rather a perpetually expensive stock market that never affords ample opportunity to invest at attractive expected forward rates of return.