Rate rises are misguided in the current fiat money/floating exchange rate environment.

 

The idea that higher rates slow economic growth/inflation rests on a theory of the macro economy that no longer applies under floating exchange. The goal of a hike is to push rates above the neutral rate in hopes that households hold off on spending because the reward for waiting is so high but it's also a cost to someone else and a drain on demand. However, this theory needs money to be scarce and money is not scarce. Under a gold standard/peg, the govt had to defend convertibility so money was scarce, they had to compete for a limited pool of funds and higher rates did indeed pull the money out of spending. If savers chose to redeem it could break the peg. So the govt paid savers enough to stay in dollars. Banks also faced this redemption risk squeezing lending too. But under a floating currency, there is nothing to defend. The govt sets and pays the rate without risk. Money is no longer a fixed pool, it's created when the govt spends (exogenous) and banks lend (endogenous). The reward for waiting to spend is now a reward for the entire macro economy, not just the individual, because the interest income govt pays is a net add to the private sector, not just a transfer from spender to saver.

— Douglas Padgett (@MMTmacrotrader) November 11, 2026

[expanded tweet]:  for waiting is so high but it's also a cost to someone else and a drain on demand. However, this theory needs money to be scarce and money is not scarce. Under a gold standard/peg, the govt had to defend convertibility so money was scarce, they had to compete for a limited pool of funds and higher rates did indeed pull the money out of spending. If savers chose to redeem it could break the peg. So the govt paid savers enough to stay in dollars. Banks also faced this redemption risk squeezing lending too. But under a floating currency, there is nothing to defend. The govt sets and pays the rate without risk. Money is no longer a fixed pool, it's created when the govt spends (exogenous) and banks lend (endogenous). The reward for waiting to spend is now a reward for the entire macro economy, not just the individual, because the interest income govt pays is a net add to the private sector, not just a transfer from spender to saver.