There's no such thing as net interest

It's not even on the list!

If I have $10 interest income and $100 interest cost, I have negative $90 interest income, net. But there's no such thing as "negative income". If it's negative, it isn't income. You can do the math and get that answer. You can be $90 short. But you cannot have "negative $90 income". Because "income" is not a math word like add or subtract. Income is an economic concept.

You can't have negative income. If it is negative, it isn't income.

We can take my negative $90 and add it to your positive $100, and call it $10 "net" interest income. But I didn't have any net interest income, and you had $100. It is some kind of fallacy of composition to add my negative and your positive together and come up with $10 "net". And anyway, it doesn't work that way. Not at the macro level.

Figuring net interest is like a big party where we all get together and have drinks and talk about our finances, and every time two people are talking and one of them has positive net interest, he gives the whole positive amount to the guy with negative net interest.

Then the guy who gave money away has achieved "zero net" and he can go home. The other guy refigures his finances and looks for somebody else to talk to. And the party doesn't end until nobody has negative net interest. When that happens, we take and add up all their positives, and we call that "net interest".

The economy doesn't work that way.


If I have $10 interest income and $100 interest cost, the $90 difference comes out of my other income. Not out of someone else's positive net interest.

Suppose I have negative $90 interest income and you have positive $100 interest income, and between us we have $1000 of other income. Add my negative $90 and your positive $100 together and you get "net interest" income of $10. So other income is $1000 and net interest is $10 and we want to say the net interest is one percent of the other income.

But really, I paid for my $90 interest shortfall out of other income, and so we should figure between us we have not $1000 of other income but $910. And actual interest income was not only my $10 and your $100, but also the $90 out of other income that I paid to a third party. So that's $200 of interest income relative to $910 of other income, and that is a lot more than one percent.


You can't add my micro to your micro and come up with macro. It doesn't work that way.

Figuring net interest assumes that no one has to pay interest costs out of their other income until after everyone with positive net interest income has given away everything above "zero net" to someone with negative net interest income.

It would be nice to have so much interest income that you could use it to pay your interest expenses, and have money left over for your other expenses. But most people don't. Maybe banks do, but most people don't pay interest expenses out of their interest income. We scrape together income from all available sources to pay whatever bills we have to pay. Figuring net interest understates financial cost and creates a false picture of our economy.


Figuring net interest assumes that everyone almost always has enough interest income to cover their own interest expenses. That's just bad economics.

Similarly, every time someone says private debt doesn't matter because debt is money we owe to ourselves, or because one person’s debt is another person’s asset so the world has no net debt, it is a fallacy of composition. Or some kind of fallacy, for sure.