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On the other hand, brilliant ideas do occasionally turn out to be right, and we can’t rule out that possibility. The MMT guru Stephanie Kelton, professor of economics at Stony Brook University and author of The Deficit Myth, made the case for rate hikes greasing the economy (and increasing inflation rather than reducing it) in a January post for her Substack newsletter, The Lens.  

Kelton’s main argument was that interest hikes “force the Treasury to pay out hundreds of billions of dollars in additional interest,” showering wealthy T-bill investors with cash. Ordinarily, the rich are likelier to bank windfalls than spend them. That’s why tax cuts for the rich, for example, are a lousy way to stimulate the economy during a downturn. But it’s different when interest rates are high, because “tighter credit impedes investment.” Might as well buy that yacht instead! Also, because the economy is beset by monopolization, a lot of businesses “with pricing power” will pass higher borrowing costs on to the consumer, “just like they would if they faced rising wages, shipping, materials, or other costs.” All this is very inflationary. 

In the Bloomberg piece, Xie explains that in years past, when higher interest rates goosed spending by bondholders, this effect wasn’t “nearly enough to match the drop in demand from those who stop borrowing money.” Why would it be different this time? Because government debt has gotten so gigantic ($35 trillion) that bondholders rake in $50 billion more than they did a decade ago.