Total interest paid is equal to total interest received. Some people will tell you it doesn't matter how much we pay as interest, because we receive exactly the same amount of interest. But who is this "we"? Unless net interest is zero for every one of us, there is a redistribution of income. So it does have an effect. It does matter.
And even if it was net zero in every instance, it can still have an effect on the economy:
- If 2% of our income is interest and 98% is income from productive activity, we got a lot of output with little financial cost.
- But
if half our income is interest and half is income from productive
activity, then we didn't produce much, and we had to pay a lot for it to
cover the financial cost.
Between individuals, incomes vary. But for the economy as a whole, if interest is a high percentage of our income, then the nation's output will be inexplicably low. Inexplicably, because we choose not to see the high level of interest as a problem. Low, because interest is not a payment for the creation of output.
2 comments:
The way it is paid back matters also...typically when 80% of the interest is applied only 50% of the principle is paid down...
Hey Big O: Is that a rule of thumb, a 80:50 rule? Or more like an example of how Finance deals with people??
I was thinking thru some calculation the other day and I remembered what you said before -- that the wage gap between men and women could have made a significant reduction in labor cost when women started entering the work force in large numbers. I only ever thought of the wage gap as an income issue, not a cost issue.
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