La Kelton says:
At the macro level, the federal government is a net payer of interest, which means that the Fed’s rate hikes work like expansionary fiscal policy in the sense that they translate into hundreds of billions of dollars in additional spending by the federal government.
Spud says:
She is right of course.
No, she’s not.
Because whether it’s fiscally expansionary depends upon how the interest payments are financed. If by money printing then that’s very expansionary. If by increasing the deficit then that’s expansionary. If other spending is cut in order to make room for the interest payments than that’s fiscally neutral.
How you finance fiscal policy matters.
But would Spud ever suggest cutting spending in one area to allow spending in another. Not bloody likely, so the idea just doesn’t occur to him.