It often seems to me that when I mention the cost of interest, people think I mean the rate of interest. That's not what I mean.
Suppose the rate of interest is always five percent. And suppose you have a debt of $100. Your cost of interest will be $5 for the year.
But now suppose you have a debt of $100 million. Your cost of interest will be $5 million. The rate of interest is the same, but the cost of interest is certainly not.
The cost of interest depends on the rate of interest and the amount of debt we owe.
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How much has debt grown?
In the US, for every $1 of debt in 1946, by the end of 2021 we had about $250 of debt:
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| The graph uses annual TCMDO ("All Sectors") data. The 1946 value was 357.032 billion. |
If we have 250 times as much debt now as we had in 1946, and if the
interest rate now happens to be the same as it was in 1946, then we will be
paying 250 times as much interest this year as in '46. If interest
rates are higher now, we'll be paying even more.
The cost of interest depends on the rate of interest and the amount of debt we owe.
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How much has GDP grown?
For every $1 of GDP in 1946, by the end of 2021 we had about $100 of GDP:
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| The graph uses nominal GDPA data. The 1946 value was 227.535 billion. |
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In the 75 years from 1946 and 2021, GDP increased about 100x. Debt increased about 250x. Is there some reason debt had to increase so much faster than GDP?
Well yeah: Policy. Debt increased so fast because of policy.
Other than that? No reason I can think of.
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At the Federal Reserve, they change interest rates all the time. And they are always ready, and able, and very often willing, to lend more money.
In Congress, they tweak things to make more credit available. And they tweak things to encourage us to borrow. These policies work: For every dollar of debt we had in 1946, we had almost $250 of debt in 2021. Debt grows rapidly. If you ever wonder why we have so much debt these days, the answer is that our policies make it happen.
They certainly do not prevent it.
You know what policymakers forgot? They forgot to invent some policies to get us to pay down our debt at a faster rate. Debt grows rapidly because of policy, and debt is paid back slowly because of policy neglect. The result is that our accumulated debt has grown to an insanely high level.
It is all
the fault of policy. A simple mistake. They encourage borrowing and the
use of credit, so that debt grows rapidly. But they do not also encourage
the accelerated repayment of debt, and so debt accumulates to unnaturally high levels.
That is the cost of policy -- or the cost, I should say, of ill-considered policy.
And that is the source of our economic troubles.
1 comment:
It would be better not to have a lot of policy pressure to accelerate the repayment of debt. But if you're gonna have policy that encourages the use of credit, then you really do need policy that accelerates the repayment of debt.
It would be better to have less policy pressure that encourages borrowing.
Of course, less policy pressure to borrow means less borrowing, less spending, and less economic growth. To prevent a policy-induced economic slowdown we would have to maintain the spending level.
To maintain the spending level, we could reverse the policy that restricts wage growth. It's the obvious solution.
But then, faster wage growth means more inflation. So we would have to cut some other cost to make up the difference, so labor share can rise while total cost does not. That way we could avoid inducing inflation.
What cost can we cut? Obviously, we should cut the cost of finance. How to do it? Less borrowing. What we need is an adequate supply of money that doesn't come with interest cost. A simple change in policymakers' thinking would do the trick. They need to manage the quantity of money as well as the availability of credit. It is the obvious solution, once you think about it.
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