Debt and Interest Cost of Nonfinancial Corporate Business

 

I'm thinking of new-use-of-credit as extra money spent into the economy. And I'm thinking of cost-of-interest as a reduction of money available for current spending. I think the "extra money" will have to be greater than the "reduction of money", or the economy will get no boost from the use of credit.

- Arthurian, 4 January 2022

 

Sometimes I get lucky. I found data at FRED for interest paid by Nonfinancial Corporate Business. And I found data for the total debt liability of Nonfinancial Corporate Business.

Graph #1: Interest Paid (blue) and Debt Owed (red) by
Nonfinancial Corporate Business

The lucky part is that both datasets are for Nonfinancial Corporate Business. The interest is being paid by the same sector that owes the debt. Lucky, because too often I don't find two datasets I want, both for the same sector.

We can take the interest paid and look at it as a percent of debt owed, to get some idea of the interest rate paid by the Nonfinancial Corporate Business (NCB) sector as a whole. I've seen that rate called the "effective interest rate".

In their Fisher Dynamics PDF, Mason and Jayadev say

The effective interest rate i is total interest payments divided by the stock of debt at the beginning of the period.

For the longest time I didn't think it could be done in a FRED graph. It can be done:

Graph #2: The Effective Interest Rate paid by Nonfinancial Corporate Business

My main reason for looking at the effective interest rate is to see if my choice of data looks right. The pattern shown on Graph #2 is:

1. Start low
2. Rise to a 1981 peak
3. Decline thereafter

That pattern matches the typical pattern of US interest rates since the late 1940s, so I'm happy with my choice of data. Note that the interest data is annual; the debt data is by default quarterly but I changed it to annual using "end-of-period" aggregation.

There is a glitch, however: If you click "Graph #2" in the caption to access the graph at FRED, click "EDIT GRAPH" to view the settings, and look past the three datasets and their units, you will see that below "Modify frequency" it says "Annual" (which is correct), but below "Aggregation method" it says "Average" (which is not the method I chose).

It is possible that I messed up. But I made this graph once, noticed the discrepancy, and made the graph a second time, carefully, conscious of the glitch. So I don't think it's me.

But either way, for my purposes today, the graph is close enough. 

 

Now I want to go in a different direction. I want to compare the size of interest paid each year to the change in the size of debt. The first graph compared the size of the interest paid to the size of total NCB debt. Now I want to see if the interest paid is more or less than the change in debt, the increase.

Hey, if I borrowed a dollar last year and (in the same year) paid 25 cents interest on my existing debt, I still had 75 cents "extra" to spend. But if I borrowed a dollar and paid $1.50 interest, I was fifty cents in the hole. 

Yeah, I know: If I didn't borrow the dollar I would have been $1.50 in the hole. That is the problem that comes with having debt. And every time you borrow, the hole gets deeper.

Okay. This next graph is a cost/benefit analysis for borrowing by US Nonfinancial Corporate Business. For the years before 1970, hard to see but it appears to be slightly above zero (new borrowing adds up to a little more than total interest paid on existing debt). For the years after 1975, it is clear that the line is almost continuously below zero (the cost of interest is almost always substantially more than new borrowing):

Graph #3: Cost/Benefit of borrowing for Nonfinancial Corporate Business

 Here's a view of the early years, thru 1975:

Graph #4: Cost/Benefit of borrowing for Nonfinancial Corporate Business, 1947-1975

Except for the occasional blip, the cost/benefit of NCB borrowing was continuously positive from 1947 to 1973. From 1975 to 2017 it was almost continuously negative.

In other words, if we think of it as NCB business borrowing in order to pay the interest on its debt, before 1974 there was almost always some borrowed money left over after paying the interest, that could be used to boost business activity and economic growth. But after 1974, after using all the borrowed money to pay interest, Nonfinancial Corporate Business typically still had more interest to pay. The money had to come out of business activity. Maybe they invested less. Maybe they gave smaller raises. Maybe they increased their prices.

Financial cost has been undermining living standards and the growth of output since the mid-1970s. Pass it on.