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Raising interest rates would increase fiscal stimulus and improve the balance sheet

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Hi Cullen, could you please clarify this statement you wrote in one of your old articles?

“4. Raising rates would actually increase the budget deficit which would be a form of backdoor fiscal stimulus and further balance sheet improvement.”
https://www.pragcap.com/raising-interest-rates-might-not-be-as-crazy-as-some-make-it-seem/

Won’t raising rates increase the interest income on bonds the government has to pay back to its creditors? How exactly would that improve the balance sheet if the US government has foreign creditors like China and Japan holding large amounts of US treasuries?

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Posted by Incognito 7
Posted on 07/20/2017 2:32 PM
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US T-Bonds are not only held by foreign govts. A huge amount is held by domestic investors and institutions. When the Fed raises rates they essentially force the average weighted interest rate to rise. This means households and institutions are earning more income from the US Treasury. This is an indirect boost in fiscal stimulus as interest costs are US govt costs.

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Cullen Roche Posted by Cullen Roche
Answered on 07/20/2017 2:42 PM
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    Oh I see…!

    Well then, this is truly ironic to all the fiscal deficit hawks who are advocating for the interest rates to rise in the US…!

    Though I think the story is a lot different in Europe and Japan as they are probably aware if the Central Bank’s raise rates, fiscal deficits would rise, and they absolutely cannot have that as otherwise Austerity as a political idealogy would entirely be discredited.

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    Posted by Incognito 7
    Answered on 07/21/2017 3:19 AM
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      That’s not true wrt interest rate hawks. If you raised short term rates by 3%, the economy will go into a nosedive cuz a yield curve inversion wipes out bank-like institutions, liquidity dries up. But that’s an extreme example. If you’re going from 1% to 1.25 or even 1.5% w/10 yr at ~2-2.5%, it’s a nonissue. If you raise it >1%, you start treading into turf where it might have a negative impact.

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      Posted by Suvy Boyina
      Answered on 07/27/2017 12:40 AM
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