Thursday, May 20, 2010

The Undiscovered Factor

Jerry again:
I think what you are saying is...

It is not the rate of interest that adds to the price level, but the cost of interest.

If the interest rate goes up today, it adds to the cost of borrowing. But you don't pay it today. The increase affects potential future costs, and that affects growth.

But if interest costs amount to 5% of income or 50%, they affect the cost of living, the cost of doing business, and the cost of governing. Interest costs are embedded costs.

And if the trend shows interest costs increasing relative to income, those embedded costs are growing.

If this is true, one could say interest costs drive inflation.

This is what I'm saying.

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