Interest-cost-push: Changes in interest cost NOPE, FORGET IT

Nope. I can't do it. Can't figure it out. I can't even tell if I'm close to right, or off by a mile. I will leave the post available, in case I need it.

The first two graphs are okay. It's the third graph, where I got inventive, that's the problem. That graph wants to show the percentage of a change in interest cost that is due to a change in interest rates. After finishing the graph, I posted the post and then started on a graph to show the percentage of a change in interest cost that is due to a change in outstanding debt.

I got another low percentage. Not as low as on Graph #3, but low. I should be able to add the part that's due to a change in interest rates and the part that's due to a change in outstanding debt, and get an answer that is equal to the change in interest cost.

Not even close.

I'm looking for evidence of cost-push inflation. Specifically, financial cost-push arising from the cost of interest.

"interest was definitely an increasing cost in those years"

I'm looking at the years before 1965. Before the Great Inflation. I'm looking for subtle but persistent increase of interest costs -- something one can find almost everywhere. I want to see the growth of interest cost relative to income (for households, disposable personal income), and in the business sector relative to profit or employee compensation costs or whatever makes sense when I get that far into it.

For households there is data going back to 1980, data on debt service (interest and principal payments) as a percent of disposable personal income (DPI). So I assume DPI is the appropriate context variable to use for my interest cost study.

The "Monetary Interest Paid" data for households is annual data starting at 1946. One version of this data is for households alone. Another version, which I used in the first graph, is for households and nonprofit organizations. I'm going to have to end up using the "households and nonprofits" version to be compatible with data that's called "household debt" but includes the debt of households and nonprofit organizations. For the next graph, I'll show both versions of the household interest cost, so you can see how nearly equal they are.

I'm using the annual version of  DPI, which goes back to 1929. The graph starts at 1946, where the interest data starts:

Graph #1: Household Interest Cost (two measures) as Percent of DPI 1946-1970
Note that the increase suddenly stops in the mid-1960s as
wages finally started participating in the wage-price spiral

Interest costs rose from roughly 1% of DPI in 1946 to 2% in 1952, to 3% in 1956, to 4% in 1962. Roughly. It's not exponential growth, but interest was definitely an increasing cost in those years. From start-of-data (1946) to the start of the Great Inflation (1965), interest cost increased by about 3.33% of disposable personal income (and DPI was itself growing at the time).

This interest cost increase works out to an average annual rate of increase of about 0.175 percent over the 1946-1965 period. Over three years, more than half a percent. Not a big number, but the increase was persistent. Subtle, but persistent.

The two lines, by the way, are very close. Nonprofit organizations add almost nothing to the household debt number. I'm going to drop the household-only data and work with "household and nonprofit".

I want to look at how much of the increasing interest cost was due to rising rates and how much was due to the growth of debt.

My method is to estimate interest cost for a given year based on the effective interest rate from the year before. I expect the change in interest to be proportional to the change in debt outstanding. Any discrepancy between expected interest cost and the given year's actual interest cost is attributed to a change in interest rates. 

The graph shows the portion of the change in interest cost that is attributable to a change in the effective interest rate: NOTE: It may not show that. I'm not sure now. I have conflicting graph results.

Graph #3: Rising Interest Cost is due mostly to Growing Debt, not to Rising Interest Rates

Before 1966 or so, interest cost due to rising rates averaged by eye a little above zero. From the latter 1960s thru the early '80s, inflationary years, the average ran closer to 5% of interest cost. After the early 1980s when the debt numbers were big and interest rates were falling, the portion of interest cost due to rising rates averaged a few points below zero. Nothing surprising there. My evaluations, however, like my averages, are only by eye.

As an indication of relevance: The deepest low, around 2001-2004, I think that's the same years John Taylor is talking about when he says interest rates were "too low for too long". 

 

More to come on the topic of financial cost-push and the cost of interest.