So I said "As long as debt grows faster than GDP, the cost of finance increases." Then I acknowledged that "interest rates also play a role in the cost of finance."
But how big a role? How much of interest cost is due to interest rates? And how much to the level of outstanding debt? Sure, as interest rates rise, more of the cost is due to interest rates. As rates fall, less of the cost is due to interest rates. As the accumulation of debt increases, more of the cost is due to the size of the debt. And as the accumulation falls in size -- Oh! Does that ever happen?
Not since 1937:
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| Graph #1: Percent Change in Domestic Nonfinancial Sector Debt (Annual Data) |
The Excel sheet shows a -0.03% change between 1936 and 1937: For every $100 of debt in 1936, there was three cents less debt in 1937.
There has been no decrease in Domestic Nonfinancial Sector debt since that time.
1 comment:
The graph is right, and the three cents in 1937, that's right. But my thinking cannot be right. Where I said:
"Sure, as interest rates rise, more of the cost is due to interest rates... As the accumulation of debt increases, more of the cost is due to the size of the debt."
That can't be right.
Surely, there must have been times when interest rates went up AND the accumulation of debt increased. But there cannot be a time when both of them were more responsible for financial cost.
Was I thinking of financial cost as fixed at 100%? Apparently I was.
If rates increase and debt increases at the same time, then financial cost will rise. Both debt and rates will cause financial cost to increase. But I don't get to say that less of the cost is due to either one. I have to think about this more.
You got any ideas?
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